TEC Olmos, LLC v. ConocoPhillips Co., 01-16-00579-CV

• Decision Date: 31 May 2018
• Docket Number: NO. 01-16-00579-CV,01-16-00579-CV
• Citation: 555 S.W.3d 176
• Parties: TEC OLMOS, LLC and Terrace Energy Corporation f/k/a Terrace Resources, Inc., Appellants v. CONOCOPHILLIPS COMPANY, Appellee
• Court: Texas Court of Appeals

555 S.W.3d 176

TEC OLMOS, LLC and Terrace Energy Corporation f/k/a Terrace Resources, Inc., Appellants

v.CONOCOPHILLIPS COMPANY, Appellee

NO. 01-16-00579-CV

Court of Appeals of Texas, Houston (1st Dist.).

Opinion issued May 31, 2018

Eric Grant, Jay Nelkin, John B. Thomas, HICKS THOMAS LLP, 700 Louisiana Street, Suite 2000, Houston, Texas 77002, for Appellants.

Darin Lee Brooks, John George, Jr., Meagan Glover, GRAY REED & MCGRAW, P.C., 1300 Post Oak Blvd., Suite 2000, Houston, Texas 77056-3000, for Appellee.

Panel consists of Chief Justice Radack and Justices Brown and Lloyd.

Sherry Radack, Chief Justice

This dispute arises in the context of the oil and gas industry. The parties entered into a drilling contract that contained a "force majeure" clause. When one of the parties failed to perform its contractual obligations by the contract deadline, it sought to invoke force majeure protections. Litigation followed, and the trial court held that the force majeure clause was inapplicable as a matter of law. This appeal requires us to construe the parties' force majeure provision.

BACKGROUND

TEC Olmos ["Olmos"] entered into a farmout agreement with ConocoPhillips Company ["ConocoPhillips"] to test-drill land leased by ConocoPhillips in search of oil and gas. The contract set a deadline to begin drilling and contained a liquidated damages clause that required Olmos to pay $500,000 if it failed to begin drilling by the specified deadline.

The contract also contained a force majeure clause that listed several events that would suspend the drilling deadline, followed by a "catch-all" provision for events beyond the reasonable control of the party affected. The force majeure clause provides:

FORCE MAJEURE

Should either Party be prevented or hindered from complying with any obligation created under this Agreement, other than the obligation to pay money, by reason of fire, flood, storm, act of God, governmental authority, labor disputes, war or any other cause not enumerated herein but which is beyond the reasonable control of the Party whose performance is affected , then the performance of any such obligation is suspended during the period of, and only to the extent of, such prevention or hindrance, provided the affected Party exercises all reasonable diligence to remove the cause of force majeure. The requirement that any force majeure be remedied with all reasonable diligence does not require the settlement of strikes, lockouts or other labor difficulties by the Party involved.

(Emphasis added.)

The contract provided for $500,000 in liquidated damages to ConocoPhillips if Olmos failed to timely commence drilling operations. Because the parties "acknowledge[d] that actual damages would be difficult to ascertain," they agreed that "the amount of [liquidated damages] is reasonable, and that [liquidated damages] are not intended to be a penalty." Olmos’s parent company, Terrace Energy Company ["Terrace"], guaranteed Olmos’s contractual obligations.

After the contract was executed, changes in the global supply and demand of oil caused the price of oil to drop significantly. The entity that Olmos intended to handle the financing for the ConocoPhillips drilling project backed out. Other sources of financing also became unavailable. Without financing for its project, Olmos informed ConocoPhillips that it was unable to meet the drilling deadline. Olmos attempted to invoke the force majeure clause to extend the drilling deadline.

ConocoPhillips disputed the applicability of the force majeure clause and sued both Olmos and Terrace [herein collectively, "Olmos" unless specified otherwise]. It sought a declaration that Olmos’s claim did not constitute a valid force majeure event and that Terrace owed $500,000 in "maximum liquidated damages" under the "default" provision of the parties' agreement. ConocoPhillips also sought attorney’s fees.

Olmos responded by asserting the affirmative defenses of force majeure and unenforceable penalty and bringing a counterclaim for repudiation.

ConocoPhillips moved for summary judgment, arguing that it established each element of its breach-of-contract claim as a matter of law and disproved Olmos’s claims and affirmative defenses as a matter of law. It moved for attorney’s fees under the contract and under Sections 37.009 and 38.001 of the Civil Practice and Remedies Code. See TEX. CIV. PRAC. & REM. CODE ANN. §§ 37.009 (West 2015) (allowing award of attorney’s fees in declaratory-judgment actions); 38.001(8) (West 2015) (allowing award of attorney’s fees in breach-of-contract actions). The trial court granted ConocoPhillips summary judgment, and Olmos appeals.

PROPRIETY OF SUMMARY JUDGMENT

In three issues on appeal, Olmos challenges the propriety of the trial court’s ruling on ConocoPhillips’s motion for summary judgment, contending as follows:

1. Under a correct understanding of the law, fact issues precluded summary judgment on Defendants' invocation of the Farmout Agreement’s "Force Majeure" clause.

2. Fact issues also precluded summary judgment regarding whether the "Maximum Liquidated Damages" sought by ConocoPhillips constituted an unenforceable penalty.

3. ConocoPhillips is not entitled to attorneys' fees against [Olmos] as a matter of law.

A. Standard of Review

We review a trial court’s ruling on a motion for summary judgment de novo. Travelers Ins. Co. v. Joachim , 315 S.W.3d 860, 862 (Tex. 2010). To prevail on a traditional summary judgment motion, the movant bears the burden of proving that no genuine issues of material fact exist and that it is entitled to judgment as a matter of law. TEX. R. CIV. P. 166a(c) ; Mann Frankfort Stein & Lipp Advisors, Inc. v. Fielding , 289 S.W.3d 844, 848 (Tex. 2009).

When a plaintiff moves for summary judgment on its cause of action, it must prove each element of that cause of action. MMP, Ltd. v. Jones , 710 S.W.2d 59, 60 (Tex. 1986) (per curiam); Cleveland v. Taylor , 397 S.W.3d 683, 696–97 (Tex. App.—Houston [1st Dist.] 2012, pet. denied). To defeat a plaintiff’s motion for summary judgment with an affirmative defense, the defendant must bring forth evidence sufficient to raise a genuine issue of material fact on each element of its affirmative defense.

Brownlee v. Brownlee , 665 S.W.2d 111, 112 (Tex. 1984) ; Anglo–Dutch Petrol. Int'l, Inc. v. Haskell , 193 S.W.3d 87, 95 (Tex. App.—Houston [1st Dist.] 2006, pet. denied). The defendant is not required to prove its affirmative defense as a matter of law; raising a material fact issue is sufficient to defeat summary judgment. See Brownlee , 665 S.W.2d at 112 ; Anglo–Dutch Petrol. , 193 S.W.3d at 95.

B. Force Majeure

Olmos asserted as an affirmative defense to ConocoPhillips’s breach-of-contract claim that the force majeure clause in the parties' farmout agreement was triggered when Olmos was unable to obtain project financing, thereby excusing its nonperformance. ConocoPhillips obtained summary judgment that the force majeure provision was inapplicable by arguing that force majeure protection is not available unless the triggering event is, first, unforeseeable and, second, something other than a mere economic hardship.

1. Rules of contract interpretation

In construing a written contract, the primary concern is to ascertain and give effect to the parties' intentions as expressed in the document. Italian Cowboy Partners, Ltd. v. Prudential Ins. Co. of Am. , 341 S.W.3d 323, 333 (Tex. 2011) ; Frost Nat'l Bank v. L & F Distribs., Ltd. , 165 S.W.3d 310, 311–12 (Tex. 2005). We begin with the contract’s language. Italian Cowboy , 341 S.W.3d at 333. Contract terms are given their plain, ordinary, and generally accepted meanings unless the contract itself shows that the terms were used in a technical or different sense. Valence Operating Co. v. Dorsett , 164 S.W.3d 656, 662 (Tex. 2005).

Sometimes contracts include terms that have common law significance. A term’s common-law meaning will not override the definition given to a contractual term by the contracting parties. See Provident Life & Accident Ins. Co. v. Knott , 128 S.W.3d 211, 217–19 (Tex. 2003). The rules of contract interpretation require that the contracting parties' intent be determined based on the language included in their contract, not by "definitions not expressed in the parties' written agreements." Id. ; see Zurich Am. Ins. Co. v. Hunt Petrol.(AEC), Inc. , 157 S.W.3d 462, 466 (Tex. App.—Houston [14th Dist.] 2004, no pet.) ("Regardless of its historical underpinnings, the scope and application of a force majeure clause depend on the terms of the contract."). However, we may consider common law rules to "fill in gaps" when interpreting force majeure clauses. Sun Operating Ltd. P’ship v. Holt , 984 S.W.2d 277, 283 (Tex. App.—Amarillo 1998, pet. denied).

Because foreseeability of force majeure events is rooted in the common law of the force majeure doctrine, the question presented is whether the trial court properly considered the foreseeability of changes in the oil and gas market when determining the applicability of the force majeure clause in this case.

2. Is Market Change a Force Majeure Event?

Olmos contends that the trial court erred as a matter of law in accepting ConocoPhillips’s invitation to apply a "traditional conception of force majeure, [i.e., a showing of unforeseeability] rather than to apply the plain language of [the force majeure clause]." ConocoPhillips counters that a foreseeable event¹ cannot qualify as force majeure under the "catch-all" provision of this force majeure clause. We agree with ConocoPhillips for two reasons. First, it is unreasonable to interpret the "catch-all" provision as broadly as suggested by Olmos. Second, application of the ejusdem generis doctrine compels the conclusion that a decline in oil and gas prices is not the sort of event covered by the force majeure clause. We discuss each reason, respectively.

a. Foreseeability Properly Limits "Catch-all" Provisions

There has, indeed, been a debate regarding whether common-law notions...