Face Challenges Confidently

304 Va. Power Energy Mktg., Inc. v. Apache Corp.

Wednesday, September 2nd, 2015

Richard F. Brown

The following is not a legal opinion. You should consult your attorney if the case may be of significance to you.
Virginia Power Energy Marketing, Inc. v. Apache Corp., 297 S.W.3d 397 (Tex. App.— Houston [14th Dist.] 2009, pet. denied), holds that a “reasonable efforts” contract provision does not trump a force majeure clause so as to require delivery to alternate delivery points on a pipeline damaged by hurricanes. Apache agreed to deliver gas to Virginia Power at two specific points on a pipeline. Hurricanes damaged Apache’s production facilities and pipeline. One delivery point was damaged and not capable of delivering the contract quantity. There was a sufficient quantity of gas available at the second delivery point to satisfy Virginia Power and all of Apache’s other buyers. Apache delivered more than the minimum contract quantity to one third party buyer and reduced Virginia Power and the other buyers by about fifty percent. Apache ranked the buyers and disproportionately reduced the allocation to Virginia Power to conform to Apache’s internal allocation of a specific source (i.e., specific platforms) of the gas supply delivered to that delivery point. That specific platform dedication was not part of the Virginia Power contract. Virginia Power covered the shortfall at a higher price in the spot market from various sellers, including Apache. Virginia Power then offset its increased costs against Apache.
The court held that Apache could rely upon the force majeure clause in the NAESB base contract, which specifically mentioned hurricanes. The base contract did not define “reasonable efforts.” In balancing the tension between the requirement to make reasonable efforts to avoid invoking force majeure and the force majeure clause itself, the court relied upon the rule of construction that a contract should not be construed in a way that would render portions of it meaningless. The court held that to require Apache to make deliveries at an alternate point because of the hurricane damage would render the contract provisions on specific delivery points and force majeure meaningless. The court also rejected a similar statutory substitute performance argument based on Section 2-614 of the Uniform Commercial Code because the statutory provision is a “gap-filler” provision that only applies if the parties do not have a specific agreement.
It was undisputed that the first delivery point was damaged and incapable of delivering the specified quantity. However, Virginia Power contended that Apache could have delivered the contract quantities at the second delivery point. Apache again invoked the force majeure clause, which only applied under the NAESB base contract if the hurricanes caused a “loss or failure of its gas supply.” The term “gas supply” was not defined in the contract. The issue was ultimately determined to present a fact question that could not be resolved in a summary judgment proceeding. However, the court did discuss the meaning of gas supply under the NAESB contract and the right of a seller to allocate the available gas supply among multiple buyers.
Apache contended that it was a common industry practice to internally allocate specific sources of supply (certain platforms) to specific delivery points. However, Apache presented no evidence that effectively supported that argument, and Virginia Power did present evidence that contested Apache’s custom and usage claim. Therefore, the court proceeded on the basis of the plain and ordinary meaning of gas supply. The court found that the meaning of “gas” was clear but the meaning of “supply” was not. Apache’s evidence did not address the effect of the hurricanes on all of the possible sources of supply but only on those platforms that Apache had internally designated as allocable to the first delivery point. Therefore, Apache left open the fact question as to whether or not Apache could have delivered the gas at the second delivery point.
Moreover, the court held that even if it accepted Apache’s narrow definition of gas supply, there was still a fact issue as to Apache’s ability to deliver gas. The record showed that enough gas was delivered to meet the contract requirements of all five buyers, but that one of those buyers took a disproportionately large amount over the minimum contract volume specified in its contract. Apparently Virginia Power and the third party buyer held different priorities or rankings in the event deliveries were curtailed, but there was nothing in the record to explain the rankings. The court held that existing authority supporting allocations in the event of a shortage (without additional evidence from Apache) would not support a disproportionate allocation when there was no shortage.
The significance of the case is that it illustrates how the simple and basic terms of the NAESB contract leave many issues open for controversy. It clarifies the relationship between events of force majeure and the reasonable efforts required to avoid them. The discussion of gas supply and allocations among multiple buyers highlights again the lack of specificity in the simple NAESB contract.