Co-author Emily Morris *

One of the questions raised in 1776 Energy Partners, LLC v. Marathon Oil EF, LLC was whether Marathon as operator could apply revenues owed to non-operator 1776 under one joint operating agreement to satisfy unpaid debts owed on another. Unfortunately, we don’t have an answer. (FWIW, this is the same “1776” from a recent post, whiffing at the plate again with runners in scoring position.)

The litigants were parties to the Culberson, Longhorn and Bordovsky JOAs. 1776 stopped paying its share of expenses under the Culberson and Longhorn JOAs and advised it was going to drill a well on Bordovsky, in which it was the operator. Marathon questioned how 1776 could fund a new well when it owed millions on other wells. 1776 responded that the new well would be funded by outside investors.

Marathon began cross-netting revenues against expenses and sent an AFE proposing three wells under the Culberson JOA along with a $9.4 million cash call. 1776 had 30 days to elect whether to participate and if it elected to participate, 15 days to pay the cash call or it would be deemed non-consent.

1776 elected to participate in the new wells but would not pay the cash call. The parties engaged in a series of complicated negotiations over two years in an attempt to resolve the situation. The negotiations failed.

Practice tip

One tactic that probably should have been avoided was an employee of 1776 responding to Marathon’s notice of default by emailing a picture of a man pulling out empty pants pockets.

Litigation ensued. Witnesses at trial disagreed on pretty much everything, including, for example, whether a certain phone call ever even happened.

The court entered a final judgment for Marathon based on the summary judgment order and evidence presented at trial showing principal and interest owed under the Bordovsky JOA and credits owed on the Culberson and Longhorn JOAs.

What about cross-netting?

The trial court declared that the Culberson JOA did not require 1776 to pay debts under other JOA’s in order to participate in the drilling of the three proposed wells under that JOA. This was based on Marathon’s refusal to assure 1776 and its outside funders that it would not cross-net the new wells’ cash call under one JOA against debts on the others.  The court of appeals agreed with Marathon that the ruling resolved a hypothetical question rather than a live controversy. It was an advisory opinion because 1776 never paid the Culberson cash call.

1776 had one last bottom-of-the-ninth opportunity on cross-netting. After partial summary judgment in favor of Marathon for $1.9 million plus interest for breach of the Culberson and Longhorn JOAs, 1776 moved to amend its counterclaim to assert that Marathon’s cross-netting was a repudiation and anticipatory breach of the Culberson JOA and to seek a declaration that cross-netting was not allowed. The trial court denied the amendment on the basis that it was not timely filed. That ruling was upheld on appeal.  Result: No answer to the cross-netting question.  

Procedural issues

In addition to reversing 1776’s declaratory judgment, the court of appeals overruled challenges by 1776 to the final judgment on issues including admissiblity of expert testimony, the jury charge, fraud by nondisclosure, calculation of damages, the effect of an “alternative judgment”, and segregation of attorneys’ fees.

Your musical interlude. Our regretfully tardy remembrance of D-Day!

*Emily is a rising 3L at University of Texas Law School and a Gray Reed summer associate.

Co-author Blake Bryan *

Tips on litigation avoidance: Not making promises you don’t intend to keep is easy enough. Stating a fact or making a promise and things change, you could be a fraudster if you don’t come clean before closing.That’s the takeaway in Baxsto, LLC v. Roxo Energy Co., a Texas Court of Appeals reversed a summary judgment dismissing fraud claims by a mineral owner-lessor against defendants the lessee and its financier. For details we refer you to the 47-page fact-intensive opinion.

The facts

Mineral owner Baxsto negotiated with Roxo and Vortus for a lease and potential sale of its minerals in Howard and Borden Counties.

After the transaction Baxsto discovered actions and statements by Roxo and Vortus that conflicted with representations in negotiations and promises in the parties’ letter of intent. Baxsto sued asserting fraud and derivative claims, alleging they locked it into a lease and an agreement to sell the minerals at a price lower than the true market value. The trial court granted summary judgment in favor of the defendants on all claims. Baxsto appealed.

For simplicity we combine the allegations and findings in no-evidence and traditional summary judgment motions. The questions of fact were about knowledge of falsity, intent to induce, and duty to disclose. The court of appeal ruled that at least a scintilla of evidence raised a genuine issue of material fact on all three elements.

Knowledge of falsity

  • Defendants knew their representations about a most-favored-nations clause for lease bonuses were false because they paid a lease bonus to a third party that exceeded Baxsto’s.
  • Roxo knew that it never intended to drill and develop the interests it acquired.
  • Defendants knew that their funding commitment of $200–250 million was false when made.
  • Roxo knew that its promise not to record the lease until after the lease bonus was paid was false.

Intent to induce

  • Knowledge of the falsity of representations was enough evidence to create a fact issue on intent to induce.

Duty to disclose

  • The defendants had a duty to disclose that several representations that might have been true when made were no longer true. 

Justifiable reliance

The issue was whether Baxsto could have plausibly relied on defendants’ representations.  Three clauses in the contract relied upon by the defendants did not directly contradict their oral representations. Thus, they failed to meet their burden of identifying conditions in the contracts. The Court also determined that there were no red flags making reliance unwarranted.

Statute of frauds

Defendants’ duty to Baxsto arose independent of the parties’ contract regardless of whether the damages sought were solely for economic losses. The economic lass doctrine did not bar the claims.

The recovery that Baxsto sought was akin to a claim for out-of-pocket damages for being induced to part with its mineral interests at a price lower than their true value. Fraud claims seeking out-of-pocket damages—the difference between the value parted with and the value received—are not barred by the statute of frauds, unlike benefit-of-the-bargain damages.

Derivative fraud claims

Evidence was sufficient to create genuine issue of material fact on Baxto’s claims for

  • Beneficiaries of fraud,
  • Civil conspiracy,
  • Constructive trust, and
  • Joint enterprise.

The facts are complicated, there are lots of them, and they will be hotly contested (A sham affidavit claim was overruled). Who knows if Baxsto can prove its claims to a jury.  The parties will return to the district court for a trial.

Your musical interlude, new band, ancient theme.

*Blake is a Baylor Law 2-L and a summer associate at Gray Reed.

Freeeport-McMoRan Oil and Gas, LLC and Ovintiv USA Inc. v. 1776 Energy Partners LLC  presented a recurring question faced by Texas oil and gas producers:  When can proceeds of production be withheld by the operator without liability for interest?

Ovintiv and its predecessor operator, Freeport-McMoRan, represented by Gray Reed partners Jim Ormiston and David Leonard, suspended proceeds it was contractually obligated to pay to non-operator 1776 in reliance on the safe harbor provisions of Section 91.402(b) Texas Natural Resources Code.

Upon learning that a Final Judgment had been entered in an unrelated case in favor of Longview Energy Company and against 1776 (then called Riley-Huff Energy), awarding title to leasehold interests and production proceeds to Longview, Ovintiv placed the disputed proceeds in suspense pending resolution of the underlying title dispute.  Ovintiv advised Longview and 1776 that it would deliver the proceeds to their rightful owner once the title dispute was resolved.  The Texas Supreme Court issued its mandate reversing the Longview Judgment and Ovintiv promptly paid the suspense funds to 1776, but 1776 continued to prosecute its claims for statutory interest and attorney’s fees.

Section 402(b) permits a payor (operator) to withhold payment of production proceeds without interest under several circumstances, including when “there is … a dispute concerning title that would affect distribution of payments” or if “there is… a reasonable doubt that the payee… has clear title to the interest in the proceeds of production.”

The trial court granted summary judgment for Ovintiv. The safe harbor statute applied as a matter of law to Ovintiv’s suspense of the proceeds.  The final judgment also awarded Ovintiv and Freeport-McMoRan legal fees against 1776 pursuant to a prevailing party clause in the Joint Operating Agreements.

The Court of Appeals reversed finding that there were fact issues regarding whether the safe harbor statute applied, even though the underlying facts were not disputed.   

The Supreme Court reversed and reinstated the trial court’s judgment, finding the safe harbor statute applied as a matter of law and Ovintiv was entitled to suspend the proceeds without liability for interest or attorney’s fees.   

1776 argued that the Longview Judgment did not “affect distribution of payments” because 1776 retained legal title to the leasehold interests and proceeds or held them as trustee under the constructive trust for the benefit of Longview.  1776 also argued that its $25 million supersedeas bond in connection with the appeal of the Longview Judgment entitled it to continue to receive proceeds during the appeal.  The Supreme Court rejected both arguments, reasoning that the plain meaning of “would,” as “expressing a contingency or possibility,” and the plain meaning of “affect,” as “to produce an effect on,” justified application of the safe harbor statute as a matter of law.   

The Court also analyzed whether Ovintiv had a reasonable doubt that 1776 had clear title to the proceeds as an independent ground for safe harbor protection.  Although reasonableness sometimes is a fact question, the Court reasoned that Ovintiv’s reasonable doubt must be determined based on an objective standard premised on persons of ordinary sensibilities. Because the underlying facts were undisputed, Ovintiv’s reasonable doubt presented a question of law where only one rational inference can be drawn.

The Court held as a matter of law that Ovintiv had reasonable doubt that 1776 had clear title to the proceeds of production. The Longview Judgment imposed a constructive trust over the subject leasehold interests and associated proceeds, which clouded 1776’s title. Thus, the very existence of the underlying title dispute, so long as it was not frivolous, clouded the title even though the Longview Judgment was ultimately reversed.

Tina Turner, RIP

Co-author Derek Younkers *

And what a difference it was! In Apache Corp. v. Apollo Expl. LLC et al, Apache and others acquired an oil and gas lease on 100,000+ acres in the Texas Panhandle. The primary term was three years. The effective date was January 1, 2007, “from which date the anniversary dates of this Lease shall be computed”.  Extension beyond the primary term required a producing well and the creation of three blocks of equal acreage from which the lessees would drill wells to a combined depth of 20,000 feet per block per year.

The parties recorded a Memorandum of Lease in the public records. The Memorandum recited that it was “subject to other provisions of the Lease” and “the Primary Term thereof expires on the 31st day of December 2009.”

The other lessees sold 75% of their working interest to Apache by a series of substantially identical purchase-and-sale agreements. Section 2.5 granted each Seller a back-in working interest for up to one-third of the interests it conveyed to Apache once the wells reached “Two Hundred Percent … of Project Payout.”

Section 4.1 required Apache to offer “all of [its] interest in the affected Leases (or parts thereof) to Seller at no cost to Seller” should Apache’s drilling commitment for the year result in the loss or release of any of the leases.

In 2014, Apache bought lessee Gunn’s remaining interest of the leases and its PSA rights.

In 2015, Apache failed to drill 20,000 feet in the North Block of the lease.

The question for the Court: Did the North Block expire on December 31, 2015, or January 1, 2016?  The day the North Block expired determined whether Apache breached the contract by failing to offer the lease back to Sellers or had until the end of 2016 to drill the 20,000 feet.

The Sellers sued for breach of contract and declaratory relief. Apache filed four motions for summary judgment asking the Court to rule that:

(1) Apache complied with § 4.1;

(2) § 2.5’s 200% provision meant that Apache had to reach a 2:1 return on investment before Sellers could exercise their back-in option;

(3) the North Block expired on January 1, 2016; and

(4) § 4.1 required Apache to only offer back each Seller’s original interest, not all of the interests.

The Court applied the common-law default rule for describing time when parties use the words “from” or “after.” Under the rule, the date from or after a period is to be measured is excluded in calculating time periods. Thus, a period of years ends on the anniversary of the measuring date, not the day before. No language in the lease manifested a clear intent to displace the rule.

The Memorandum stipulated the lease would expire on December 31, 2009, but by its terms the Memorandum was subordinate to the lease. The lease was not ambiguous, so the Court ignored extrinsic evidence of the December date and found the primary term ended on January 1. Thus, the North Block expired on January 1, 2016.

The Court found that Section 4.1 only required Apache to offer back to each seller its original interest. A contrary interpretation would require Apache to offer each seller 100% of the same interests. (The court of appeal decision focused more on this issue.)

Finally, Section 2.5 meant a 2:1 ratio of profits to expenses. The Sellers’ argument that they could back in when profits equaled expenses would render the 200% language meaningless.

The Court remanded the case for further proceedings.

Your musical interlude.

* Derek is a rising 2-L at Baylor Law School and a Gray Reed summer associate.

You might recall our posts on litigation by states, counties, and cities blaming a host of calamities, real and imagined, past and future, on Big Oil. The producers tried their best to remove the cases to federal court. In a two-sentence ruling, the United States Supreme Court refused to consider defendants’ Hail-Mary to have the cases remain in federal court. This was the City of Baltimore case but it is expected to affect all climate litigation in which the plaintiffs assert only state law claims. The jurisdictional mud-wrestling is over and it’s back to the state courts for resolution.

In the future, you can follow climate litigation at this site: U. S. Climate Change Litigation sponsored by Columbia Law School and Arnold and Porter.

In the meantime, the breathless MSM celebrated the decision, likening these cases to the Big Tobacco litigation from years back.

Is the push to electrify the world at the expense of oil and gas achievable and if so, at what cost? Is government moving dangerously fast? Let’s hear from those who know more about the subject than I:

Daniel Markind in Forbes focuses the legal and financial challenges faced by New York State’s natural gas ban (60% of New York’s energy comes from fossil fuels). It’s probably pre-empted by federal law anyway.

The Wall Street Journal observes that the government doesn’t have to actually implement regulations that are destructive to the economy, the threat itself drains the life out of investment in whatever the government is targeting.

https://www.wsj.com/articles/power-plants-environmental-protection-agency-rule-epa-biden-administration-fossil-fuels-60f06bd0

According to E.J. Antoni in the Daily Signal, Biden’s Push for electric vehicles is expensive and unrealistic.

What the push will do to economy it will also do to the birds.

Finally, a two-fer: over-regulation and offshore wind turbines in the Northeast could endanger your Friday fishsticks say some Maine fishermen.

BUT WAIT!

Misguided ideology is a two-way superhighway. Here in Texas, the wind capital of the free world, our erstwhile laissez-faire Legislature loads the deck against alternative energy, says Texas Monthly.

RIP Chris Strachwitz, founder of Arhoolie Records. A musical interlude from one of his first discoveries.

Imagine these facts in a force majeure dispute (as presented in Point Energy Partners Permian LLC et al. v. MRC Permian Company).

Lessee (MRC) invokes the force majeure provision of an oil and gas lease, asserting that “wellbore instability” on a well on an unrelated lease requires the lessee to effectively redrill portions of the other well, setting back its rig schedule for the lease at issue. The event results in a 30-hour slowdown in the drilling of the other well. The lessee’s deadline to spud a new well on the lease to avoid lease termination is May 22, which it mistakenly records as June 19. Lessee schedules the spud date for June 2. Lessee discovers the error after the deadline has passed. Lessee could have spudded the well by the May 22 deadline but decides to drill the other well first. Before lessors receive a June 15 force majeure notice from MRC they sign new leases with Point Energy. 

MRC sues Point Energy and the lessors for trespass to try title, repudiation and civil conspiracy to tortiously interfere with the existing lease. Point Energy counterclaims for trespass to try title, accounting and constructive trust.

Who wins?

The force majeure discussion

The Court described a force majeure clause as a “contractual provision allocating the risk of loss if performance becomes impossible or impracticable, especially as a result of an event or fact that the parties could not have anticipated or controlled”. The Court observed that force majeure clauses “come in many, shapes, sizes and forms” and may vary according to

  • The definition of force majeure,
  • the causal-nexus requirement,
  • the remedial-action requirement,
  • the notice requirement, and
  • the grace period excusing or delaying performance.

The Court focused on the “causal-nexus” requirement that is a necessary predicate to properly invoke the force majeure clause and decided that MRC did not satisfy the predicate.

As for remedial-action requirement, the lessee must use its “best efforts” to overcome the problem, which would not have been satisfied even if there had been no delay because the drilling of the new well as scheduled (i.e., after the lease termination deadline) would not have satisfied the continuous drilling requirement to perpetuate the lease.

The Court also determined that MRC would have had enough time to move the rig to the well on the lease at issue and to commence drilling by the termination date but chose to drill other wells first.

MRC’s proposed definition of the meaning of “delay” was not persuasive. The Court cautioned against taking literalism too literally and adopting of wooden construction of a word foreclosed by the context of the document at issue. That’s a mouthful, but the lesson is the Court will not allow a party to focus on the meaning of one wordd at the expense of the entire document.

The Court concluded that the ordinary person using the phrase “Lessee’s operations are delayed in by an event of force majeure”, given its textual context, would not understand those words to encompass a 30-hour slowdown of an essential operation that was already destined to be untimely due to a scheduling error.

The Court conclujded that the force majeure clause did not save the lease, and the Court rendered a take nothing judgment on MRC’s tortious interference claims to the extent those claims were predicated on application of the force majeure clause to save the lease.

Other issues preserved but not reached by the Supreme Court, such as the extent of acreage that would be held under a retained-acreage clause, were remanded to the Court of Appeals. 

Your post-Jazz Fest musical interlude

In TotalEnergies E&P USA, Inc. v. MP Gulf of Mexico LLC. the Supreme Court of Texas resolved the chaos created by conflicting dispute resolution regimes in three contracts for ownership and operation of an offshore unit and gathering system. The essential question: Did the parties agree that an arbitrator, rather than the courts, must determine the arbitrability of the disputes.

The Court held that the parties clearly and unmistakably allocated arbitrability issues to the arbitrator when they agreed to arbitrate their controversies in accordance with the AAA Commercial Rules, and their agreement to arbitrate some controversies but not others did not affect the delegation of the arbitrability decision to the arbitrator.

There were three contracts: the Chinook Unit Operating Agreement, a System Operating Agreement, and a Cost-Sharing Agreement for a common system to secure and transport production from the Chinook Unit and another unit. There were three procedings:

  • TotalEnergies sued in district court for a declaration construing the Cost-Sharing Agreement, which had no arbitration clause. That dispute required the court to look at the Chinook Operating Agreement but no one asked the court to determine the parties’ rights under the Chinook Operating Agreement,
  • TotalEnergies initiated an arbitration seeking determination of the parties’ rights under the Chinook Operating Agreement, which required arbitration of any controversy arising between the parties.
  • MP Gulf initiated an arbitration under the American Arbitration Association Commercial Rules, alleging that TotalEnergies breached the System Operating Agreement, which required arbitration of any controversy arising out of the agreement

The Court summarized the state of arbitration law in Texas:

  • Arbitration is a creature of contract, not coercion. Parties will not be forced to arbitrate unless they agreed to it.
  • When a party challenges the validity of a contract, but not of an arbitration agreement within the contact, the courts must enforce the arbitration agreement and require the arbitrator to decide the challenge to the broader contact. …
  • But when a party challenges the scope of the arbitration agreement, the courts must resolve that challenge ….
  • UNLESS the parties agree that the arbitrator will decide.
  • Courts will enforce an agreement to delegate arbitrability to the arbitrator if that agreement is “clear and unmistakable”.
  • The general rule is that an agreement to arbitrate under the AAA rules is a “clear and unmistakable” agreement that the arbitrator is the one to decide whether the disputes must be resolved through arbitration.

The Court referred to American Arbitration Association Rule 7(a). As it existed at the time the arbitrations were initiated the rule empowered arbitrators to “rule on his or her own jurisdiction.”  The rule changed in September 2022 to specifically designate the arbitrator as the arbiter of the scope of the arbitration.

What about a contractual carve-out of issues? It didn’t matter. Delegation to arbitrability to the arbitrator included the decision on the scope of the issues to be arbitrated and those that would not be.  … That is, unless the parties agreed more specifically than in this situation what would be arbitrated and what would not be.

Interested in the history of Texas, federal and other state court decisions on this subject? You are invited to read the opinion, all 50 pages of it. These meager 500+ words cannot do justice to all of that history.  And you don’t want a treatise anyway, so we are in accord.

Your mid-Jazz Fest musical interlude.

Golden Eagle Resources II LLC v. Rice Drilling D LLC. presents a small step in the development of subsurface trespass law in Ohio. The federal court considered a motion to dismiss, in which it evaluated the sufficiency of the complaint to state a cause of action. Such a motion is not a challenge to plaintiff Golden Eagle’s factual allegations. The causes of action were trespass and conversion.

Golden Eagle owns mineral rights in two tracts in Belmont County, 11.456 acres and 7.47 acres. Rice owns leasehold rights in the Marcellus Shale and Utica Shale. Minerals from the surface to the top of the Marcellus, between the bottom of the Marcellus and the top of the Utica, and below the base of the Utica were excluded from the lease. Rice drilled the “Big Tex” well, which is in the Big Tex 6 drilling unit. The unit overlaps with the entirety of the 7.47 acres and 9.05 of the 11.456 acres. Rice produces gas from the “Utica/Point Pleasant formations”. The Point Pleasant is below the Utica and not covered by the lease.

Trespass

Under Ohio law a trespass is an interference or invasion of a possessory interest in property. An entity is liable for trespass if it intentionally enters upon land in the possession of another or causes a thing or third person to do so. Landowners’ rights include the right to exclude invasions that actually interfere with their reasonable and foreseeable use of the subsurface.

The interest at issue was the Point Pleasant formation. How Rice invaded the property was the question. The Big Tex wellbore did not pass under Golden Eagle’s tracts, so there was no physical trespass with the drill bit.

Golden Eagle alleged trespass by Rice’s improper pooling. The court concluded that Ohio law does not hold that improper pooling into a drilling unit constitutes a trespass.

The central question was whether Ohio law recognizes a trespass by subsurface injection of frac fluids into the Point Pleasant formation. Rice relied on the so-called “negative rule of capture” allowing a landowner to inject into a formation substances which then migrate through the structure of the land to the land of others even if it results in displacement under such land. Ohio courts have not accepted that doctrine, said the court.  

Rice also argued that even if a claim for subsurface injectate is cognizable, it will fall short without allegations of physical damage or interference with use, assertions that were not in the complaint. Golden Eagle admitted that it did not specify the nature of the alleged physical invasion.  The trespass claim fell short of the federal pleading standard and Golden Eagle was given 14 days to amend its complaint.

Conversion

Golden Eagle alleged that Rice wrongfully converted oil and gas produced from the Point Pleasant formation that should belong to Golden Eagle. Ohio courts have held that the rule of capture does not apply to drainage or seepage of natural gas caused by the injection of frac fluids onto into another’s property. The court cited Briggs v. Southwestern Energy. The court concluded that the sparse Ohio case law on this topic recognizes a conversion claim predicated on natural resources that have been acquired by fracking that invades the plaintiff’s property. That is what Golden Eagle alleged and thus it adequately stated a claim for conversion.

Caveat

It might not matter. The case has been stayed pending a motion for summary judgment ruling on a related case.

Your Jazz Fest warmup musical interlude

As you negotiate your master service agreements are you confident that you know how insurance choices might affect indemnity obligations? Me neither. That’s why I turn to my Gray Reed partner Darin Brooks and his insurance coverage lawyers. I didn’t consult them about this post so all errors are on me, not them.

A basic principle of Texas insurance law is that a separate contract may be incorporated by reference into an insurance policy only if that reference is clearly manifested in the terms of the policy itself.  A court will consult the separate contract only to the extent that the policy requires it.

The question in Exxon Mobil v. National Union Fire Insurance Company was whether an insurance policy incorporated payout limits in an underlying service agreement. It did not.

The facts

Savage Refinery Services was an independent contractor at the Exxon refinery in Baytown. In the service agreement Savage promised to obtain at least a minimum stated amount of liability insurance for its employees and to name Exxon as an additional insured. Fulfilling its obligation, Savage procured five different insurance policies. Two Savage employees were severely burned in a workplace accident, sued Exxon for compensation for their injuries, and settled for $24 million. $5 million was paid from Savage’s primary insurance policies. National denied Exxon coverage under an umbrella policy. Exxon sued for breach of contract.

Summary judgments were heard on the question of Exxon’s status as an insured under the umbrella policy and whether the Exxon-Savage service agreement otherwise limited Exxon’s entitlement to further policy proceeds.

The Court’s reasoning

The policies defined “Insured” as “any person or organization, other than the Named Insured, included as an additional insured under Scheduled Underlying Insurance, but not for broader coverage than would be afforded by the Scheduled Underlying Insurance.”

The first question was easily resolved: National had recognized Exxon as an additional insured under its primary policy. The primary policy was incorporated for the limited purpose of identifying who was an insured.

The real inquiry was invited by the umbrella policy’s reference to the primary policy. The umbrella policy disclaimed “broader coverage” than what the primary policy offered. Exxon was not demanding broader coverage. It sought only the same coverage as the primary policy but at the umbrella policy’s higher limits because the primary policies had been exhausted.

National Union argued that the limit on “broader coverage” invoked payout limits of the service agreement, but the umbrella policy did not say anything about the service agreement’s payout limits.

To the extent it could read the umbrella policy to reference the service agreement, the Court found no limits that the umbrella policy could adopt. The primary policy had its own payout limits, which was the very reason that the parties needed an umbrella policy. Interpreting “broader coverage” to refer to payout limits would give the umbrella policy a self-defeating meaning.  An umbrella policy springs into action only when the primary policy is exhausted. To conclude that “broader coverage” referred to payout limits could be the result only if the language the parties use clearly required it. There was no such language here.

The Court considered conventional usage of the words “coverage” and “umbrella insurance”. The former contemplated the risks covered, the latter was triggered only by reason of the limits under other policies. Coverage does not include payout limits in this context. The umbrella policies provide greater limits for risks already covered by primary policies.

The Court of Appeals’ decision in National’s favor was reversed and the case remanded.

Your musical interludes, sponsored by GM … and Ford …

MIECO, LLC v. Pioneer Natural Resources presented a challenge to a force majeure defense in a dispute arising from Winter Storm Uri. The defense carried the day.

MIECO agreed to purchase 20,000 MMBtu/day of natural gas from Pioneer. Pioneer delivered residue gas from the tailgate of a Targa processing plant to two points near the border of Arizona and California. If Pioneer experienced a shortfall, it purchased gas on the spot market to cover.

From February 14 to 19, 2021, Pioneer failed to deliver the full amount of gas it contracted to deliver.  To fulfill its obligations to its own customers MIECO reallocated gas it had contracted to purchase for other purposes two days earlier. On February 16, Pioneer sent a notice of force majeure dated February 15. On February 16-19 Pioneer delivered no gas and MIECO purchased gas on the spot market. During this period Pioneer made no effort to purchase replacement gas. Pioneer resumed daily delivery on February 20 until March 1 when it was short again. Pioneer withdrew its force majeure declaration two days later.

The contracts (substantially redacted)

11.1. (as amended) … “Force Majeure” … means an event or circumstance which prevents one party from performing its obligations under one or more Transactions, which event or circumstance was not anticipated as of the date of the Transaction was agreed to, which is not within the reasonable control of, or the result of the negligence of, the claiming party, and which, by the exercise of due diligence, the claiming party is unable to overcome or avoid or cause to be avoided.

11.2. Force Majeure shall include … weather related events affecting an entire geographic region, such as low temperatures which cause freezing or failure of wells or lines of pipe …. Seller and Buyer shall make reasonable efforts to avoid the adverse impacts of a Force Majeure and to resolve the occurrence once it has occurred in order to resume performance.

11.3. Neither party shall be entitled to the benefit of … Force Majeure to the extent performance is affected by … loss or failure of Seller’s gas supply …

MIECO sued for $9MM+ in damages for the cost to cover gas not delivered by Pioneer.

In cross-motions for summary judgment Pioneer argued its nondelivery was excused by the force majeure provisions of the contract because it lost its gas supply due to low temperatures that affected the entire region.

Force majeure wins

MIECO argued three reasons why Pioneer’s facilities were not covered, none of which the Court found persuasive.

Caveat: For the most part, New York law applied in this Texas case.

First: the event must render performance literally impossible, citing a dictionary definition of “prevent”. But “prevent” also has other meanings (look it up). To require impossibility would render portions of the force majeure provisions superfluous, including the requirement that the claiming party was unable to overcome or avoid the event by exercise of due diligence.

Force majeure ordinarily excuses a party’s performance only if the clause specifically includes the event that actually prevents performance. Citing Ergon W. Va. v. Dynergy, a Texas case, the Court reasoned that to require a party to be unable to perform by force majeure if it could still purchase gas on the spot market would render the force majeure provision essentially meaningless because it would mean that a seller could never invoke force majeure so long as there was some gas available anywhere in the world at any price. That would lead to an absurd result.

Second: Pioneer lost only its preferred source and that is not force majeure because the contract provides only for price, amount, and delivery point. But the contract specifically mentioned Pioneer’s gas supply. The availability of other supplies did not bar a force majeure defense.

Third, the contract did not define the gas supply to be delivered. Under MIECO’s definition, if there were no available gas anywhere in the world at any price with which Pioneer could meet its contractual obligation it would still be liable for non-delivery unless 11.2 was met.  Pioneer’s “gas supply” is the gas it received from the Targa plant. This avoids the same absurd result. And use of the possessive “Seller’s” suggests the gas supply is owned or possessed by Pioneer, something which cannot be said of the spot market.

The court excused Pioneer’s failure to perform, granted Pioneer’s motion and denied Mieco’s breach of contract claim.

Your musical interlude