February 20, 2023
On Feb. 15, 2023, the U.S. District Court for the Northern District of Texas held that the force majeure provision contained in the parties’ contract applied to excuse performance even if the event — Winter Storm Uri — did not render performance impossible.
In MIECO LLC v. Pioneer Natural Resources USA, Inc., 2023 WL 2064723, the parties had entered into an agreement in which MIECO (Buyer) would purchase 20,000 million British thermal units of natural gas from Pioneer (Seller) each day from Nov. 1, 2020, to March 31, 2021. But from Feb. 14, 2021, to Feb. 19, 2021, Pioneer failed to deliver the full amount of the contracted natural gas due to Winter Strom Uri. On Feb. 16, 2021, Pioneer sent MIECO a notice of force majeure.
Section 11 of the Parties’ Base Contract addressed issues of force majeure:
11.1. Except with regard to a party’s obligation to make payment(s) due under Section 7, Section 10.4, and Imbalance Charges under Section 4, neither party shall be liable to the other for failure to perform a Firm obligation, to the extent such failure was caused by Force Majeure. The term “Force Majeure” as employed herein means any cause not reasonably within the control of the party claiming suspension, as further defined in Section 11.2.
11.2. Force Majeure shall include, but not be limited to, the following: . . . (ii) weather related events affecting an entire geographic region, such as low temperatures which cause freezing or failure of wells or lines of pipe. . . . Seller and Buyer shall make reasonable efforts to avoid the adverse impacts of a Force Majeure and to resolve the event or occurrence once it has occurred in order to resume performance.
11.3. Neither party shall be entitled to the benefit of the provisions of Force Majeure to the extent performance is affected by any or all of the following circumstances: . . . (ii) the party claiming excuse failed to remedy the condition and to resume the performance of such covenants or obligations with reasonable dispatch; . . . or (v) the loss or failure of Seller’s gas supply or depletion of reserves, except, in either case, as provided in Section 11.2.
. . .
11.5. The party whose performance is prevented by Force Majeure must provide Notice to the other party. . . . Upon providing written Notice of Force Majeure to the other party, the affected party will be relieved of its obligation, from the onset of the Force Majeure event, to make or accept delivery of Gas, as applicable, to the extent and for the duration of Force Majeure, and neither party shall be deemed to have failed in such obligations to the other during such occurrence or event.
Another document comprising the parties’ complete agreement, the special provisions, modified the base contract (collectively, Contract). It did so by deleting the words “any cause not reasonably within the control of the party claiming suspension” in the last sentence of Section 11.1 of the base contract. The special provisions then replaced those words with the following:
an event or circumstance which prevents one party from performing its obligations under one or more Transactions, which event or circumstance was not anticipated as of the date of the Transaction was agreed to, which is not within the reasonable control of, or the result of the negligence of, the claiming party, and which, by the exercise of due diligence, the claiming party is unable to overcome or avoid or cause to be avoided.
According to the court, reading the base contract and special provisions together resulted in unambiguous contractual language: “force majeure includes a loss or failure of Pioneer’s gas supply (Section 11.3) caused by low temperatures that affected an entire geographic region and caused freezing or failure of wells or lines of pipe (Section 11.2) that prevented Pioneer from performing under the Contract (Section 11.1).”
The court rejected each of MIECO’s arguments that the force majeure provision did not apply to the storm:
First, MIECO argued that performance must be impossible for the force majeure provision to apply. The court disagreed finding “[t]his reading would . . . make the force majeure provision essentially duplicative of common law defense of impossibility. . . .”
Second, MIECO argued that Pioneer lost only its preferred source of gas and Pioneer could have used gas from another source or purchased gas on the spot market to satisfy its contractual obligations. While the court seemingly agreed with this characterization, it found the argument unpersuasive. Specifically, the Contract provided that failure of Pioneer’s gas supply can constitute force majeure. This language, according to the court, permitted Pioneer to invoke the force majeure provision “regardless of the availability of alternative gas supplies.”
Third, MIECO argued that “gas supply” should be read broadly to require Pioneer to timely deliver any gas it produced or could have purchased. Again, the court was not persuaded and found that MIECO’s argument would require Pioneer to be liable to MIECO for nondelivery “if there was no available gas, anywhere in the world, at any price.”
This case is a reminder that force majeure remains an important provision in contractual arrangements, especially arrangements for buying/selling energy sources. In crafting such force majeure clauses (as with all clauses in complex commercial arrangements), it is important to consider the exact situations to which such clauses should apply and ensure that the contract unambiguously covers those situations.