Justin T. Scott, Charles L. Sharman & Zachary J. Wyatte | BuildSmart
The Texas Supreme Court recently provided new guidance in interpreting force majeure language in an oil and gas drilling dispute. In Point Energy Partners Permian, LLC v. MRC Permian Company, the court held that the oil and gas lessee’s scheduling error linked to a well collapse 60 miles from the lease site at issue did not constitute an unexpected event that prevented the lessee from meeting a drilling deadline in the lease. While this case involves an oil and gas lease, the court’s analysis is instructive regarding interpretation of force majeure clauses and thus provides guidance regarding construction contracts’ force majeure clauses as well.
In MRC Permian, the oil and gas lease at issue required the lessee to commence drilling a new well by a certain date in order to suspend lease termination at the end of the lease’s primary term. However, the lessee mistakenly scheduled the drilling of a well to commence three weeks after this deadline. Once the deadline lapsed, and upon discovering its mistake, the lessee attempted to invoke the lease’s force majeure clause, claiming that an allegedly qualifying event that occurred nearly a month before the drilling deadline, and on an unrelated lease 60 miles away, retroactively kept its lease in force through the deadline, but the Texas Supreme Court disagreed.
In its reasoning, the court noted that a force majeure clause is a contractual provision allocating the risk of loss if performance becomes impossible or impracticable, especially as a result of an event or effect that the parties could not have anticipated or controlled. Force majeure clauses, however, come in many shapes, sizes, and forms. For example, force majeure clauses vary according to their (1) definition of “force majeure,” such as specifying a list of qualifying events; (2) causal-nexus requirements, such as requiring that the force majeure event caused the failure to perform, prevented or hindered compliance, or delayed or interrupted operations; (3) remedial-action requirements, such as requiring due diligence or reasonable efforts to overcome or mitigate the force majeure event’s effects, to remove the force majeure event, or both; (4) notice requirements; and (5) grace periods excusing or delaying contractual performance.
The force majeure clause at issue in MRC Permian addressed each of these types of variations, but the court focused on the predicate causal-nexus requirement of the clause, which stated “when Lessee’s operations are delayed by an event of force majeure…” Specifically, the court focused on what it means for the lessee’s operations to be delayed by a force majeure event and whether that requirement interacted with lease deadlines.
On this point, the lessee argued that even a slowdown of an operation erroneously scheduled to commence after the lease deadline could trigger the force majeure clause, but based on contractual interpretation maxims, the court found otherwise. For example, the court noted that it does not read contractual phrases in isolation and must avoid taking literalism too literally and adopting a wooden construction foreclosed by the legal text’s context. Further, the court stated that context is a primary determinate of meaning, and a force majeure provision must be read within the context of the entire lease agreement for a proper interpretation of the provision’s impact.
In short, the court found that if an untimely operation would have led to termination of the lease, even absent any delay, the alleged force majeure event is not the cause of the termination. Accordingly, the court held that, construed in context, the language “Lessee’s operations are delayed by an event of force majeure” did not refer to the delay of a necessary drilling operation already scheduled to occur after the deadline for perpetuating the lease and rendered judgment that the clause did not extend the drilling deadlines or perpetuate the lease.
As noted by the court, this case reinforces the Texas Supreme Court’s strong position in favor of parties’ freedom of contract, but it also serves as a reminder that courts construe contract terms in context and, when possible and proper, by avoiding unreasonable constructions. As such, parties to a construction contract should carefully examine the contract’s force majeure clause to determine what, if any, of the force majeure clause variations described herein are included and how those variations apply in the construction industry context so that, if needed, the effected party can properly invoke the force majeure clause.
When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.