Energy contract lawsuits expected to jump in Harvey's wake

Hurricane Harvey bridge with refinery in background AP FBN

Lawyers expect a spate of force majeure contract lawsuits after Hurricane Harvey tore through Southeast Texas and parts of Louisiana last month, paralyzing a fifth of U.S. fuel output and pushing some oil production offline.

Hurricanes and other natural disasters can affect the energy industry’s ability to honor contracts related to oil and natural gas production, transport and oilfield services.

Force majeure is a legal declaration that means the operator cannot fulfill a contract due to circumstances outside its control.

Damage in Texas wrought by Harvey is estimated at around $180 billion, according to Texas Governor Greg Abbott, with some of that in the oil-rich Eagle Ford shale region southwest of Houston.

While the full extent of Harvey’s effect on the Gulf Coast energy industry is still being tabulated, damage from hurricanes Katrina and Rita in 2005 shut in more than 8 billion cubic feet of gas production and 1.5 million barrels per day of oil production.

Hurricane Ike, which came less than a month after Hurricane Gustav in 2008, had a similar effect on oil and gas production and disrupted the chemical industry, leading some companies to declare force majeure of certain products and supplies.

Many chemical and refinery plants along the U.S. Gulf Coast have already restarted operations or are beginning to ramp up after damage by Harvey. Once they do, customers may insist on reviewing contractual terms with their energy industry suppliers for the product they did not receive while plants were shuttered.

Force majeure issues typically arise in both contract lawsuits and tort suits, which allege negligence, said Jessica Crutcher, an attorney for Houston law firm Meyer Brown.

“Every force majeure clause is different, especially when you’re dealing with heavily negotiated contracts in the energy sector,” she said on Tuesday during a force majeure webinar sponsored by the law firm.

In tort disputes, defendants can best defend themselves if they took every reasonable effort to protect their property from storm damage or other factors, according to Crutcher.

Force majeure notices should clearly outline a connection between Harvey and the reason for making the notice.

“Failure of a notice is fatal to a defense,” she said.

But not every consequence of a force majeure declaration should be viewed as being automatically tied to Harvey, attorney Mike Lennon said.

“Disclose any latent issues in the force majeure declaration and connect it to the Harvey event,” he said.