New Orleans v. United Gas Pipe Line Co.
1987 WL 376, 517 So. 2d 145 (1987)
Premium Feature
Subscribe to Lexplug to listen to the Case Podcast.
Rule of Law:
A supplier in a long-term requirements contract cannot be excused from performance by defenses of force majeure, governmental orders, or impossibility when the supplier's own business decisions, such as voluntarily releasing gas reserves, were the primary cause of its inability to perform. A supplier has an implied obligation to use reasonable foresight and good faith to acquire and maintain sufficient supply to meet its contractual commitments.
Facts:
- United Gas Pipe Line Company (United) entered into long-term requirements contracts to supply natural gas to power plants operated by Louisiana Power & Light Company (LP&L) and New Orleans Public Service, Inc. (NOPSI).
- Between 1962 and 1969, to avoid financial penalties under its 'take or pay' contracts with gas producers, United voluntarily released massive gas reserves from the pipeline system that supplied NOPSI and LP&L's Ninemile plant.
- The released reserves from the New Orleans intrastate line alone would have been sufficient to supply those plants for over 13 years at their current consumption rates.
- Throughout the 1960s, United also released substantial reserves from its interstate system, which supplied LP&L's Sterlington plant, while its additions to reserves failed to offset the releases and usage, causing a continuous decline in its reserve position.
- Despite being aware of its declining reserves, United continued to make new sales commitments to other customers.
- Beginning in late 1970, United began curtailing its gas deliveries to LP&L and NOPSI, claiming it was unable to supply their full requirements due to a gas shortage.
- As a result of the gas curtailments, LP&L and NOPSI were forced to procure more expensive alternative fuels, primarily oil, to generate electricity.
- To use oil as an alternative fuel, LP&L and NOPSI incurred substantial costs to convert their gas-burning power generators to be capable of burning oil.
Procedural Posture:
- The City of New Orleans, New Orleans Public Service, Inc. (NOPSI), and a class of its ratepayers filed suit against United Gas Pipe Line Company (United) for breach of contract in a Louisiana state trial court.
- Separately, Louisiana Power & Light Company (LP&L) sued United for breach of contract and United's parent company, Pennzoil Company, in tort.
- The cases were consolidated for trial in the trial court.
- United's motion to recuse the trial judge was denied on the merits by the Louisiana Supreme Court in a prior proceeding.
- After a trial, the trial court found United liable for breach of contract and entered judgments awarding $44,403,106 to NOPSI and the ratepayers, and $40,309,142 to LP&L.
- The trial court dismissed the tort claims against United and Pennzoil.
- United, as appellant, appealed the adverse judgments to the Court of Appeal of Louisiana, Fourth Circuit.
- LP&L and NOPSI, as appellees and cross-appellants, also appealed, seeking increased damages and reversal of the dismissed tort claims.
Premium Content
Subscribe to Lexplug to view the complete brief
You're viewing a preview with Rule of Law, Facts, and Procedural Posture
Issue:
Does a gas supplier breach its long-term requirements contracts by failing to deliver gas, and is it liable for damages, when its inability to perform was caused by its own business decisions to release gas reserves and not acquire sufficient new reserves, despite a nationwide gas shortage and subsequent governmental curtailment orders?
Opinions:
Majority - Redmann, Chief Judge
Yes. A gas supplier that fails to deliver gas under a firm requirements contract is liable for breach of contract when its own imprudent management of gas supplies was the cause of its inability to perform. The court found that United's defenses of force majeure, governmental orders, and impossibility of performance were not proven because United failed to demonstrate that the shortage on its pipelines was a fortuitous event beyond its control. The evidence established that United's own business decisions—specifically, releasing massive gas reserves to avoid 'take or pay' penalties and failing to acquire new reserves when they were available—were the primary cause of its inability to meet its contractual obligations. While these decisions may have been reasonable from a cost-saving perspective, they constituted a breach of United's implied good faith obligation to take reasonable steps to be able to perform its contracts. The subsequent federal governmental orders merely allocated the scarce gas that United had remaining; they did not cause the underlying shortage and therefore do not excuse United's breach.
Analysis:
This decision significantly clarifies the scope of a seller's obligations and available defenses under a long-term requirements contract, particularly in a regulated industry prone to market fluctuations. It establishes that a seller cannot invoke force majeure or impossibility when its own calculated business decisions are a primary cause of the non-performance. The ruling reinforces the implied duty of good faith, interpreting it to require a supplier to proactively manage its resources to meet firm commitments, even if doing so is less profitable than other alternatives. This precedent strengthens the position of buyers in requirements contracts by holding suppliers to a high standard, preventing them from prioritizing their own economic convenience over their contractual duties.
