Background
In 2020, MIECO L.L.C. (the buyer) and Targa Gas Marketing L.L.C. (the seller) entered into two agreements for the daily delivery of natural gas. When Winter Storm Uri hit in February 2021, causing massive disruptions to the Texas energy market, Targa failed to deliver the contracted volumes of gas for six days. Targa, a gas marketer that does not produce its own gas, had been sourcing its supply from both its affiliates and the daily spot market.
Targa invoked the “force majeure” clause in their standard form contract, arguing the extreme weather and force majeure declarations from its affiliate suppliers excused its failure to perform. MIECO disputed this, and litigation ensued. The U.S. District Court for the Southern District of Texas sided with Targa, granting it summary judgment. The court ruled that the storm was a force majeure event and that the contract did not require Targa to purchase expensive replacement gas on the spot market to fulfill its delivery obligations.
MIECO appealed to the Fifth Circuit. The appellate court initially issued an opinion reversing the district court, but Targa petitioned for rehearing, highlighting the decision’s significant impact on the natural gas industry. The petition argued that the court’s ruling would unsettle industry expectations regarding force majeure events.
The Court’s Holding
On rehearing, the three-judge panel withdrew its previous opinion and substituted a new one. Instead of ruling on the merits, the Fifth Circuit certified two questions of state law to the Supreme Court of Texas. The court recognized that the core issue—the interpretation of a standard industry contract under Texas law—was of “exceptional importance” with no clear, controlling precedent.
The central legal question is whether the contract’s “force majeure” clause required Targa, a non-producing gas marketer, to continue purchasing gas on the spot market to meet its obligations, given that it had used the spot market for a portion of its supply before the storm. The contract’s force majeure provision is inapplicable to “the loss or failure of Seller’s gas supply,” and the withdrawn opinion had reasoned that Targa’s “gas supply” included the spot market sources it regularly used. The contract also excludes “economic hardship” as a force majeure defense, complicating Targa’s position that it should be excused from buying gas at Uri’s dramatically inflated prices.
Acknowledging the closeness of the question and the lack of guiding Texas case law, the Fifth Circuit asked the Texas Supreme Court to decide: 1) Does the standard form contract require a non-producer seller to enter the spot market during a force majeure event if it was already using that market for part of its supply? and 2) If so, how should the contractual requirement of “reasonable efforts” to perform be defined in that context?
Key Takeaways
- Federal courts can certify determinative but unanswered questions of state law to that state’s highest court, especially when the issue is of major economic importance to the state.
- For a gas marketer who doesn’t produce gas, the definition of its “gas supply” in a force majeure clause is ambiguous. It is unclear if that supply is limited to specific sources (like affiliates) or if it includes the entire spot market from which the marketer regularly purchases.
- A contractual duty to make “reasonable efforts” to overcome a force majeure event might require a party to incur significant financial losses, as the contract explicitly states that “economic hardship” is not an excuse for non-performance.
- The Texas Supreme Court’s future ruling will provide critical guidance on how force majeure clauses in standard energy contracts apply to gas marketers.
Why It Matters
This case revolves around the North American Energy Standards Board (NAESB) base contract, a form agreement that, according to Targa, “governs the entire natural gas industry in Texas.” The Texas Supreme Court’s answers will therefore have widespread implications, defining the rights and obligations of potentially thousands of parties in the energy sector. The decision will clarify who bears the immense financial risk of price spikes during catastrophic supply disruptions like Winter Storm Uri: the seller, who may be forced to buy gas on the spot market at astronomical prices to meet delivery commitments, or the buyer, who may be left without supply and forced to cover on their own.
The outcome will directly influence how risk is allocated and priced in natural gas contracts going forward. It will provide a definitive interpretation of key contractual terms like “gas supply” and “reasonable efforts” in the context of non-producing sellers, bringing much-needed clarity to a critical legal issue that has been the subject of extensive litigation since the 2021 storm.