Two Contracts. Two Hurricanes. Different Results? - U.S. Fifth Circuit
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Two Contracts. Two Hurricanes. Different Results?

Two contracts thwarted by the same natural disasters can have two different outcomes in litigation.

That's why it's important to carefully define your force majuere responsibilities in an agreement.

Dynegy Marketing and Trade, a natural gas clearing house, had two separate contracts with two separate entities that manage refinery plants: Ergon Refining and Ergon-WV. In 2005, Hurricanes Katrina and Rita caused extensive damage to the gas industry's infrastructure, and Dynegy's internally-designated suppliers declared force majeure. Dynegy followed suit, and reduced its gas supply to both Ergon entities. When the Ergons were forced to buy gas on the open market at increased costs, they sued Dynegy.

Their claim? The force majeure provisions in their contracts required Dynegy to secure replacement gas. Dynegy admits that it didn't.

Following trial, the district court concluded that the Ergon Refining Contract was unambiguous, and that extrinsic evidence didn't require Dynegy to attempt to secure replacement gas. The Ergon-WV contract, on the other hand, unambiguously required Dynegy to make a replacement attempt.

So what was the difference between the two contracts?

The Ergon Refining contract required the party invoking force majuere to demonstrate that it had "remedied with all reasonable dispatch" the force majeure event. The district court found that language latently ambiguous and looked to extrinsic evidence to clarify the force majeure provision.

The Ergon-WV contract, by contrast, allowed a party to invoke force majeure if it was "rendered unable, by reason of an event of force majeure, to perform, wholly or in part." The Ergon-WV contract included "hurricanes" among the qualifying events "not within the control of the party claiming suspension and which by the exercise of due diligence such party is unable to prevent or overcome." The district court decided that the language in the Ergon-WV contract was clear.

The Fifth Circuit, however, found that Dynegy was not required to find replacement gas to satisfy either contract based on force majeure.

Here, the appellate court concluded that both contracts were ambiguous and open to multiple reasonable interpretations. As such, the district court should have considered the same extrinsic evidence that it relied on to illuminate the Ergon Refining contract to clarify the Ergon-WV contract. Because the district court believed that evidence was "highly credible" when it found that Dynegy had no duty to attempt to provide replacement gas to Ergon Refining, the Fifth Circuit Court of Appeals concluded that the supplier had no such duty with respect to Ergon-WV either.

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