Rehearing and Rehearing In Banc Denied June 15, 1983.
OPINION OF THE COURT
A. LEON HIGGINBOTHAM, Jr., Circuit Judge.
This appeal challenges six separate orders of the Federal Energy Regulatory Commission ("FERC" or "the Commission"
A. Gulf Oil I.
The present case relates to earlier litigation between the Gulf Oil Company and the FERC. Section 7(c) of the Natural Gas Act of 1938, 15 U.S.C. § 717f(c) (1970), gives the Commission supervisory power over the sale of natural gas. The Commission executes these duties in part by issuing a certificate of "convenience and necessity" to the seller. In 1963, Gulf Oil applied for such a certificate to distribute gas to Texas Eastern for a twenty-six year period. The certificate that FERC issued to Gulf mirrored the contract terms between Gulf and Texas Eastern.
In 1975, the Commission initiated a show cause order against Gulf for alleged contract violations and against Texas Eastern because it had not submitted a complaint to the agency about the violations. Gulf's failure to meet contract requirements goes back to 1971, when Gulf applied to the Commission to amend its certificate because it had mistakenly estimated the supply of one of its reserve fields.
The Commission's order as affirmed by the court in Gulf Oil I required Gulf to file regular reports computing the refunds attributable to the underdeliveries. (I App. p. 77). The Commission also ordered Gulf to "recoup refunds" through surcharges when the volumes remaining to be delivered under the contract equaled the volumes of prior underdeliveries. (I App. p. 78). Gulf was directed to tender refund payments to Texas Eastern within 30 days after the Commission approved Gulf's computations. The Commission directed Texas Eastern to survey its customers and the affected state regulatory commissions and to file a plan for the flow through of Gulf's payments. (I App. p. 78). The Commission contemplated that further proceedings would be held as to the distribution of the refund payments and the calculation of those volumes attributable to force majeure. (I App. p. 90).
B. Later Commission Proceedings.
1. The Force Majeure Hearing.
The Commission's decision of January 17, 1979 ordered a formal hearing before an Administrative Law Judge (ALJ) to resolve specified issues involving force majeure. (II App. 1-9). The Commission's order directed the ALJ to determine the accuracy and reasonableness of allowable force majeure volumes as designated in Article X. The hearing afforded Gulf an opportunity to show force majeure events under the contract which would excuse its daily delivery obligations (II App. p. 7-8).
Gulf argued that its daily warranty obligation required it to have available a maximum of 625 Mmcf less force majeure volumes (II App. p. 23). Gulf supported this claim on the theory that in order to produce a daily maximum of 625 Mmcf, Gulf would have to obtain gas from the fields ordinarily relied upon in addition to the reserve fields. Consequently Gulf would have been required to use all of its fields to produce the daily quantity. Gulf contended that its existing source of supply was insufficient to meet this demand. Gulf did not show whether it had sufficient quantities of gas
To prove its force majeure claims, Gulf produced the "downtime" reports that it prepared whenever a field was shut down for any amount of time. Gulf prepared these reports immediately following each such incident and regularly notified Texas Eastern of its occurrence. Gulf classified each downtime as a force majeure. A shutdown occurred routinely, almost daily. Gulf's testimony also showed the use of preventive maintenance techniques to minimize the loss of production from shutdown fields. It appears that Texas Eastern never questioned Gulf's force majeure claims. (II App. p. 20-21).
Gulf showed a total deficiency of 307.2 Billion cubic feet ("Bcf") for the period August 1971 through December 1978. It catalogued by date the volumes of gas from particular fields not delivered to Texas Eastern. Gulf attributed 84.4 Bcf or about 27.5% of the undeliveries to force majeure. Therefore, it claimed that these were exempt from the refund calculation. (II App. p. 20).
Gulf classified the force majeure volumes according to contract provisions. Out of the total number of undelivered volumes due to force majeure, Gulf attributed 71.3% to "repairs to or alterations of machinery or lines of pipes"; 8.8% to pipe breakage; 8.7% to factors outside the "control of [Gulf]"; 7.6% to "storms"; 2.7% to "the failure of production facilities for causes other than depletion of the source of gas supply"; and 1% to "[frozen] . . . wells or lines, of pipes." (II App. p. 21).
WUL and other intervenors moved to strike Gulf's evidence at the conclusion of Gulf's evidentiary presentation on force majeure as insufficient as a matter of law. The ALJ treated the motion as a motion for summary judgment against Gulf, and granted it. (II App. pp. 12-26).
The ALJ held that Gulf had not made out a prima facie case to establish force majeure volumes. The ALJ required Gulf to establish a causal connection between the failure to deliver the volumes of gas that Texas Eastern demanded and alleged force majeure events. Consequently, in addition to cataloguing force majeure events that precluded Gulf from fulfilling delivery obligations, the ALJ required Gulf (1) to show that it was not able to produce gas from other sources to make up the deficiency; (2) to disclose the gas fields from which it ordinarily met Texas Eastern's daily delivery demands; (3) to show that all of its fields, the regular sources of supply as well as the reserve fields, were not capable of delivering the maximum amount of gas that Texas Eastern could demand; and (4) to establish that other sources of supply were unavailable to make up the deficiency. The ALJ found that only after showing these four requisites would Gulf have laid a foundation for excusing its non-performance because of force majeure. (II App. pp. 22-23).
The ALJ concluded that Gulf failed to make a prima facie case and that therefore its showing was inadequate to reduce its refund obligation. In order to show an excuse to performance, Gulf catalogued on a daily basis the same types of mechanical breakdowns as force majeure events. The ALJ labeled Gulf's presentation as a "mechanical exercise in pigeonholing volumes of gas" and required Gulf, in addition to proving force majeure occurrences, to show how it had tried to overcome these occurrences. (II App. at 25). Gulf Oil appealed to the Commission for reconsideration of the ALJ's decision.
2. Opinion No. 136.
The Commission reversed the ALJ's decision in Opinion No. 136 which held that the volumes of gas Gulf attributed to force majeure were accurate and reasonable. The Commission defined force majeure as found in Article X of the contract. It also required Gulf to show that it used due diligence to produce the daily contract quantity of gas upon the occurrence of a force majeure event. (II App. p. 33)
The Commission imposed and found that Gulf satisfied a two-part burden of proof.
The Commission based its decision on the total number of volumes warranted over the life of the contract. It identified Gulf's "unconditional warranty" as the delivery of 4.4 Tcf of gas over the 26-year contract period. (II App. p. 36). Gulf's "obligation to deliver available volumes which could otherwise be delivered, but for a force majeure event [was] suspended during the period in which the force majeure occurred." Id. Consequently, this meant that Gulf's daily delivery obligation under the warranty was merely to attach fields capable under optimal conditions of producing 625 Mmcf daily; it also meant that Gulf need only deliver gas from the reserve fields to the extent that it was prevented by any specified force majeure event. Id. The Commission viewed the underdelivered volumes as simply a loss of time, not of gas. It therefore found that Gulf's refund should be reduced by the full extent of the specified force majeure events.
The Commission required Gulf to show the quantity of undelivered gas and the type of force majeure event which contributed to the underdelivery. It did not require a showing of Gulf's source of supply: the gas fields Gulf ordinarily relied upon and its reserve fields. Neither did it require Gulf to show the steps that it had taken to overcome particular events labeled as force majeure that occurred regularly.
A. The Standard of Review.
This court initially reviews the Commission's order in light of the relevant facts to determine whether it either exceeds the Commission's authority or whether the Commission's order is an abuse of discretion. Section 19(A) of the Natural Gas Act of 1938, 15 U.S.C. § 717r (1970).
1. The Definition of Force Majeure in a Warranty Contract.
We must decide here how a party's daily delivery obligation is affected by its force majeure claims. To determine whether the Commission abused its discretion in reducing Gulf's refund payment to Texas Eastern by those volumes of gas attributable to force majeure, we must review the Commission's definition and its application of force majeure to the calculation of the recoupment under the refund plan. The Commission defined the contract term to allow force majeure as an excuse to a party's performance whenever an event can be classified as one of the twenty-six listed in Article X of the contract. We find the Commission's definition in legal error within the context of a warranty contract.
We were referred to no cases in which a force majeure clause was decided within a warranty contract context. However, it is well settled that a force majeure clause in a non-warranty contract defines the area of unforeseeable events that might excuse nonperformance within the contract period. United States v. Brooks-Callaway Co., 318 U.S. 120, 123-24, 63 S.Ct. 474, 476, 87 L.Ed. 653 (1943). Thus, to use the clause as an excuse to nonperformance, the event must have been beyond the party's control and without its fault or negligence. The nonperforming party has the burden of proof.
In Brooks-Callaway, a suit was brought by the nonperforming party to recover money deducted from the contract price as liquidated damages for delay in the completion of a contract for construction of levees on the Mississippi River. 318 U.S. at 121, 63 S.Ct. at 475. The contract contained a force majeure clause which required that events delaying performance be "beyond the control and without the fault or negligence of the contractor." Id. at 120-21 n. 1, 63 S.Ct. at 475 n. 1. The Supreme Court upheld a decision by the Court of Claims that the showing of the occurrence of an alleged force majeure event resulting in a delay in delivery did not constitute a per se claim to force majeure relief. To invoke force majeure and excuse performance, the nonperforming party's duty extends to showing what action it took to perform the contract regardless of the occurrence of the excuse. Id.
Within a warranty contract, a force majeure clause is appropriate; Gulf Oil I, 563 F.2d at 595; it excuses a party's nonperformance due to events outside of its control and without its fault or negligence. However its application differs from that of non-warranty ordinary contract. Force majeure events within a warranty contract can excuse the supplier's nonperformance for events beyond its control only to the extent that the supplier has shown that it had available resources to meet its warranty obligation. Thus, the supplier has the burden of proving that it had a quantity available greater than the maximum amount that could be demanded from it. When force majeure events affect the availability of both the regular source of supply as well as the reserve, and damage the system of delivery, the supplier's nonperformance is an excuse to delivery of the warranted amounts.
This court found in Gulf Oil I that the warranted daily quantity that Gulf was to deliver to Texas Eastern was a maximum of 625 Mmcf daily, unless Texas Eastern demanded less. Gulf Oil I, 563 F.2d at 602. The Commission's error in defining the volumes of gas attributable to force majeure was in viewing Gulf's daily warranty delivery requirements as conditional on having gas available only from its regular source of supply. The Commission understood Gulf's duty as "connecting additional reserves as necessary to meet its total obligation." (II App. at 36). This indicates that the Commission viewed Gulf's overall obligation as unconditional: Gulf must deliver by the expiration of the contract term the total amount of gas warranted. The Commission
We find that the Commission's definition of force majeure is inconsistent with the underlying warranty. The warranty is to have a specific quantity of gas available daily from an unidentified source of supply. Article X becomes effective to excuse delay and the failure to meet the daily delivery obligations, if the delay caused by the listed events cannot be overcome from the regular or the reserve fields.
Our decision is based on the contract's daily warranty. The warranty provision in the Gulf-Texas Eastern contract is found in Article I, Paragraph 4. The contract terms require Gulf to have available a larger amount of gas than 625 Mmcf so that it can supply the maximum amount per day when demanded:
Gulf Oil I, 563 F.2d at 613 (emphasis added). This obligation is separate and apart from Gulf's obligation over the contract period to deliver 4.4 Tcf of gas. The warranty clause in the contract supports the petitioners' claim that Gulf was warranting to have available reserves in excess of those capable of delivering 625 Mmcf of gas per day under optimum conditions. Gulf's intentions become clearer given its knowledge that all wells and equipment cannot operate consistently at maximum capability and the need for a significant amount of downtime for maintenance and repairs. Gulf does not allege that mechanical breakdowns and maintenance repairs are totally unforeseeable, but argues that the contract terms are to protect the parties from both foreseeable and unforeseeable events. (Answering Brief of Intervenor Gulf Oil in No. 82-3166, p. 30).
To support a definition of force majeure in a warranty contract, we must stress the element of uncertainty or lack of anticipation which surrounds the event's occurrence and must affect the availability and the delivery of gas. For example, the occurrence of a hurricane is a force majeure event. The resultant unavailability of gas follows from the occurrence of the event and carries with it the same amount of uncertainty. However, the effect of the event on the delivery of gas, the actual damage to the pipes, is not inferred from the event and thus does not carry the presumption of uncertainty. It is incumbent on Gulf to establish that the pipe damage and mechanical breakdowns in issue would not have occurred if there had not been a hurricane. Pipe damage occurs because of normal wear and tear and therefore can be anticipated. If the force majeure event causes the inability to deliver the gas rather than the inability to obtain the gas, the supplying party has the burden of proving that the inability to deliver was not caused by routine maintenance.
Furthermore, it is possible to accurately describe an event at its initial occurrence as unforeseeable and later because of the regularity with which it occurs, to find that such a description is no longer applicable.
Finding support in the Brooks-Calloway rationale, we conclude that in order to invoke the use of force majeure as an excuse under the warranty contract, Gulf as the nonperforming party must show that even though the events which delayed its performance were unforeseeable and infrequent that it had available at the time of their occurrence more than the maximum warranted quantity of gas. This means that it must show that the availability of the gas as well as its delivery of it was affected by the occurrence of a force majeure event. Thus, we find that the Commission's definition and application of force majeure resulted in legal error. We therefore find that the refund calculations based on these volumes inaccurate.
2. The Due Diligence Showing.
We must also review the findings of fact underlying the Commission's order to determine if they are supported by substantial evidence. We find that the Commission's decision was not based on a consideration of all the relevant factors. Specifically, we conclude that in order to use force majeure events to excuse nonperformance, Gulf must show that it tried to overcome the results of the events' occurrences by doing everything within its control to prevent or to minimize the event's occurrence and its effects.
Article X of the contract requires a showing of due diligence to overcome the event upon the occurrence of a force majeure event. The Commission found Gulf's regular reporting of force majeure events as listed in the contract categories sufficient to meet this standard. The Commission's finding that Gulf exercised due diligence to overcome the events does not detail the nature of that showing. The Commission accepted Gulf's testimony that it had undertaken the steps of a prudent pipeline producer to initiate or prevent the occurrence of the various force majeure events. The Commission also accepted as a showing of due diligence Gulf's careful and prompt categorizing of claimed force majeure events and the amount of gas lost from each of them. Gulf even demonstrated various ways in which it maximized deliveries from inadequate supplies thus minimizing alleged force majeure events. (II App. p. 38). The Commission looked favorably upon Gulf's preventive maintenance, its minimizing of downtimes, the nearly perfect percentage of times at which its wells and compressors operated, and its deferral of maintenance procedures so as not to hinder production. (II App. pp. 38-39). Although such showings are perhaps indicative of the occurrence of some force majeure events and of skillful management of the supply of gas, they do not meet the requisite burden of proof to excuse performance and thus satisfy a force majeure defense to delivery. Brooks v. Calloway, 318 U.S. at 123, 63 S.Ct. at 476; Jennie-O Foods Inc. v. United States, 580 F.2d 400, 408 (Ct.Cl.1978).
The Commission distinguished the burden of proof imposed by the court in Jennie-O from this case because in Jennie-O, the contracting parties sought a permanent excuse from performance rather than temporary suspension. The Commission's reasoning was based on Gulf's warranty obligation over the life of the contract. (II App. 35, n. 17). We find such a distinction unnecessary, especially given our earlier discussion of the divisibility of the daily quantity requirement from the total quantity requirement. The parties in Jennie-O, similar to the parties here, were seeking to reduce liquidated damages required in the event of
For force majeure events to excuse nonperformance, some correlation must be drawn between the occurrence of an event and the obligation of the nonperforming party. Brooks-Calloway, 313 U.S. at 123, 63 S.Ct. at 476; Jennie-O, 580 F.2d at 400. We think that Gulf must show that it exercised due diligence to overcome the effects of the specific force majeure events. Gulf must show that it tried to limit the problem and was not able and that it did everything in its control to prevent or minimize its happening. Gulf must show that its source of supply was either unavailable or undeliverable due to force majeure occurrences. To show that its source of supply was unavailable or undeliverable, Gulf must prove that despite its efforts, it was not able to produce its maximum daily contract warranty of 625 Mmcf from either its regular or its reserve sources.
Gulf's nonperformance will be excused because of force majeure events that affect either its source of supply or its ability to deliver gas. To defend nonperformance due to the supply of gas, Gulf must show a correlation between a deficiency in supply and overcoming that deficiency. Specifically, Gulf must identify each of its fields, those which it relies upon for the regular sources of supply and those for the reserve; it must demonstrate the amount of gas that each field is capable of producing on a daily basis; it must identify which fields the force majeure events affected and show the amount of gas that each field produced on the day that the force majeure event occurred. Then, Gulf would have determined the number of deficit volumes from unavailable sources of supply due to force majeure events.
To defend nonperformance due to mechanical breakdowns, Gulf must show that although the gas was available, the force majeure event caused its inability to deliver the gas. It has the burden of proving that the accidents, alterations, repairs or failure of production facilities were a result of a force majeure event. It must show the notice of the breakdown that it gave; the daily quantity of gas that is produced through the damaged pipe or pipes; the amount of time that the repair took; and the number of volumes undelivered due to that repair. The mere fact that a routine repair occurred unexpectedly will not constitute a claim of undelivery due to force majeure events. Gulf must prove the number of deficit volumes undelivered due to a force majeure event that caused the mechanical breakdown.
The contract term requiring a showing of due diligence should be interpreted to require Gulf to act expeditiously and efficiently in cataloging those volumes of gas attributable to force majeure events. This standard does not mean that Gulf is excused from proving how it tried to overcome the effects of a force majeure event.
Examining those volumes attributable to force majeure events that Gulf presented, we agree with the ALJ that, with the exception of the category listed "storms," the contract categories are obscure. Storms qualify as a force majeure event because they are unexpected, and out of the party's control. (II App. p. 21). The occurrence of such events and nonperformance due to the unavailability or undeliverability of supply is plausible. A showing of the occurrence of those events on a specific date, and an identification of the fields affected, will constitute some evidence for a defense. Nevertheless, the nonperforming party must still prove how it tried to overcome the event and its effects. The connection between the other listed categories and force majeure events is too tenuous to make the clause effective without a stronger connection between the event and the nonperformance due to its occurrence. Because Gulf's evidence does not prove how it tried to overcome the results of force majeure events, we find that the Commission's order on the force majeure issue was not supported by substantial evidence and therefore must be reversed.
Based on the foregoing we find that the Commission's order in Opinion No. 136 reducing Gulf's refunds to Texas Eastern by the volumes of gas attributable to force majeure was in error. We will therefore reverse the Commission's order on the force majeure issue and remand that case to the Commission for a determination of the appropriate number of volumes attributable to force majeure in a way that is consistent with this opinion.
563 F.2d 613-14.
Section 706 provides:
In making the foregoing determinations, the court shall review the whole record or those parts of it cited by a party, and due account shall be taken of the rule of prejudicial error.