Results tagged “force majeure” from GTH Energy & Natural Resources Law Blog

Texas Supreme Court Blows Away Wind Generator Claims, Finds Contracts Assigned Risk of Transmission Congestion to Generators

April 2, 2014

Transmission congestion between the wind-rich plans of western Texas and population centers to the east frequently force curtailment of deliveries of electricity from Texas wind farms. In a contract dispute worth tens of millions of dollars, the Supreme Court of Texas recently concluded that wind energy producer FPL Energy assumed the risk of transmission curtailments and therefore must pay contractual damages for delivery failures caused in large part by transmission curtailments. The decision, which turns on specific language addressing transmission curtailments in a contractual "Uncontrollable Forces" clause, once again underscores the peculiar importance of such clauses in energy contracts.

The Court also disallowed a lower court's $29 million judgment against FPL Energy under the liquidated damages provisions of the relevant contracts. The Court found that the liquidated damages clause was intended to compensate the purchaser for undelivered Renewable Energy Credits ("RECs"). The clause provided for recovery of $50 per each undelivered REC, an amount based on the penalty to be paid by utilities in Texas if they do not purchase enough RECs or renewable energy to satisfy the state's Renewable Portfolio Standard. The Court concluded that the liquidated damages provision crossed the line from an acceptable estimate of actual contract damages to an unacceptable contractual penalty for breach because it assumed TXU would pay the $50 penalty rate for all RECs not delivered, but in fact the Texas regulatory scheme excuses compliance for any RECs not delivered because of transmission constraints or curtailments. As a result, the liquidated damages provision required FPL Energy to pay approximately $29 million, whereas the actual losses suffered because the RECs were not delivered was only about $6 million, possibly less. Thus, there is an "unacceptable disparity" between the results of the liquidated damages provision and the actual damages incurred by TXU as a result of FPL's failure to deliver.

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Force Majeure Matters: Split Fifth Circuit Decision Reminds Energy Contract Drafters That Such Clauses Have Serious Consequences

January 30, 2013

While attorneys frequently treat force majeure provisions as a throw-away, a recent decision from the U.S. Court of Appeals for the Fifth Circuit underscores the importance of these provisions in energy contracts and contracts in other complex industries. That decision, Ergon-West Virginia, Inc v. Dynegy Marketing & Trade, determined that Dynegy's invocation of force majeure clauses in two natural gas contracts excused it from liability for failure to deliver natural gas in the wake of Hurricances Katrina and Rita. Notably, however, both the lower court and the dissenting Fifth Circuit judge reached the opposite conclusion with respect to one of the contracts.

While hurricanes might seem an obvious case of force majeure, Ergon argued that the clauses in its contracts with Dynegy excused Dynegy's performance only if Dynegy could not remedy the force majeure event with the exercise of due diligence. Because the contracts were general supply contracts, rather than contracts for delivery of gas from a specific source, Ergon argued that Dynegy could have met its delivery obligations by purchasing replacement gas on the open market. Ergon therefore sued, seeking to recover the cost it incurred to cover gas deliveries not made by Dynegy while Dynegy claimed force majeure from the hurricanes.

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