The Uniform Commercial Code — in all its forms — tells us that the increased or unforeseen cost of selling a good alone does not excuse performance. After all, a rise in prices or the collapse of a given market is no justification, the UCC states, “for that is exactly the type of business risk which business contracts made at fixed prices are intended to cover.”
In other words, if a seller agreed to sell 1000 MMBtu of natural gas per day to a buyer, and the price skyrocketed or the seller’s supply source fell through, that risk fell on the seller alone. The seller under the UCC was still obligated to procure and sell the 1000 MMBtu of gas as contracted — the source and the seller’s purchase price are irrelevant. What matters is that the seller agreed to sell the 1000 MMBtu at a set price per week.
While that generally holds true today, recent case law puts a finer point on the issue and may require lawyers to refine their form natural gas purchase and supply contracts to redefine force majeure in certain circumstances. In a recent case, Mieco, LLC v. Pioneer Natural Resources, Inc., the Northern District of Texas held that a force majeure provision actually excused a seller of gas from making gas deliveries during Winter Storm Uri, which brought unprecedented low temperatures and ice storms in Texas, even though the seller could obtain replacement natural gas from alternative sources at a higher price. There, the contract at issue required MIECO to purchase 20,000 MMBtu of natural gas from Pioneer each day from Nov. 1, 2020, through March 31, 2021.
In February 2021, Winter Storm Uri caused significant well and pipeline freeze-offs that limited production for gas producers such as Pioneer, thus preventing Pioneer from delivering the full amount of natural gas required under the contract Feb. 14-19, 2021. Pioneer submitted a notice of force majeure to MIECO on Feb. 15, 2021, but made no efforts to purchase replacement gas on the spot market (which was available at a higher price). Pioneer resumed daily deliveries on Feb. 20, 2021, despite not lifting its force majeure declaration.
MIECO filed suit alleging breach of contract. In defense, Pioneer asserted that its nonperformance was excused by the contract’s force majeure provision due to Winter Storm Uri. The parties then filed opposing motions for summary judgment in which MIECO argued that the force majeure clause was inapplicable.
Applying New York law to the form gas purchase contract, the court found that the language in the provision unambiguously excused Pioneer from performing the contract because “it lost its gas supply — the residue from … processing plants in the Permian Basin — due to low temperatures that affected an entire geographic region — Winter Storm Uri.” In making its decision, the court rejected MIECO’s three main arguments that: (1) force majeure required actual impossibility, (2) Pioneer lost only its preferred source of gas; and (3) the plain meaning of “gas supply” is any quantity of gas available to satisfy the contract — Pioneer could have simply bought replacement gas on the spot market.
First, the court ruled that “[r]equiring a party to show true impossibility would render portions of the Force Majeure Section superfluous and would make the provision essentially duplicative of the common law defense of impossibility.”
Second, the court also dismissed the argument that Winter Storm Uri only caused Pioneer to lose its “preferred source of gas.” The court distinguished the holding in Hess Corp. v. ENI Petroleum US, LLC, from the present case because, unlike Hess Corp., the contract at issue “specifically mentions Pioneer’s gas supply.” The contract makes clear that “‘the loss or failure of Seller’s gas supply or depletion of reserves can constitute force majeure in some circumstances, regardless of availability of alternative gas supplies.”
Third, the court rejected MIECO’s argument that the term “Seller’s gas supply” should be interpreted to mean “the amount or quantity of gas that was available to satisfy Pioneer’s contractual demands,” including any gas in the world produced or purchased by Pioneer. Conversely, Pioneer argues that “gas supply” means the gas it receives from the Permian Basin. The court applied Pioneer’s understanding of “gas supply,” as it would avoid absurd results and because the contract’s use of the possessive “Seller’s” means that the “gas supply” is owned or possessed by Pioneer as opposed to gas on the spot market. Because MIECO’s interpretation of “Seller’s gas supply” is unreasonable, the court held that the term means gas that Pioneer receives from the Permian Basin.
The force majeure provisions found in North American Energy Standards Board form “Base Contract for the Sale and Purchase of Natural Gas,” such as the one at issue in Mieco, LLC v. Pioneer Natural Resources, Inc., should be carefully drafted in light of the Northern District of Texas’ decision. For example, drafting considerations should include whether a seller is obligated to obtain gas from any available source in the event of the failure or loss of its own “gas supply.” Additional consideration should also be given to whether the provision specifically mentions the seller’s “gas supply” or any implied definitions of “gas supply” which would require further measures to be taken in obtaining replacement gas in the event of a force majeure occurrence.
In short, if you are selling natural gas and your supply is critical to performance, you should consider listing the gas supply source in particular and noting that an unforeseeable interruption is an event of force majeure. If, on the other hand, you are buying gas and the source is ultimately irrelevant, you should consider modifying the force majeure clause to specifically note that the interruption in supply from the seller’s preferred source is not a force majeure event and will not excuse performance. In either event, pay attention to a form contract’s force majeure clause — it may not say what you think it says!
To view the full article, click here.