On January 22, 2013, the United States Court of Appeals for the Fifth Circuit (“5th Circuit”) held that natural gas clearinghouse Dynegy Marketing and Trade (“Dynegy”) had no contractual duty to refinery plants Ergon Refining and Ergon-West Virginia (“Ergon WV”) to attempt to secure replacement gas, when Dynegy’s upstream supplies were curtailed during Hurricanes Katrina and Rita.  The 5th Circuit case focused on the meaning of two different force majeure clauses in two different agreements that Dynegy had with Ergon Refining and Ergon WV. 

In 2005, Hurricanes Katrina and Rita led to disruptions in Dynegy’s upstream supplies of natural gas from which it planned to serve the Ergon refineries.  When Dynegy’s upstream suppliers declared a force majeure event, Dynegy also declared force majeure under its contracts with the refineries.  As such, gas supplies to the Ergon entities were reduced, which forced them to buy gas on the open market at increased costs.  The Ergon entities sued Dynegy in Mississippi state court to recover the increased costs, and argued that Dynegy’s failed performance under the contracts was not excused under force majeure.  They argued that the force majeure provisions in their contracts required Dynegy to attempt to obtain replacement gas, which they alleged Dynegy did not do.  Eventually both cases were removed to federal district court and consolidated.

The Ergon Refining contract’s force majeure provision states that a party is entitled to invoke force majeure if that party “remedied with all reasonable dispatch” the force majeure event.  The district court found this language ambiguous and looked to extrinsic evidence to determine what “reasonable dispatch” included as a factual matter.  The district court concluded that based on “highly credible” expert testimony proffered by Dynegy and unrebutted by the Ergon entities, it is natural gas industry practice for the seller to invoke force majeure if upstream suppliers (like those of Dynegy) declare force majeure.  The district court concluded, and the 5th Circuit affirmed, that Dynegy’s response of maintaining contact with its upstream suppliers and delivering a portion of gas to Ergon Refining was enough to satisfy the “reasonable dispatch” requirement.

Meanwhile, the Ergon WV contract does not contain a “reasonable dispatch” provision, and instead includes a “catch-all” force majeure category which includes: “any other causes, whether of the kind herein or otherwise, 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.”  Dynegy and Ergon WV argued at the district court about whether the “due diligence” clause applied to all force majeure events or simply the “other causes.”  The district court found that the Ergon-WV contract was unambiguous and required Dynegy Marketing to find replacement gas or use due diligence to overcome the event.  However, the 5th Circuit found the contract was ambiguous and stated that the district court should have considered extrinsic evidence to determine the provision’s meaning.  Using the same expert testimony applied to the Ergon Refining contract, the 5th Circuit reversed the district court, and ruled that Dynegy could invoke the force majeure clause, and this was not liable for damages from its failure to search for replacement gas.

In a dissenting opinion, Judge Dennis Reavely argued that while Dynegy was not obligated to secure replacement gas for Ergon Refining, it was obligated to deliver a designated quantity of gas to Ergon WV, regardless of the particular source.  Judge Reavely further argued that since gas supply was available and nothing prevented Dynegy from performing its contract, it was required to do so. 

A copy of the 5th Circuit’s opinion is available here.