In a case of interest to the natural gas industry, the Appellate Division of the Superior Court in New Jersey recently decided a seller could not rely on a force majeure provision within a natural gas supply contract. In this instance the supply of gas from the seller’s fields (located near the delivery point), was prevented by the loss of transportation in an intermediate transportation system. The court decided that the seller could deliver gas to the delivery point using a different source and transportation route, which would likely necessitate it buying gas from elsewhere to fulfil its obligations.

Although a New York law case, it is likely that English law would reach the same result. The decision highlights the importance of carefully drafting force majeure clauses in gas sale and purchase contracts where there may be multiple potential sources of gas and/or gas supply routes to the point of delivery.

Force Majeure in English law

In English law there is no common law concept of force majeure. In the absence of a force majeure clause in an English law agreement, a party seeking relief from performance for reasons beyond its control has only the common law remedy of frustration; if there is no other express standard of performance stated in the agreement. This is unlikely in the case of a sellers’ obligation to deliver quantities within the annual and daily contract quantities. As one of the requirements for frustration is that the event must render further performance of the contract impossible, if there is an alternative method of performance of the obligation, a claim for frustration may be unsuccessful. As a consequence of the limited remedy offered by frustration and counterparties’ preference for structured allocation of risk for non-performance through the supply chain, force majeure clauses are an essential part of natural gas sale and purchase contracts.

Facts

Hess Corporation (the “Buyer”) and Eni USA Gas Marketing LLC (the “Seller”) (together, the “Parties”) entered into a contract (the “Contract”) for the sale and purchase of 20,000 MMBtu/day of natural gas, with delivery taking place at the 2i - Zone L – 500 Leg pooling area of the Tennessee 500 (the “Delivery Point”).  The Seller produced gas from wells located in the Gulf of Mexico which were connected through underwater pipelines to the Independence Hub (“I-Hub”), a floating platform in the Gulf, approximately 195 miles off the coast of Louisiana. Other producers also sent gas to the I-Hub. Once in the I-Hub, the gas was comingled, processed and transported via the Independence Trail Pipeline, owned and operated by Enterprise, to another platform in the Gulf called the West Delta 68. From there the gas was then transported to the Delivery Point, where it was pooled.

The Contract was based upon a pro forma template that promoted a flexible contracting approach, consisting of a number of provisions to be completed by the Parties as they deemed necessary to reflect the nature of the specific transaction. In this case, the Parties did not complete the “transporter” information and did not include any “Special Conditions”, such as identifying the origin of the gas. As a consequence, the Contract did not require the gas that was the subject matter of the Contract to have been produced from a specified field or to have been transported to the Delivery Point via a specified route.

The Contract contained a standard force majeure provision which stated that “neither party shall be liable to the other for failure to perform a firm obligation, to the extent that such failure was caused by a Force Majeure”. The Contract further stated that “Force Majeure shall include, but not be limited to…interruption and/or curtailment of firm transportation and/or storage by Transporters…”

On 8 April 2008, a leak in the Independence Trail Pipeline resulted in Enterprise ceasing all gas transportation through the pipeline. This resulted in the Seller being unable to ship gas from its production fields through the I-Hub to the Delivery Point. The Seller claimed force majeure under the Contract and argued that it no longer had an obligation to perform under the Contract on the grounds that the Contract expressly included as a force majeure event an interruption and/or curtailment of firm transportation by a pipeline transporter. The Buyer disputed the force majeure claim.

Decision and Reasoning

The Appellate Division of the Superior Court in New Jersey held that the Seller’s performance under the Contract should not be excused on the grounds of force majeure. 

The court found that the Seller had agreed to provide a specific quantity of gas at a specified delivery point (the Tennessee 500) and that nothing in the Contract obliged the Seller to ship the gas to the Delivery Point via a specific transporter or pipeline route, or for the gas to have been produced from a specific source. The Delivery Point itself was unaffected by the events causing the alleged force majeure and alternative sources of natural gas were available at the Delivery Point at such time. There was nothing in the Contract that prevented the Seller from purchasing natural gas from other sources and supplying it to the Buyer at the Delivery Point. Therefore the Seller had breached its obligations to deliver to the Delivery Point and sell to the Buyer natural gas in the contract quantities in accordance with the terms of the Contract.

The court distinguished the facts of this case from those in Virginia Power Energy Marketing Inc. (“VPEM”) v Apache Corporation (“Apache”) [Case number 14-07-00787-CV, 6 Aguust 2009 in the Court of Appeal of the State of Texas], which involved a force majeure claim under an identical clause to that set out in the Contract. The parties in Virginia Power had expressly agreed that Apache was to deliver gas to a specific delivery point. However, the specified delivery point itself had been damaged to such an extent that delivery was impossible. The court therefore decided in that case that Apache could rely on a force majeure clause and was not obliged to find an alternative delivery point at which to fulfil its sale obligations under the contract.

Comment

It is likely that English law would have reached the same conclusion as the New Jersey Superior Court on the facts of this case. Analogous authority on this point exists in an English shipping law case (Warinco AG v Fritz Mauthner [1978] 1 Lloyd’s Rep), in which the terms of a sale of goods agreement provided that an exception to the delivery obligation would apply upon prohibition of export from the loading ports specified in the agreement. Exports were prohibited from a jurisdiction in which one of the ports was located and the seller unsuccessfully sought to have performance excused on the basis of the exception. The court decided that the seller would continue to be bound if the prohibition of export only affected one of the ports, unless it could show that, having made reasonable efforts, it could not have shipped from any one of the other ports goods of the contractual description within the contractual time for shipment.

Subject to the drafting of the force majeure provision, it would therefore be challenging for a natural gas seller under an English law-governed sale and purchase agreement to successfully claim force majeure and have its delivery obligations excused where such delivery is to take place at a location that has sufficient liquidity in terms of alternative sources of gas supply provided a force majeure event does not affect such location itself.

The decision of the New Jersey court highlights the importance of sellers paying careful attention to the drafting of force majeure clauses. In negotiating and drafting a force majeure provision, sellers will need to keep in mind many significant factors, including:  whether it intends to source hydrocarbons from a dedicated field(s) or sell hydrocarbons from a non-dedicated source; its ability to substitute gas from different sources or means of transportation; and trading constraints imposed by the market in which the gas is delivered. When selling gas within a trading system or hub, the seller will need to ensure the force majeure provisions reflect any relevant codes and/or market rules.

Click here to see the relevant case.