Quote: "Liquidated damages clauses possess several contractual advantages. First, they establish some predictability involving costs, so that parties can balance the cost of anticipated performance against the cost of a breach. In this way liquidated damages serve as a source of limited insurance for both parties. Another contractual advantage of liquidated damages clauses is that the parties each have the opportunity to settle on a sum that is mutually agreeable, rather than leaving that decision up to the courts and adding the costs of time and legal fees."
It is a potentially intriguing court case because of the subject matter (headlined as a test of the force majeure clause) but this seems like a clear case of two parties entering into an agreement on terms that make agreement easier by limiting each others risks. Alcoa possibly thought that they would be able to procure replacement gas and hence the low expectation of losses and presumably a lower price for gas contracted. That was the agreement at the time the contract was entered. As far as we know, it wasn�t varied by either party, just as the pipeline wasn�t maintained. It wasn't only Apache that was potentially negligent here.
Alcoa's liquidated damages were set much too low in hindsight. If they had been higher then Apache may well have performed more thorough maintenance and have checked and double checked the condition of the pipe. Or only have settled for a higher gas price from the beginning.
Force majeure? One thing for the pipe to be so thin that it ruptured (probably very poor maintenance execution) but an act of god that the leaking gas found a source of ignition, oxygen in the wrong concentration and exploded at the time it did? Taking out 35pc of WA's gas supply - it was not Apache's fault that they supplied 35pc or that there was no alternate source of supply for Alcoa at the right price when they needed it. Possibly a reason that the liquidated damages was agreed at such a low level.
A test of force majeure provisions - I don't think so. A test of contract law yes - the parties agreed to liquidated damages in an event such as this at the time the agreement was entered into the contract and liquidated damages should stand. It is easy to see why Alcoa are mightily pissed off but hard to see that they won't also have to pay Apache's court costs for bringing this frivolous case. Just my tuppence worth. Time will tell.
TAP Price at posting:
$1.11 Sentiment: Hold Disclosure: Held
