Economic Downturn Force Majeure Cases
party of the obligation to perform, unless the disabling event was unforeseeable at the time the parties made the contract… An economic downturn in the market for a product is not such an unforeseeable occurrence that would justify application of the force majeure provision, and a contractual obligation cannot be avoided simply because performance has become more economically burdensome than a party anticipated…” (emphasis added) It is curious that both of these cases were decided in 1987. Both addressed the issue of foreseeability with Kodiak turning on the express force majeure language and Valero apparently on the lack of an express clause like that found in Kodiak . In the author’s opinion, there is no question but that the market downturn is also outside of the control of the gas purchaser in both cases. Kodiak involved a force majeure clause and was correctly decided since the event claimed to be a force majeure event was expressly identified in the clause. Without knowing the express terms of the force majeure clause involved in Valero , it is unknown whether a different legal outcome of the case would have been reached by the court had it not turned the case on the issue of foreseeability.
There are only two Texas cases that the author could locate that address the occurrence of a severe economic downturn and the allowance of a force majeure defense in response to a suit for breach of contract. Neither case is a true oil and gas lease clause interpretation issue. One case looks at an economic downturn as a force majeure event, the other does not. Pro – Kodiak 1981 Drilling Partnership v. Delhi Gas Pipeline Corp. This case involved a suit for breach of a gas purchase contract. The parties had negotiated a force majeure provision which provided in pertinent part the following: “The term ‘force majeure’ as employed in this agreement shall mean ... partial or entire failure to gas supply or market or any other cause, whether of the kind herein enumerated or otherwise, not reasonably within the control of the party claiming ‘force majeure…” (emphasis added) The gas purchaser, Delhi, defended the breach of contract case on the basis of force majeure, asserting that the factual underpinning of the case (severe drop in the price of gas in the resale market in East Texas where the gas was being produced/resold) constituted a force majeure event and relieved it from compliance with the gas sales contract during the pendency of the event. Kodiak countered by taking the position that the economic downturn was a foreseeable event and, as such, regardless of the express language found in the contract, was not a force majeure event. The court clearly rejected Kodiak’s defense of foreseeability. Instead, it held that foreseeability was NOT an element in determining whether an event was a force majeure event where that event was specifically identified in the force majeure clause. Con - Valero Transmission Co. v. Mitchell Energy Corp. This case involved a gas purchase contract where there existed a lack of a profitable gas resale market. Although not expressly stated, it appears that a market downturn was not a specifically enumerated force majeure event. The court held:
Conclusion
The answer to the initial question posed in this paper ie, whether the “standard” force majeure clause will allow for delayed drilling/development on the company’s Texas leases in a severe market downturn, is a qualified yes. Qualified how? Qualified by the express terms of the force majeure clause as found in the relevant oil and gas lease.
Specific
Force majeure clauses, as identified in this paper as well as in numerous oil and gas leases, oftentimes DO contain express provisions that define a force majeure event to include a market downturn, lack of a (economic) market etc. It is the identification of these provisions coupled with a legal determination that the individual lessee(s) could not influence, eliminate or in any manner control the oil and gas market downturn that will determine if a lessee may successfully initiate
“ We overrule these assertions. A force majeure clause does not relieve a contracting
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G r o w t h T h r o u g h E d u c a t i o n - A p r i l / M a y / J u n e 2 0 2 0
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