Language is paramount when determining a company’s obligation to fulfill a contractual commitment. Adapting to changing political landscapes and the use of tariffs, combined with complex trade policies, is crucial for oil and gas companies in Texas and across the country to pursue their economic goals. Working with a Texas oil and gas lawyer at MehaffyWeber can help Texas companies navigate force majeure contract risks under newly imposed and future tariffs.
Texas Law and the Purpose of a Force Majeure Clause
The events that trigger a force majeure clause are generally defined as unforeseeable events, or acts of God, that remain beyond a company’s control. The risks that such an event produces are typically accepted by a party unless a force majeure clause specifically addresses them. In Texas oil and gas contracts, these clauses allow companies to address unpredictable events that may result in an inability to meet performance and production obligations.
Currently, there is no specific universal example of a force majeure event under Texas law. However, some companies may consider events such as major hurricanes or other natural disasters, governmental actions, or wars as force majeure events that prevent them from fulfilling contract terms.
Texas courts often indicate that heightened production costs are not an excuse for a company’s inability to end the terms of an oil and gas agreement. In theory, increased natural gas production expenses may create challenges, but they do not make it impossible to maintain an agreement, preventing the use of force majeure clauses to end a contract under these circumstances. Because Texas courts use strict interpretations of these clauses, oil and gas firms should construct business contracts with terminology that avoids blanket terms but uses distinct contractual language.
Contract Interpretation and Its Potential Risk to Texas Oil and Gas Companies With Force Majeure Clauses When Considering Tarrifs
The specific wording of a contract guides the interpretation of an oil and gas agreement and whether tariffs qualify as a force majeure event. Working with a Texas oil and gas lawyer with the experience and ability to advise on clear and definitive terms is necessary to navigate potential disputes.
Identifying governmental actions as uncontrollable events using umbrella terminology may not be enough to trigger a force majeure clause. Specifically addressing tariffs and their impact on a company’s ability to meet contractual agreements becomes necessary.
Proving that tariffs create additional, unforeseeable obstacles other than increased costs, that genuinely prevent a company from keeping contract terms is vital. The courts may also require a company to prove that reasonable steps have been taken to mitigate the impact of unforeseen events.
Proving an Inability to Meet Oil and Gas Contractual Agreements Due to Newly Imposed Tariffs
Invoking force majeure clauses due to tariffs will require additional evidence of the impossibility of meeting a contract’s terms. Proof may exist due to various circumstances that a tariff creates. The Texas oil and gas lawyers at MehaffyWeber can help to minimize contract risks and address the following events that may successfully invoke a force majeure clause:
The Impossibility of Production
A lack of essential materials vital to the oil and gas industry may make it impossible to comply with a contract’s terms. Failing to address a scarcity of materials and establishing that the scarcity is unforeseeable risks the inability to trigger force majeure clauses.
A notable example of force majeure contract risk mitigation and the impossibility of production in Texas is the case of MIECO, L.L.C. v. Pioneer Nat. Res. USA, Inc. An appeal’s court noted that the contract’s language constructed the document in a manner that did not require Pioneer Natural Resources to demonstrate that winter storm Uri rendered its performance literally impossible, offering crucial protection under the force majeure clause.
Disruptions to Supply Chains
Most industries experience minor disruptions to supply chains from uncontrollable events. However, proving that the disruption creates more than a difficulty in production or a cost increase may be crucial under force majeure contracts.
Texas courts will carefully scrutinize the language of an agreement to identify specific provisions that address the impact of supply chain disruptions on contractual performance, thereby determining the enforceability of the contract. Some of the possible material scarcity impacting the Texas oil and gas industry include steel and specialty steel products, steel pipes, aluminum, and imported equipment necessary for oil and gas production.
Minimizing Force Majeure Contract Risks for Oil and Gas Companies Under Newly Imposed and Future Tariffs
Oil and gas companies can implement proactive language to provide legal protection through force majeure clauses, which aim to mitigate the impact of tariffs. Tariffs have the power to escalate uncertainty, costs, and risks in the oil and gas industry, particularly when trading materials with other countries is necessary. The Texas oil and gas lawyers at MehaffyWeber may initiate the following actions for oil and gas firms to minimize certain contract risks:
- Continually monitor an executive order’s potential impact on trade policies and tariffs to identify its effect on contractual agreements
- Determine whether renegotiating existing contract terms is necessary based on its terminology and the potential impact of a tariff
- Revisit force majeure clauses in oil and gas contracts to determine if they specifically address tariffs or include catch-all language
- Determine the need for price adjustment or production clauses to account for foreseeability in force majeure contracts
- Offer guidance to address notice and mitigation requirements contained in a contract, and document company actions
The political landscape can shift dramatically throughout the life of an oil and gas company. Preparing for these shifts with detail-oriented and enforceable force majeure contracts can help protect against tariffs that may significantly impact drilling, extraction, and production.
Managing Force Majeure Clauses That Minimize Tariff Risks for Oil and Gas Companies
The wording of a force majeure clause is critical to the court’s interpretation when disputes arise due to tariffs. The goal is to fulfill the terms of oil and gas contracts in the state of Texas. However, current or future tariffs may make certain contract terms impossible to fulfill.
Contact the Texas oil and gas lawyers at MehaffyWeber to review your oil and gas agreements and navigate the complexities newly imposed tariffs could create for your business. Our collaborative approach can provide the tools your business deserves to minimize potential contract risks in a changing geopolitical climate.