Kaiser-Francis Oil Co. v. Producer's Gas Co.
870 F.2d 563 (1989)
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Rule of Law:
Under a take-or-pay gas contract, a decline in market demand or a fall in the resale price of gas does not constitute a force majeure event that would excuse the buyer's obligation to take or pay for the minimum contract quantity.
Facts:
- Kaiser-Francis Oil Co. (Kaiser-Francis), a seller, entered into two gas purchase contracts with Producer’s Gas Co. (PGC), a buyer.
- The contracts contained 'take-or-pay' provisions requiring PGC to purchase a minimum quantity of gas from wells where Kaiser-Francis had an interest, or pay for that quantity if not taken.
- The contracts also included a force majeure clause which listed 'partial or entire failure of gas supply or demand over which neither Seller nor Buyer have control' as a potential excusing event.
- Subsequently, the resale market price for natural gas declined sharply, making the contracts unprofitable for PGC.
- As a result of the market change, PGC refused to take the minimum quantity of gas and also refused to pay Kaiser-Francis for the gas it did not take.
- PGC also began purchasing gas from Kaiser-Francis's co-owners in the same wells at lower, negotiated prices, while refusing to pay Kaiser-Francis its contract price for its percentage of the gas taken.
- When confronted, PGC asserted that the market decline was a force majeure event and also claimed the gas failed to meet quality specifications regarding water vapor.
- PGC sent Kaiser-Francis a proposed contract amendment that would grant PGC unilateral control over the price and stated it would only take gas under these new proposed terms.
Procedural Posture:
- Kaiser-Francis Oil Co. filed a lawsuit against Producer’s Gas Co. in federal district court based on diversity jurisdiction.
- Kaiser-Francis moved for partial summary judgment on the issue of liability.
- The district court granted the motion for partial summary judgment in favor of Kaiser-Francis, rejecting all of PGC's defenses to the contracts.
- The parties subsequently stipulated to the amount of damages, interest, and attorney’s fees.
- Producer’s Gas Co., as appellant, appealed the district court's grant of summary judgment to the U.S. Court of Appeals for the Tenth Circuit, with Kaiser-Francis Oil Co. as the appellee.
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Issue:
Under Oklahoma law, does a decline in market demand and resale price for natural gas constitute a force majeure event under a take-or-pay contract, thereby excusing the buyer from its obligation to take or pay for a minimum quantity of gas?
Opinions:
Majority - Baldock, J.
No. A decline in market demand for gas does not constitute a force majeure event excusing performance under a take-or-pay contract. The court reasoned that the very purpose of a take-or-pay clause is to apportion the risks of production and sales, with the buyer expressly assuming the risk of fluctuations in market demand. Citing the Oklahoma Supreme Court's decision in Golsen v. Ong Western, Inc., the court held that interpreting the force majeure clause to include market-driven unprofitability would render the take-or-pay provision meaningless. The force majeure clause is not a substitute for a price redetermination or market-out clause, which the parties did not include. Regarding PGC's other defenses, the court found that PGC's refusal to perform unless Kaiser-Francis agreed to new price terms created reasonable grounds for insecurity for Kaiser-Francis under U.C.C. § 2-609, and PGC's conditional offer to perform was not an adequate assurance. Therefore, Kaiser-Francis's duty to cure any alleged gas quality defects was suspended. Finally, the court rejected PGC's argument that it was buying only from co-owners, holding that PGC could not use this tactic to evade its direct contractual obligations to Kaiser-Francis.
Analysis:
This decision reinforces the sanctity and economic purpose of take-or-pay clauses in long-term energy contracts, which are crucial for financing large-scale production projects. By clearly stating that market risk is allocated to the buyer, the ruling prevents buyers from using general force majeure clauses as an escape hatch when a contract becomes unprofitable due to market shifts. The court's application of U.C.C. § 2-609 (adequate assurance of performance) is also significant, as it demonstrates that a party cannot leverage a minor or curable issue (like gas quality) as a pretext to force a complete renegotiation of core price terms. This precedent provides significant legal certainty for sellers/producers in the natural gas industry.
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