Force-majeure clauses are tricky and prone to litigation when invoked. The Fifth Circuit recently confronted this when interpreting force-majeure clauses in two gas-supply contracts. Click here to read Ergon-West Virginia, Inc. v. Dynegy Marketing & Trade.
The supplier, Dynegy, invoked the force-majeure clauses after two hurricanes extensively disrupted gas supplies. The buyer, Ergon, argued that the clauses were ambiguous and required Dynegy to buy gas on the spot market to cover the contractual supply obligation.
One clause required Dynegy to remedy the situation "with all reasonable dispatch." The Fifth Circuit held that this language was not ambiguous and that expert testimony about industry practices supported the district court's finding that "reasonable dispatch" did not include a duty to secure replacement gas since Dynegy's suppliers themselves had declared force majeure.
The other clause covered an enumerated list of causes, including hurricanes, as well as "other causes" that "by the exercise of due diligence such party is unable to prevent or overcome." The court held that the quoted language was ambiguous with respect to whether it applied only to "other causes" or also to the enumerated causes. The court held that Dynegy's undisputed expert testimony about industry practices conclusively resolved the ambiguity in Dynegy's favor. Thus, Dynegy had no duty to find replacement gas.
Ergon argued that Dynegy should have a duty to find replacement gas, because even though gas supplies were disrupted, it was possible for Dynegy to find replacement gas on the spot market. The court made the important observation that this would make force-majeure clauses essentially meaningless, because the seller could never invoke the clause if some of the product was available somewhere for some price.
This case provides some important lessons to contract drafters about drafting tighter force-majeure clauses, and to litigators about proving the industry meaning of such clauses.
-- Scott Stolley, Thompson & Knight
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