Nissho-Iwai Co., Ltd. v. Occidental Crude Sales, Inc.
729 F.2d 1530 (1984)
Rule of Law:
Under California law, a contractual force majeure clause implicitly requires that any excusing event, whether specifically enumerated or not, must be beyond the party's reasonable control. A party is not excused from performance if it could have prevented the event through reasonable diligence and good faith.
Facts:
- Occidental Crude Sales, Inc. ('Occidental'), an American oil producer, held oil concessions in Libya.
- In 1969, a new Revolutionary Government under Colonel Moammar Khadafy took control of Libya and began imposing production restrictions on oil companies.
- On October 4, 1973, Occidental entered into a contract to supply crude oil to Nissho-Iwai Company, Ltd. ('Nissho'), a Japanese distributor. The contract contained a 'force majeure' clause excusing nonperformance for events like 'executive or administrative orders' of the Libyan government or 'breakdown or injury' to facilities.
- The force majeure clause also included a catch-all for 'any other event...which shall not reasonably be within the control of the party.'
- In the summer of 1975, after the Libyan government imposed new production restrictions, Occidental withheld $117 million in taxes and royalty payments it owed to the government.
- In retaliation for the withheld payment, the Libyan government placed an embargo on Occidental's oil exports, effective October 1, 1975.
- Around the same time, Occidental's oil pipeline experienced persistent leaks and was shut down for major repairs from October 1975 until May 1976.
- Due to the embargo and the pipeline shutdown, Occidental failed to deliver any oil to Nissho from September 1975 through April 1976.
Procedural Posture:
- Nissho sued Occidental in the U.S. District Court for the Southern District of Texas for breach of contract and fraud.
- The first jury trial resulted in a verdict that was internally inconsistent, finding both that Nissho had waived Occidental's performance and that Occidental was liable for contract damages, and awarding punitive but not actual damages for fraud.
- The trial judge recalled the jury to clarify instructions, but after a second confusing verdict was returned, the judge declared a mistrial sua sponte and ordered a new trial.
- At the second trial, a new jury found Occidental liable for both breach of contract and fraud, awarding substantial compensatory and punitive damages.
- Occidental, the defendant from the trial court, appealed the judgment of the second trial to the U.S. Court of Appeals for the Fifth Circuit.
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Issue:
Does a force majeure clause that lists specific excusing events, followed by a general catch-all phrase containing a 'reasonable control' limitation, require a party to prove that the specifically listed events were also beyond its reasonable control?
Opinions:
Majority - Goldberg, Circuit Judge
Yes. A party seeking to excuse its nonperformance under a force majeure clause must prove that the specified event was beyond its reasonable control. The court, applying California law, reasoned that the concept of 'force majeure' inherently includes a requirement that the excusing event was not caused by and could not have been prevented by the party's reasonable actions. Citing Oosten v. Hay Haulers Dairy Employees, the court explained that 'reasonable control' involves two elements: first, the party must not have affirmatively caused the event, and second, the party must have taken reasonable steps to prevent it. In this case, Occidental's decision to withhold $117 million from the Libyan government provoked the retaliatory embargo, and there was evidence Occidental delayed pipeline repairs. Therefore, the trial court correctly instructed the jury that to be excused, Occidental had to prove both the Libyan embargo and the pipeline breakdowns were beyond its reasonable control.
Analysis:
This decision clarifies that force majeure clauses are not a 'get out of jail free' card for specifically listed events. It establishes that a party's own strategic business decisions that contribute to or precipitate an excusing event can negate a force majeure defense. The ruling integrates the common law duties of good faith and diligence into the interpretation of these clauses, meaning courts will look beyond the mere occurrence of a listed event to analyze the party's conduct leading up to it. This precedent significantly impacts contract law by cautioning parties that they cannot engineer a force majeure situation to escape their contractual obligations.
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