HOUSTON – ConocoPhillips Co. has won a contract dispute over a drilling project after a state appeals court found that a drop in oil prices isn’t a natural or man-made disaster.
The 2-1 opinion filed May 31 in the Court of Appeals for the 1st District of Texas consisted of a panel of Chief Justice Sherry Radack and Justices Harvey G. Brown and Russell Lloyd. Brown dissented.
According to the opinion, ConocoPhillips, TEC Olmos LLC and Terrace Energy Corp. entered into a drilling contract containing a “force majeure” clause.
“When one of the parties failed to perform its contractual obligations by the contract deadline, it sought to invoke force majeure protections,” the opinion said. “Litigation followed, and the trial court held that the force majeure clause was inapplicable as a matter of law.”
As part of the agreement, TEC Olmos would test-drill land leased by ConocoPhillips in search of oil and gas, the opinion states. The contract contained a liquidated damages clause requiring TEC Olmos to pay $500,000 if it failed to begin drilling by the specified deadline.
The opinion notes that changes in the global supply and demand caused oil prices to "significantly" drop. This reportedly led to TEC Olmos losing its financing for the project and the company invoked the force majeure clause in an effort to extend the drilling deadline. But ConocoPhillips argued the clause wasn’t applicable and filed a lawsuit seeking the $500,000 owed for breaking the contract along with attorney’s fees. The trial court agreed and TEC Olmos appealed.
The appeals court affirmed the trial court’s judgment, saying, “an economic downturn in the oil and gas industry is not like the other events specified in the contract as force majeure events.”
These events include natural or man-made disasters like "fires, floods, storms, an act of God, governmental actions and labor disputes,” the opinion states.
“These events, while perhaps foreseeable, occur with such irregularity that planning for them and allocating the risks associated with such would be difficult,” the court said.
The court noted that TEC Olmos was aware that its ability to start on time “would be contingent on obtaining financing.”
“Changes in commodities markets and the resulting ability of a party to obtain financing occur regularly and could easily be dealt with in a specific contractual allocation of risks,” the court said.
In his dissenting opinion, Brown noted that the contract doesn’t “say that an event must have been unforeseeable to suspend performance.”
"I dissent because the Texas Supreme Court has repeatedly told us that it is this state’s policy to enforce contracts as they are written,” Brown said.
He described contracting parties as being masters of their agreement.
“They should be able to rely on their negotiated terms to mean what they say,” Brown said. “We are not to imply terms into an agreement. If a party wants a term in a contract, the party should write it.”