555 S.W.3d 176
Tex. App.2018Background
- Olmos (TEC Olmos), guaranteed by Terrace, entered a farmout agreement with ConocoPhillips to drill an "earning well" by a fixed deadline; failure to start drilling would trigger $500,000 in liquidated damages and termination of the agreement.
- The contract contained a force majeure clause listing specific events (fire, flood, storm, act of God, governmental authority, labor disputes, war) and a catch‑all for "any other cause not enumerated herein but which is beyond the reasonable control" of the affected party; it required reasonable diligence to remove the cause.
- After oil prices dropped and a committed financier withdrew, Olmos could not obtain financing and failed to commence drilling by the deadline; Olmos invoked the force majeure clause to excuse the delay.
- ConocoPhillips sued for declaratory relief and breach, seeking the $500,000 "maximum liquidated damages" and attorney’s fees; Olmos asserted force majeure, argued the liquidated damages were a penalty, and counterclaimed for repudiation.
- The trial court granted ConocoPhillips summary judgment on breach, rejected Olmos’s force majeure defense and penalty argument, and awarded attorney’s fees; Olmos appealed.
Issues
| Issue | Plaintiff's Argument (ConocoPhillips) | Defendant's Argument (Olmos) | Held |
|---|---|---|---|
| Force majeure applicability: whether market downturn/ inability to obtain financing qualifies under the catch‑all | The catch‑all requires unforeseeability and excludes routine economic hardship; market changes are foreseeable and cannot trigger force majeure | A market downturn that prevents financing is beyond Olmos’s control and thus suspends performance under the catch‑all | Held for ConocoPhillips: catch‑all does not cover foreseeable market/financing problems; unforeseeability limits catch‑all and ejusdem generis confines it to events like those listed |
| Liquidated damages: whether $500,000 is an unenforceable penalty | Liquidated amount was negotiated, parties acknowledged difficulty of ascertaining damages, and amount was reasonable | Market changes after contracting made actual damages far less than $500,000 so clause operates as a penalty now | Held for ConocoPhillips: enforceability judged at time of contracting; Olmos presented no fact issue on reasonableness at formation |
| Attorney’s fees: whether fees may be assessed jointly and severally against Olmos (an LLC) and Terrace | Recovery under Tex. Civ. Prac. & Rem. Code § 38.001 and § 37.009; declaratory and breach claims are independent justifying fees | § 38.001 authorizes fees against individuals/corporations, not LLCs; declaratory claim was incidental to breach, so § 37.009 fees are unavailable | Held for Olmos on fees: modified judgment—fees cannot be assessed against Olmos (LLC); declaratory claim was not independent so § 37.009 award improper against Olmos |
Key Cases Cited
- Italian Cowboy Partners, Ltd. v. Prudential Ins. Co. of Am., 341 S.W.3d 323 (Tex. 2011) (principles of contract interpretation: give effect to parties’ intent and plain language)
- Valero Transmission Co. v. Mitchell Energy Co., 743 S.W.2d 658 (Tex. App.-Houston [1st Dist.] 1987) (market price fluctuations in a fixed‑price contract are foreseeable and do not excuse performance)
- Gulf Oil Corp. v. Federal Energy Regulatory Comm’n, 706 F.2d 444 (3d Cir. 1983) (in warranty/supply contracts, force majeure analysis tied to contract type and availability of alternate sources; unforeseeability considered)
- Eastern Air Lines, Inc. v. McDonnell Douglas Corp., 532 F.2d 957 (5th Cir. 1976) (when a force majeure event is specifically listed, parties need not show unforeseeability; general clauses often read to cover only unforeseen events)
- FPL Energy, LLC v. TXU Portfolio Mgmt. Co., 426 S.W.3d 59 (Tex. 2014) (liquidated damages enforceability requires difficulty of estimating harm and a reasonable forecast of compensation measured at time of contracting)