     Case: 11-60492   Document: 00512119951    Page: 1    Date Filed: 01/22/2013




        IN THE UNITED STATES COURT OF APPEALS
                 FOR THE FIFTH CIRCUIT  United States Court of Appeals
                                                 Fifth Circuit

                                                                  FILED
                                                              January 22, 2013

                                No. 11-60492                     Lyle W. Cayce
                                                                      Clerk

ERGON-WEST VIRGINIA, INCORPORATED,

                                   Plaintiff - Appellee

ERGON REFINING, INCORPORATED,

                                   Plaintiff - Cross Appellant

v.


DYNEGY MARKETING & TRADE,

                                   Defendant - Appellant Cross Appellee



ERGON REFINING, INCORPORATED,

                                   Plaintiff - Cross Appellant
v.


DYNEGY MARKETING & TRADE,

                                   Defendant - Appellant Cross Appellee



                Appeals from the United States District Court
                   for the Southern District of Mississippi
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                                      No. 11-60492

Before REAVLEY, DENNIS, and CLEMENT, Circuit Judges.
EDITH BROWN CLEMENT, Circuit Judge:
      Appellant-Cross Appellee Dynegy Marketing and Trade (“Dynegy”) and
Cross Appellant Ergon Refining appeal the district court’s holding that Dynegy
had no contractual duty to Ergon Refining to attempt to secure replacement gas
after declaring force majeure in response to hurricane damage, but did have such
a duty to Ergon-West Virginia (“Ergon-WV”) under a separate contract. For the
reasons provided below, we hold that neither contract required Dynegy to
attempt to secure replacement gas during the force majeure period.                     We
AFFIRM the district court’s ruling on the Ergon Refining contract and
REVERSE and RENDER with respect to the Ergon-WV contract.
               FACTUAL AND PROCEDURAL BACKGROUND
      This is a contract dispute between a natural gas clearinghouse, Dynegy,
and two separate entities that manage refinery plants, Ergon Refining and
Ergon-WV. The two Ergon entities1 have contracted with Dynegy to provide
their natural gas supply since 19932 and 1997, respectively. When Hurricanes
Katrina and Rita hit in 2005 and caused extensive damage to the gas industry’s
infrastructure, Dynegy’s own internally designated suppliers declared force
majeure. Dynegy followed suit, reducing its supply of gas to both Ergon entities.
This forced Ergon Refining and Ergon-WV to buy gas on the open market at
increased cost during the force majeure event. To recoup these costs, they sued
Dynegy in Mississippi state court, alleging that their respective contracts’ force
majeure provisions required Dynegy to attempt to secure replacement gas, which




      1
          Ergon-WV is a subsidiary of Ergon Refining. The two are separate legal entities.
      2
        This contract was originally with Chevron, as gas supplier, but was later assigned
to Dynegy.

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Dynegy admits that it did not do.3 Instead, Dynegy contends that it had no such
contractual duty to either Ergon company.
       After the two Ergon companies’ suits were removed to federal court and
consolidated, the district court held a bench trial. Following trial, the district
court determined that the Ergon Refining contract was ambiguous and that
extrinsic evidence showed that the contract did not obligate Dynegy to attempt
to secure replacement gas. But the court concluded that the Ergon-WV contract
unambiguously required Dynegy to make this attempt. The court’s analysis
hinged on the language of the force majeure provisions in each contract.
       Interpreting the Ergon Refining contract, the district court ruled for
Dynegy.      The language in this contract required the party invoking force
majeure to demonstrate that it had “remedied with all reasonable dispatch” the
force majeure event.4 The court concluded that this provision was ambiguous for
two main reasons. First, it determined that one of the recitals of the contract,
which specifies, “WHEREAS, Seller has certain volumes of gas which are
available for sale,” implies that the parties intended that the seller would supply


      3
         Dynegy’s primary response to the force majeure event was to maintain contact with
its upstream suppliers. It also delivered a portion of the gas that was due to the Ergon
companies during the force majeure and eventually resumed full gas supply to both entities.
      4
          The Ergon Refining contract’s force majeure provision reads:

               In the event of either Party hereto being rendered unable, wholly or in
               part, by force majeure to carry out its obligations under this Contract,
               other than to make payment for gas delivered hereunder, it is agreed
               that on such Party’s giving notice and full particulars of such force
               majeure in writing to the other Party as soon as practicable after the
               occurrence of the cause relied on, then the obligations of the Party giving
               such notice, so far as they are affected by such force majeure, shall be
               suspended during the continuance of any inability so caused but for no
               longer period, and such cause shall as far as possible be remedied with
               all reasonable dispatch.

(Emphasis added.) It continues with a list of force majeure events, which includes
“hurricanes” as well as the “partial or entire failure of wells.”

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                                   No. 11-60492

gas from designated sources. Second, the district court noted that the initial
contract expressly referred to designated source points, which the parties later
removed through a series of amendments. Taken together, these facts suggested
to the court that there was “at least a latent ambiguity” in the contract as to
whether Dynegy had a duty to seek replacement gas.
      Because the district court concluded that the contract was ambiguous, it
admitted parol evidence of trade usage in the form of unrebutted testimony
given at trial by Dynegy’s expert witness, whom it found “highly credible.” The
district court explained that the witness testified that it is a “universal practice”
in the gas industry for a downstream supplier to declare force majeure when its
upstream supplier has done so and that the downstream supplier is not expected
or obligated to search for replacement gas. Moreover, the court noted that the
witness testified that “there were sound economic reasons for this approach,”
and, particularly that it stabilized prices during a force majeure event by
quelling demand. The court, based on this testimony, found that Dynegy had
remedied with all reasonable dispatch the supply reduction caused by the
hurricanes and held that Dynegy was excused from performing during the force
majeure period.
      Turning to the Ergon-WV contract, the district court ruled for Ergon-WV.
Although this contract did not contain an “all reasonable dispatch” clause in its
force majeure provision, it required that for some, if not all, force majeure
events, the party invoking force majeure demonstrate that the event was one
that it was unable to overcome with due diligence. The provision allowed a party
to invoke force majeure if it was “rendered unable, by reason of an event of force
majeure, to perform, wholly or in part” and listed events that qualify. Following
its list of enumerated force majeure events, which included “hurricanes” and
“partial or entire failure of wells or sources of supply of gas,” the provision
concluded “and any other causes, whether of the kind herein enumerated or

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                                 No. 11-60492

otherwise, not within the control of the party claiming suspension and which by
the exercise of due diligence such party is unable to prevent or overcome.”
(Emphasis added.) The court concluded that the language of the Ergon-WV force
majeure provision was “far more straightforward” than the Ergon Refining
provision, and thus that the Ergon-WV contract was unambiguous. According
to the court, the Ergon-WV contract unambiguously “required [Dynegy] to find
replacement gas or use due diligence to overcome the event.” Because Dynegy
conceded that it was physically capable of transporting gas to Ergon-WV’s plant
and that it could have purchased gas on the open market, the district court
found that Dynegy could have provided replacement gas using due diligence, and
so it was not entitled to invoke force majeure. The court, therefore, awarded
Ergon-WV the difference between the cover price and the contract price plus pre-
judgment interest.
      Ergon Refining and Dynegy cross-appeal the district court’s construction
of the two contracts’ force majeure provisions. Dynegy also contends on appeal
that the district court erred by not requiring Ergon-WV to prove the amount of
its damages.
                         STANDARD OF REVIEW
      “The standard of review for bench trials is well-established: ‘findings of
fact are reviewed for clear error; legal issues de novo.’” Gebreyesus v. F.C.
Schaffer & Assocs., Inc., 204 F.3d 639, 642 (5th Cir. 2000) (quoting FDIC v.
McFarland, 33 F.3d 532, 536 (5th Cir. 1994)).    Under the contracts’ choice-of-
law-provisions, all issues of contract construction are governed by Texas law.
      In Texas, the existence of ambiguity in a contract is a question of law, so
the Court reviews whether the Ergon contracts were ambiguous de novo. In re
D. Wilson Constr. Co., 196 S.W.3d 774, 781 (Tex. 2006); see Gebreyesus, 204 F.3d
at 642. “A contract is ambiguous only if it is subject to two or more reasonable
interpretations after applying the pertinent rules of construction.” In re D.

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                                  No. 11-60492

Wilson Constr. Co., 196 S.W.3d at 781 (citation and internal quotation marks
omitted). A contract is unambiguous “[i]f the written instrument is so worded
that it can be given a certain or definite legal meaning or interpretation.” Coker
v. Coker, 650 S.W.2d 391, 393 (Tex. 1983).
      “The construction of an unambiguous contract is reviewed de novo, but
while interpretation of an unambiguous contract is a question of law, clear error
is the standard of review when a district court uses extrinsic evidence to
interpret an ambiguous contract.” Tarrant Distribs. Inc. v. Heublein Inc., 127
F.3d 375, 377 (5th Cir. 1997) (citation and internal quotation marks omitted); see
Coker, 650 S.W.2d at 394. This Court also reviews for clear error the district
court’s factual findings as to whether the parties fulfilled their duties under the
contracts. See Sellers v. Delgado Coll., 902 F.2d 1189, 1193-94 (5th Cir. 1990).
      Finally, this Court reviews the propriety of damages awarded to Ergon-
WV as a question of law. State v. Ware, 86 S.W.3d 817, 822 (Tex. App.—Austin
2002, no pet.); see also Jackson v. Fontaine’s Clinics, Inc., 499 S.W.2d 87, 90
(Tex. 1973) (“Damages must be measured by a legal standard.”). The actual
calculation of damages is an issue of fact subject to clear error review. See
Jackson, 499 S.W.2d at 90.
                                 DISCUSSION
      The resolution of these appeals turns on our interpretation of the contracts
between Dynegy and the Ergon companies.              We consider each of these
agreements in turn.
      The Ergon Refining Contract
      The language of the Ergon Refining contract’s force majeure provision
states that a party to the contract is only entitled to invoke force majeure if that
party “remedied with all reasonable dispatch” the force majeure event. The
meaning of “with all reasonable dispatch” determines whether Dynegy had a



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                                      No. 11-60492

duty to secure replacement gas.5 The district court concluded that this language
was latently ambiguous and looked to extrinsic evidence to clarify the force
majeure provision. Although we hold that the “reasonable dispatch” term is not
ambiguous as a matter of law, it was nevertheless appropriate for the district
court to look to extrinsic evidence to determine, as a factual matter, what
“reasonable dispatch” is under the circumstances of this case.
       The district court based its conclusion that the contract was latently
ambiguous on the contract’s reference to “certain volumes of gas” in the recital
as well as on the initial presence of specified sources in exhibits to the contract.
Although a “contract may be read in light of the surrounding circumstances to
determine whether an ambiguity exists,” Balandran v. Safeco Ins. Co. of Am.,
972 S.W.2d 738, 741 (Tex. 1998) (citation omitted), there is a fine line between
whether evidence of surrounding circumstances is used to create an ambiguity
or to reveal an ambiguity. We need not navigate that line here.
       The word “reasonable” is not ambiguous. When it modifies other terms in
a contract—reasonable time, reasonable value—it is used by the parties to
designate that specific time, value, or dispatch that “would be thought
satisfactory to the offeror by a reasonable man in the position of the offeree.”
Christy v. Andrus, 722 S.W.2d 822, 824 (Tex. App.—Eastland 1987, writ ref’d
n.r.e.) (citation and internal quotation marks omitted). This is a question of fact
that must be answered by looking to the circumstances of the case, including
“the nature of the proposed contract, the purposes of the parties, the course of

       5
         Both Ergon companies also argue that the language, found in each contract, that a
party must be “rendered unable” to perform “wholly or in part” by force majeure prevents
Dynegy from invoking the provision, because even after the 2005 hurricanes, Dynegy had the
physical capacity to continue supplying gas to the designated delivery points and could still
purchase gas on the spot market. The district court did not place much weight on this
argument, nor do we. The Ergon companies’ interpretation would make the force majeure
provisions essentially meaningless because it would mean that a seller could never invoke
force majeure so long as there was some gas available anywhere in the world, at any price.
It was not clearly erroneous for the district court to disagree with this interpretation.

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                                  No. 11-60492

dealing between them, and any relevant usages of trade.” Id. (citation and
internal quotation marks omitted). The district court thus properly looked to
extrinsic evidence of standards used by the gas industry to determine what was
“reasonable dispatch,” even though it mistakenly thought that what was
“reasonable” was ambiguous, rather than definite.
      The district court did not clearly err in finding that “reasonable dispatch”
does not include a duty to try to secure replacement gas. It cited “highly
credible” expert testimony, which Ergon Refining did not rebut, that it is
practice in the natural gas industry for a seller to simply pass on force majeure
if its upstream suppliers have declared force majeure.          It therefore was
reasonable for the district court to conclude that Dynegy’s          responses to
Hurricanes Katrina and Rita were enough to satisfy the reasonable dispatch
requirement in the Ergon Refining contract. Accordingly, the district court did
not err in concluding that Dynegy was entitled to invoke force majeure under the
Ergon Refining contract.
      The Ergon-WV Contract
      The force majeure provision in the Ergon-WV contract is significantly
different from the one in the Ergon Refining contract. Like its counterpart in
the Ergon Refining contract, it enumerates certain force majeure events,
including hurricanes and well failures, but then it ends with a catch-all category:
“and any other causes, whether of the kind herein or otherwise, not within the
control of the party claiming suspension and which by the exercise of due
diligence such party is unable to prevent or overcome.” (Emphasis added.)
Because Dynegy stipulated that it could have purchased some gas on the open
market at some price after its suppliers declared force majeure, the case turns
on whether the final clause modifies only the “other causes” or whether it
modifies each of the enumerated force majeure events as well. Dynegy argues
that the final clause applies only to other, unenumerated causes, and so the

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                                       No. 11-60492
provision does not require a party to use due diligence, such as attempting to
buy replacement gas on the open market, to overcome an enumerated cause,
such as a hurricane. Ergon-WV argues that the due diligence clause applies to
all force majeure events.
       Both possibilities are reasonable and both have support in Texas case law.6
Compare Va. Power Energy Mktg., Inc. v. Apache Corp., 297 S.W.3d 397, 407
n.13 (Tex. App.—Houston [14th Dist.] 2009, pet. denied) (noting that the Texas
trial court ruled that the gas buyer was not obligated to purchase gas on the
open market after a force majeure event and cited Tejas Power Corp. v. Amerada
Hess Corp., No. 14-98-00346, 1999 WL 605550, at *3 (Tex. App.—Houston [14th
Dist.] Aug. 12, 1999, no pet.), in support of its conclusion), with Tractebel Energy
Mktg., Inc. v. E.I. Du Pont De Nemours & Co., 118 S.W.3d 60, 68 (Tex.
App.—Houston [14th Dist.] 2003, pet. denied) (“[O]ne party’s assumption about
the source of supply—and [even] the other party’s knowledge of that
assumption—is not enough to excuse performance if alternative sources of
supply are still available to fulfill the contract.”).               In addition, the last-
antecedent canon of construction, which Texas courts apply (although they
consider it “neither controlling nor inflexible”), provides additional support for
the reasonableness of Dynegy’s interpretation of the contract. Spradlin v. Jim
Walter Homes, Inc., 34 S.W.3d 578, 580 (Tex. 2000) (citation omitted). Therefore,
both       Dynegy   and     Ergon-WV        have    proffered       conflicting   reasonable
interpretations of the force majeure provision. That being the case, the contract
is ambiguous and the district court should have considered the same extrinsic
evidence that it relied on to illuminate the Ergon Refining contract to clarify the
Ergon-WV contract.

       6
         “[I]n diversity cases this Court has further held that while the decrees of lower state
courts should be attributed some weight . . . the decision (is) not controlling . . . where the
highest court of the State has not spoken on the point.” C.I.R. v. Bosch’s Estate, 387 U.S. 456,
465 (1967) (internal quotation marks and citation omitted, alterations in original).

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                                       No. 11-60492
      The gas industry evidence the district court believed “highly credible”
when it found that Dynegy had no duty to attempt to provide replacement gas
to Ergon Refining similarly counsels that we conclude that the supplier had no
such duty with respect to Ergon-WV either. Ergon-WV has provided no evidence
to rebut Dynegy’s expert witness. We thus hold that Dynegy was entitled to
invoke the force majeure clause of the Ergon-WV contract and is not liable to
Ergon-WV for damages stemming from its failure to search for replacement gas.7
                                     CONCLUSION
      Although the district court mistakenly concluded that the Ergon Refining
contract was ambiguous, it nevertheless correctly used extrinsic evidence to
determine the parties’ understanding of the contract’s “reasonable dispatch”
clause. We therefore AFFIRM the district court’s judgment with respect to
Ergon Refining. Because the district court erred in concluding that the Ergon-
WV contract unambiguously required Dynegy to attempt to secure replacement
gas, we REVERSE its decision with respect to Ergon-WV and RENDER a
decision in favor of Dynegy.




      7
          Because we conclude that Dynegy is not liable, we do not reach the issue of damages.

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                                  No. 11-60492
REAVLEY, Circuit Judge, dissenting in part:
      I would affirm the district court judgment. I concur with the judgment
that, due to the force majeure clause, Dynegy was not obligated to secure
replacement gas for Ergon Refining. But the contract with Ergon-West Virginia
required Dynegy to continue to supply the designated quantity of gas.
Judgment, to be consistent with the contract, should compensate Ergon-West
Virgina for the failure of that supply.
      Dynegy’s obligation to Ergon-West Virginia was not to deliver a particular
source of gas; it was to deliver a designated quantity. If the Dynegy could not
deliver its supply because of Katrina and Rita, the force majeure clause would
be material; but nothing prevented Dynegy from performing its contract since
gas supply was available. Dynegy agrees that it was capable of transporting gas
that it could have obtained for Ergon-West Virginia. Therefore, its contract
required it to do so.




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