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Appellate Court Splits Over Whether a Force Majeure Event Needs to be Unforeseeable

Firm Thought Leadership

I. Introduction

A recent decision from the Court of Appeals for the First District of Texas underscores the need for clarity in drafting force majeure provisions. In TEC Olmos, LLC & Terrace Energy Corporation F/K/A Terrace Resources, Inc. v. ConocoPhillips Company, No. 01-16-00579-CV, slip op. (Tex. App.—Houston [1st Dist.] May 31, 2018, no pet. h.), the court construed common law principles to interpret a force majeure provision, finding that the party seeking to excuse its nonperformance could not rely on such provision because the purported force majeure event was foreseeable, even though unforeseeability was not an express requirement in the force majeure provision.

 

The case involved a farmout agreement in which TEC Olmos, LLC (the “Contractor”) agreed to drill a test well for ConocoPhillips Company (the “Owner”) by a specified deadline. Due to a significant drop in the price of oil, the Contractor’s financing source fell through and the Contractor was unable to locate additional sources of financing. This prevented the Contractor from beginning to drill by the deadline, resulting in a claim by the Owner for liquidated damages as provided in the agreement. The agreement contained a force majeure clause, which is set forth in part below, that identified events that could suspend the deadline:

 

FORCE MAJEURE: Should either Party be prevented or hindered from complying with any obligation created under this Agreement, other than the obligation to pay money, by reason of fire, flood, storm, act of God, governmental authority, labor disputes, war or any other cause not enumerated herein but which is beyond the reasonable control of the Party whose performance is affected, then the performance of any such obligation is suspended during the period of, and only to the extent of, such prevention or hindrance, provided the affected Party exercises all reasonable diligence to remove the cause of force majeure.

 

Slip op. at 2 (emphases added). The clause lists seven specific events, followed by the italicized “catch-all” provision for events beyond the reasonable control of the party affected.

 

The Contractor attempted to invoke the force majeure clause under the catch-all provision to extend the drilling deadline. The Owner disputed the applicability of the force majeure clause and sued the Contractor and its parent company, which had guaranteed the Contractor’s obligations under the farmout agreement, seeking a declaration that the Contractor’s claim did not constitute a valid force majeure event. The trial court granted the Owner’s motion for summary judgment. The Contractor and its parent company appealed to the First Court of Appeals.

 

The majority panel opinion held that unforeseeability is a requirement for an event to constitute a force majeure under the catch-all provision (but not the specified force majeure events). Because, as the parties agreed, changes in oil prices are foreseeable as a matter of law, the loss of financing as a result thereof cannot be a force majeure under the catch-all provision. The dissenting opinion disagreed, arguing that there was no clear intent by the parties to incorporate the common law concept of foreseeability into the force majeure clause.

 

II. The Court’s Reasoning

In interpreting the catch-all provision, the court held that common law notions of force majeure, including unforeseeability, should be considered when a party has not protected itself by specifically listing an event in the force majeure clause. The court reasoned that in such a situation, it is unclear whether a party has contemplated and voluntarily assumed the risk of such event, and it is thus appropriate to use the unforeseeability standard to “fill the gaps” in the force majeure clause. The court concluded that including unspecified foreseeable events would result in an overly broad force majeure clause and render it meaningless.

 

As an additional rationale for its decision, the court cited the canon of interpretation ejusdem generis, which provides that when general words follow an enumeration of two or more things, the general words apply only to things of the same general kind or class specifically mentioned. It held that, as a matter of law, an economic downturn in the oil and gas industry is not like the other events specified as force majeure events. The court suggested that such canon would not be appropriate if the catch-all provision were stated first and followed by “including but limited to” the specified events.

 

The dissent argued that, because there was no reference to foreseeability in the force majeure clause, the court was injecting an additional term into the clause, contrary to well-established Texas rules of contract interpretation. Instead, the dissent reasoned, such clauses must be read according to their plain language and in the context of the contract as a whole, including any specific assignments of risk elsewhere in the contract and the overall purpose of the contract.

 

III. Conclusion; Lessons Learned

The case is only the latest in a long line of cases from various jurisdictions attempting to determine the intersection between the common law and express force majeure provisions. This body of law provides a patchwork of holdings that are fact-based and difficult to reconcile. One thing is clear, however: states (and even courts within a state) differ on whether unforeseeability is an implicit requirement of express force majeure provisions and, if so, whether it applies only to events specifically listed in the clause, only to events within the clause’s catch-all provision, or both. It is important to note that the majority opinion may not be the final word in in this dispute because the Contractor could seek panel or en banc rehearing and/or discretionary review by the Texas Supreme Court.

 

This case highlights the importance of careful drafting of force majeure clauses. Both the majority and the dissent agreed that courts should defer to specific language that directly addresses the issue. In this case, the dissent noted that the parties could have included the term “unforeseeable” in the catch-all clause but did not, while the majority noted that the parties could have included a drop in oil prices or loss of financing as a specified force majeure event but did not. Having such language might have avoided the dispute.

 

The key lesson learned is that force majeure clauses should be as specific as possible. Among other things, they should (a) specify events that constitute force majeure, (b) specify events that do not constitute force majeure and (c) expressly address the issue of foreseeability. As this case demonstrates, a couple of sentences are unlikely to achieve this result.

 

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