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Court applies foreseeability limitation to catch-all force majeure clause

A Texas appellate court ruled that a significant downturn in the price of oil is not a force majeure event that excuses non-performance with a promise to drill for oil by a certain date. Reviewing a contract that excused non-performance for several reasons plus a catch-all clause which stated, “any other cause not enumerated herein,” the court said that this broad language must be interpreted to reach only force majeure events that were not reasonably foreseeable at the time the parties entered into their contract.

The case arose from a contract dispute between two oil companies, TEC Olmos and ConocoPhillips. TEC Olmos contracted with ConocoPhillips to drill for oil and gas on land leased by ConocoPhillips. The contract contained a deadline for drilling to begin, and a $500,000 liquidated damages clause in the event TEC Olmos failed to meet the deadline. The contract contained a force majeure clause listing several specific events, adding to the list a catch-all provision that excused non-performance due to “any other cause not enumerated herein but which is beyond the reasonable control of the Party whose performance is affected.”

After the contract was executed, global oil prices dropped significantly, causing TEC Olmos’ financing partners to drop out of the project. TEC Olmos informed ConocoPhillips that it would be unable to meet the drilling deadline, citing the force majeure clause as a reason to extend the deadline. ConocoPhillips successfully sued for the $500,000 liquidated damages amount, with the trial court finding that the force majeure clause did not excuse TEC Olmos’ non-performance.

First District Court of Appeals Chief Justice Sherry Radack, writing for a 2-1 majority, explained that, at common law, the term “force majeure” included the notion of foreseeability. In cases such as this one, where an event is alleged to fall within the terms of a catch-all force majeure provision, it is unclear whether the contracting parties had contemplated and voluntarily assumed that risk of that event.

In a such a circumstance, it is appropriate to apply common-law notions of force majeure, including unforeseeability, to “fill the gaps” in the force majeure clause, Chief Justice Radack wrote. “Because fluctuations in the oil and gas market are foreseeable as a matter of law, it cannot be considered a force majeure event unless specifically listed as such in the contract.”

The case is TEC Olmos LLC v. ConocoPhillips Co., No. 01-16-00579.

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