1. First District Court of Appeals—Houston
The primary issue the First District Court of Appeals considered in this contract interpretation dispute was whether a party to an oil and gas contract could enforce a “catch-all” provision inserted after the force majeure clause which modified force majeure projections to include foreseeable events—more specifically, the court considered whether the trial court appropriately considered the foreseeability of changes in the oil and gas market when determining the applicability of the force majeure clause at issue.130
The original dispute arose after TEC Olmos (“Olmos”) entered into a farmout agreement with ConocoPhillips Company (“ConocoPhillips”) to test-drill land leased by ConocoPhillips in search of oil and gas. Among other things, the contract set a deadline to begin drilling and also contained a force majeure clause listing several events that would suspend the drilling deadline, followed by a “catch-all” provision for events beyond the reasonable control of the party affected. The force majeure clause provides:
Should either Party be prevented or hindered from complying with any obligation created under this Agreement, other than the obligation to pay money, by reason of fire, flood, storm, act of God, governmental authority, labor disputes, war or any other cause not enumerated herein but which is beyond the reasonable control of the Party whose performance is affected, then the performance of any such obligation is suspended…131 (emphasis added).
Changes in the global supply and demand of oil caused the price of oil to drop significantly after the contract was executed, causing the entity Olmos intended to handle the financing of the drilling project to back out, and then other sources of financing also to become unavailable. Without financing for its project, Olmos informed ConocoPhillips that it was unable to meet the drilling deadline and sought to invoke its force majeure protections by way of the catch-all provision to extend the drilling deadline.
ConocoPhillips disputed the applicability of the force majeure clause and sued Olmos. Litigation followed, and the trial court held in favor of ConocoPhillips that the force majeure clause was inapplicable as a matter of law, as force majeure protection is unavailable unless the triggering event is unforeseeable and the party seeking its protection suffers from a cause other than mere economic hardship. Olmos appealed, arguing that the force majeure clause triggered when Olmos was unable to obtain project financing, thereby excusing its nonperformance.
On appeal, the court upheld the trial court’s ruling that Olmos’ interpretation of the catch-all provision in the force majeure clause was overly broad for two reasons. First, the court clarified that enforceable catch-all provisions require a showing of unforeseeability, and as economic fluctuations in the oil and gas market are foreseeable as a matter of law, they cannot be considered a force majeure event unless specifically enumerated as such in the contract.132 Second, the court employed the doctrine of Ejusdem Generis in ruling that a market downturn could not be not a force majeure event in the context of the parties’ agreement because it was not similar to the other events specified in the contract as a force majeure event, which included natural and man-made disasters (fires, floods, storms, act of God), governmental actions and labor disputes. While these events may generally be foreseeable, they occur with such irregularity that a force majeure clause is necessary to plan for them and allocate the risks connected to them. However, changes in market commodities and the ensuing inability of a party to obtain financing due to such changes occur regularly and may be dealt with by specifically allocating the risks in the agreement. Here, Olmos was aware its ability to perform would be contingent on obtaining financing but did not condition its performance on such. It did not specifically list economic downturns in the oil and gas market as a force majeure event, and as such could not be construed to apply to events not specifically enumerated in the clause.
In conclusion, Olmos’ failure to perform was not excused by the force majeure clause since there was no specific provision in the force majeure clause making an economic downturn in the oil and gas market a force majeure event. The court’s use of the doctrine of Ejusdem Generis implies that parties can add specific events to the force majeure clause to relieve the burden of showing unforseeablility—thus, once a specific event is added to the clause, the party no longer needs to show that the occurrence of this event was unforeseeable. It is important to note, however, that the law is unsettled in this regard, but parties to oil and gas contracts should nevertheless follow the majority opinion when writing catch-all provisions into their agreements.
1 TEC Olmos, LLC v. ConocoPhillips Co. , No. 01-16-0057, 2018 WL 2437449, (Tex. App.—Houston [1st Dist.] May.31, 2018).
130 Id . at *1.
131 Id .
132 Id . at *5.