Hanover Petroleum Corp. v. Tenneco Inc.
1988 La. App. LEXIS 703, 521 So. 2d 1234, 99 Oil & Gas Rep. 42 (1988)
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Rule of Law:
In a 'take-or-pay' gas purchase contract, adverse economic conditions, changes in market demand, and shifts in government regulation do not constitute force majeure events that excuse a buyer's performance. Such market risks are precisely what the contract is designed to allocate, and invoking a force majeure clause to escape these assumed risks would nullify a central term of the agreement.
Facts:
- On June 8, 1981, Hanover Petroleum Corporation (Hanover) and Tenneco Inc. (Tenneco) entered into a Gas Purchase Contract, known as the 'Kaplan Contract'.
- Under the contract, Tenneco had a 'take-or-pay' obligation, meaning it agreed to annually buy, or pay for if not taken, a quantity of 'deep gas' from three of Hanover's wells equal to 85% of the wells' delivery capacity.
- The contract permitted Tenneco to 'make up' volumes of gas it paid for but did not take at a later date during the contract's term without additional charge.
- Following the execution of the contract, the natural gas market experienced a significant downturn due to factors including an economic recession, a drop in the price of competitive fuels, and changes in government regulation.
- For a considerable period, Tenneco failed to take or pay for the volume of gas required by the contract.
- In the spring of 1983, Tenneco issued an 'Emergency Gas Purchase Policy' (EGPP) to its suppliers, including Hanover, stating it could not comply with its take-or-pay obligations due to what it claimed were force majeure events.
- Hanover rejected Tenneco's EGPP, viewing it as a unilateral breach of the Kaplan Contract.
Procedural Posture:
- Hanover Petroleum Corporation sued Tenneco Inc. in a Louisiana trial court for breach of contract.
- Tenneco asserted several affirmative defenses, including force majeure, commercial impracticability, and error.
- Hanover moved for summary judgment.
- The trial court granted summary judgment in favor of Hanover, finding Tenneco had breached the contract and that its defenses were without merit as a matter of law.
- Tenneco (as defendant-appellant) filed a suspensive appeal to the Court of Appeal of Louisiana, Third Circuit.
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Issue:
Does a significant decline in market demand for natural gas, coupled with changes in government regulation, constitute a force majeure event under a 'take-or-pay' gas purchase contract, thereby excusing the buyer's obligation to take or pay for the contractually specified quantity of gas?
Opinions:
Majority - Guidry, Judge.
No, a significant decline in market demand for natural gas and related regulatory changes do not constitute a force majeure event sufficient to excuse performance under a take-or-pay contract. The court reasoned that the very purpose of a take-or-pay provision is to allocate risks, with the seller assuming the supply risk and the buyer assuming the market risk. Interpreting the force majeure clause's catch-all provision ('any other causes... not reasonably within the control of the party') to include foreseeable business risks like market collapse or regulatory shifts would nullify the central purpose of the contract and render the buyer's obligation meaningless. The court determined that such economic events are not of the same character as the catastrophic events specifically enumerated in the force majeure clause, such as acts of God, wars, or explosions. The court also rejected Tenneco's other defenses, holding that the common law doctrine of commercial impracticability and the French doctrine of imprevision are not recognized in Louisiana law, and that Tenneco's 'error' was merely an error in business judgment about future market conditions, which is not grounds for voiding a contract.
Analysis:
This decision solidifies the enforceability of 'take-or-pay' clauses in Louisiana, establishing a strong precedent that market-based risks do not trigger force majeure clauses. By refusing to relieve a sophisticated party from a bargain that became unprofitable, the court reinforced the principle of contractual sanctity and risk allocation. This ruling provides certainty for producers by ensuring that buyers cannot easily escape their contractual obligations due to economic downturns, thereby shaping the landscape for energy contract litigation and negotiation in the future.
