Unit Petroleum Company v. Koch Energy Services, LLC is another force majeure case arising out of winter storm Uri. Unlike a similar case, summary judgment was denied because, said the United States District Court,
The word “reasonable”, although not ambiguous, is a question of fact that must be answered by looking into the circumstances of the case at issue, including the nature of the proposed contract, the purposes of the parties, the course of dealing between them, and any relevant usages of trade.
The facts
Unit agreed to sell gas to Koch under a Base Agreement (the North American Energy Standards Board General Terms and Conditions Base Contract for Sale and Purchase of Natural Gas). Specific transactions were memorialized in Transaction Confirmations. The parties’ obligations were “firm”, meaning that either party may interrupt its performance without liability only to the extent that performance is prevented by events of force majeure.
The operative portion of the clause was, “Seller and Buyer shall make reasonable efforts to avoid the adverse impacts of force majeure and to resolve the event or occurrence once it has occurred in order to resume performance”.
In January 2021 Unit informed Koch that in February it would sell 25,000 MMBTU/day as a base load and up to 6,500 as a swing option. Then came Uri, which damaged Unit’s wells. Unit alerted Koch that it was declaring force majeure, explaining that Uri had reduced gas supply such that it could not fill Koch’s order. Koch rejected the declaration insisting that Unit perform by either buying back its contract obligation or buying gas on the spot market for Koch. Unit did neither. During this time Unit delivered gas to two other purchasers with whom it had interruptible contract obligations.
Koch bought spot gas for substantially greater sums for its spot gas and the next month withheld $1.3 million from Unit as cover damages and invoiced Unit $5.1 million for gas that it purchased on the spot market.
Arguments
Unit argued that because the storm was a qualifying force majeure event it had no obligation to buy gas on the spot market or buy back its obligation, arguing that to require Unit to either buy spot gas or buy back its obligation would effectively eliminate the force majeure clause.
Koch responded that there were fact questions precluding summary judgment, such as whether the storm caused Unit’s nonperformance and whether Unit undertook reasonable efforts to avoid the effects of the event. Koch also argued that industry practice requires the seller to either buy back its obligation or buy gas on the spot market during an event such as Uri and that Unit should have allocated to Koch gas that it sold under interruptible contracts.
Result
Summary judgment denied. Whether a particular gas allocation was fair and reasonable was a fact issue. The experts disagreed on what activities were reasonable in the context of “resonable efforts”. A jury could disagree both as to whether Unit’s gas allocation waa fair and reasonable and whether Unit exerted reasonable efforts to avoid the effects of the force majeure event.
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