Background

Targa Gas Marketing L.L.C., a natural gas marketer, brought an action against Mieco L.L.C., a purchaser, seeking a declaratory judgment that force majeure excused its failure to deliver contracted quantities of natural gas during a severe winter storm. Mieco counterclaimed for breach of contract. The district court granted Targa partial summary judgment on the force majeure defense and, after a jury trial on separate pricing and allocation issues under two other contracts, entered judgment following denial of Targa's motion for judgment as a matter of law. Both parties appealed from the unfavorable portions of the judgment.

The Force Majeure Dispute

The central issue on appeal concerned the scope of Targa's obligations under the force majeure clause, which required a loss of "gas supply" and prohibited using economic hardship as an excuse for non-performance. The Fifth Circuit held that the district court erred in granting summary judgment because genuine issues of material fact existed regarding what constituted Targa's "gas supply" and whether Targa made reasonable efforts to procure gas during the storm. Critically, the court held that the spot market was not categorically excluded as a source of natural gas supply after declaration of force majeure if the spot market was a meaningful source of supply during normal times. The court rejected Targa's argument that higher spot market prices during the crisis constituted a loss of supply, noting that although the marketer historically relied daily on the spot market at the agreed-upon location for delivery and the market was demanding much higher than usual prices, that fell into the category of "economic hardship" under the base contract and did not itself excuse performance, unless supply also was lost.

Defining "Gas Supply" and Reasonable Efforts

The court provided important guidance on interpreting the "gas supply" term in force majeure clauses. Under Texas law, the court held that "gas supply" under the base contract meant "usual gas supply through life of transaction confirmations up until period immediately before weather calamity." This interpretation required examining what sources Targa typically used during normal operations, not what might theoretically be available in extraordinary circumstances. The court emphasized that the contract's requirement of "reasonable" efforts created fact questions that precluded summary judgment, including "what purchases marketer made from usual suppliers other than affiliates, whether such purchases were still available during winter storm, what was available on spot market, and what in general would have been reasonable for marketer during winter storm." Factual issues as to whether gas supply had been lost, and if so, the extent it had been lost, precluded summary judgment in favor of Targa.

Allocation and Usage of Trade

On the separate question of how to price gas delivered to Mieco under two other contracts, the jury returned a verdict favorable to Mieco. The Fifth Circuit affirmed, holding that usage of trade could be considered under the contracts between Targa and Mieco for allocating delivery of natural gas between their two different transaction confirmations that were silent as to how to allocate partial deliveries. The court found that whether Targa rebutted the presumption of universal industry practice with its own evidence was a fact issue for a properly instructed jury to decide. The jury could find that Mieco's evidence as a whole raised a presumption that the parties contracted with reference to industry practice that Targa was required to allocate all available natural gas to the cheaper "First-of-Month" transaction before allocating any gas to the more expensive Gas Daily transaction.

Holding

The Fifth Circuit affirmed in part, reversed in part, and remanded the case for further proceedings consistent with its opinion.