MIECO, L.L.C. v. Pioneer Nat. Res. USA, Inc., 109 F.4th 710 (5th Cir. 2024)
Winter Storm Uri sent shockwaves through Texas, freezing gas supplies at a time of critical need and plunging the state into widespread power outages. In the aftermath, the courts have been flooded with force majeure claims, many of them hinging on widely used contracts like the NAESB model form. This recent case delves deep into pivotal force majeure issues tied to the NAESB form and arising out of Winter Storm Uri. With these common strings, this case could have implications (small or large) for other similar pending disputes across the state.
In this case, the Fifth Circuit analyzed a customized NAESB in the context of a dispute as to whether a force majeure clause applied to excuse a producer’s failure to supply gas in the aftermath of Winter Storm Uri, whether it obligated the producer to procure spot market gas when their own production was disrupted by the force majeure event.
Pioneer Natural Resources USA, Inc. ("Pioneer"), a natural gas producer operating in the Permian Basin, entered into a firm contract with MIECO, L.L.C. ("MIECO"), an energy trading firm. The parties used a North American Energy Standards Board ("NAESB") Base Contract for Sale and Purchase of Natural Gas, but included some custom modifications, including some modifications to the force majeure provisions. Under the contract, Pioneer agreed to deliver 20,000 MMBtu of natural gas daily to MIECO at the Ehrenberg pooling hub on the Arizona-California border.
Pioneer produces natural gas in the Permian Basin as a byproduct of its crude oil extraction operations and sends it to Targa Pipeline Mid-Continent WestTex ("Targa") for processing. After processing, Targa returns the residue gas to Pioneer, and Pioneer considers that residue its “gas supply” for sales to customers like MIECO. When production is insufficient to meet contractual demands, Pioneer occasionally purchases supplemental gas on the spot market.
In February 2021, during Winter Storm Uri, Pioneer failed to deliver the contracted amounts of gas from February 14 to 19. Pioneer did not provide replacement gas, and MIECO had to purchase replacement gas on the spot market at significantly higher prices, incurring approximately $9 million in additional costs. MIECO sued Pioneer for breach of contract, seeking damages for the cost differential.
The underlying NAESB contained three force majeure provisions:
Section 11.1: “Neither party shall be liable … for failure to perform … caused by Force Majeure,” which it defined as including an event that “prevents one party from performing its obligations … and which, by the exercise of due diligence, the claiming party is unable to overcome or avoid.”
Section 11.2: Indicated that FM included weather-related events causing regional freezing of pipelines, but said “Seller and Buyer shall make reasonable efforts to avoid the adverse impacts of a Force Majeure and to resolve the event … in order to resume performance.”
Section 11.3: Indicated that a loss or failure of “Seller’s gas supply” would qualify as FM only pursuant to Section 11.2.
The district court granted summary judgment in favor of Pioneer, holding that Pioneer properly invoked the force majeure clause and was not obligated to procure spot market gas. MIECO appealed, challenging the court's interpretation of the force majeure provisions and arguing that genuine issues of material fact precluded summary judgment.
The Fifth Circuit interpreted the force majeure provisions under New York law as specified in the contract, but it noted that New York law on these issues appeared consistent with Texas law. The court addressed four primary issues: whether “prevent” requires impossibility, whether the phrase “Seller's gas supply” included replacement gas from spot markets, whether the force majeure provision excused Pioneer from seeking replacement gas, and whether there were genuine issues of material facts that precluded summary judgment.
First, regarding the term “prevent,” MIECO argued that it required Pioneer to demonstrate that performance was rendered literally impossible by the force majeure event. The court referenced several dictionary definitions and concluded that the ordinary meaning of “prevent” also includes hindering or impeding performance, not just making it impossible. Further, in the court’s view, interpreting “prevent” to require impossibility would render other provisions of the force majeure clause superfluous, such as the requirement for the claiming party to be “unable to overcome or avoid” the event by exercising due diligence. The court reasoned that, if “prevent” meant “impossible,” then there would be no reason to add this further provision and it would be impermissibly rendered meaningless. The court also said that interpreting “prevent” to mean “impossible” would render the force majeure provision superfluous with the common law defense of impossibility, which would be inconsistent with the parties’ intent in negotiating an express force majeure provision.
The court also relied on its prior decision in Ergon-West Virginia, Inc. v. Dynegy Marketing & Trade, 706 F.3d 419 (5th Cir. 2013), where the court refused to read the phrase “rendered unable” to require proof that no gas was available on spot markets, reasoning that it would render the force majeure provision meaningless since some gas would always be available somewhere in the world at some price. In the MEICO court’s view, that case “counsels strongly” against reading the word “prevent” to mean “make impossible.” The court also noted that multiple other recent cases have issued similar holdings.
Regarding the meaning of “Seller's gas supply,” MIECO contended that it included gas available on the spot market that Pioneer could have purchased to fulfill its contractual obligations. The court rejected this argument, interpreting “Seller's gas supply” to refer only to the gas Pioneer produced and processed through Targa in the Permian Basin. In the court’s view, the possessive “Seller's” indicates ownership or control, which would not extend to gas available for purchase on the spot market, and because Pioneer is a producer and not a reseller, the court reasoned that its “gas supply” naturally refers to its own production.
The court went further, stating that even if the contract were ambiguous, the extrinsic evidence in the record would lead to the same result. For example, the court reviewed a history of NAESB rejecting amendments to its contract that it said could have imposed obligations to procure spot market gas, and suggested that history shows that the current NAESB form does not include spot market gas within the phrase “Seller’s gas supply.”
Although the court affirmed the district court's interpretation of the contract, the Fifth Circuit held that summary judgment was improper because there were unresolved factual disputes. For instance, the court found that there were genuine issues of fact regarding whether Winter Storm Uri actually “prevented” Pioneer's performance and whether Pioneer exercised “due diligence” and ma[d]e "reasonable efforts to avoid the adverse impacts of a Force Majeure.”
The court also held that Pioneer's interpretation—that its obligations were completely excused when it lost its gas supply due to Uri—would render meaningless the additional requirements to exercise “due diligence” and “make reasonable efforts.” In the court’s view, the requirement to “make reasonable efforts to avoid the adverse impacts of a Force Majeure and to resolve the event or occurrence once it has occurred in order to resume performance” imposes two independent requirements, including a duty to make reasonable efforts to avoid the adverse impacts, not just to overcome the force majeure event itself. Thus, whether Pioneer met this obligation was a question of fact unsuitable for summary judgment.
This case is notable for its illustration of how courts may interpret force majeure provisions, particularly in the context of NAESB contracts, extreme weather events, and the relevance of spot market replacement gas. It also underscores that, even where a force majeure provision is triggered, a party may have further obligations such efforts to mitigate the effects as well as efforts to overcome the force majeure event.
