Southern Fuels Co and Langham-Hill Petroleum, Inc are both in the business of buying and selling large quantities of petroleum products. In October, the parties entered into a fixed price contract wherein Southern agreed to purchase 4.2 million gallons

Question

of No.2 fuel oil at a specified price per gallon to be delivered in four monthly installments. The contract included a force majeure clause. The first three monthly shipments of oil were purchased by Southern as agreed. In January of the next year, the price of oil in the world market collapsed as a result of Saudi Arabian attempts to regain its share of the world oil market. Southern refused to purchase the last shipment under the contract. Southern informed Langham-Hill that because the drop in world oil prices was caused by Saudi Arabians who were "outside Southern's control" that it was invoking the force majeure clause. Langham-Hill sued for damages in the amount of $306,075 . What is a force majeure clause? Southern's basic argument is that it can now buy oil at a substantially lower price. Will Southern succeed on this basis?

Answer 1

A force majeure clause is a provision included in a contract which allows cancellation of the contract in the case of an extraordinary, unexpected event, such as an act of God, fire, labor dispute, or accident. A court will generally not enforce the clause if one party is trying to use it to escape from routine financial problems. A force majeure clause is not intended to buffer a party from the normal risks of a contract. These parties were sophisticated merchants who regularly entered into contracts in the international oil market. The normal risk of this type of contract was that the market value of the contract would change, so Southern would not succeed based on the argument that it can now buy at a substantially lower price.