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COVID-19 and the Increased Attention on Force Majeure Clauses

A force majeure clause is a contract provision that excuses both parties from liability or obligation when an event beyond the parties’ control prevents one or both parties from fulfilling contractual obligations.  With the ongoing health crisis this country faces over COVID-19 (widely known as the coronavirus), and the resulting effect on businesses’ operations, force majeure clauses are gaining increased attention.

Many businesses currently face or will face delays or an inability to meet contractual obligations, including those related to the manufacture, distribution, or sale of goods.  Suppliers will examine which contractual provisions may protect them from timely and fully delivering on their obligations as it relates to goods and services.  Customers and recipients will also look to see what remedies they have in these circumstances.  At this time, it is very uncertain when this health crisis will stabilize.  Importantly, it is also uncertain the breadth of future, corresponding governmental restrictions on businesses’ operations.  Should these limitations occur, one of the consequences is parties alleging that any nonperformance of contractual obligations should be excused due to a force majeure event that has materialized.  It is thus important for businesses to review their contractual agreements, to consider and understand the potential consequences and risks they may face, and to consult with counsel regarding the meaning and effect of such provisions. Whether the coronavirus outbreak and the resulting governmental actions constitute force majeure under a contract depends on the contractual language, the cause of the nonperformance, and the applicable law of each respective state.  As the reaction and response to COVID-19 escalates, the more likely a force majeure event will take place.

From a practical standpoint, as a business, the following are important steps in assessing rights, obligations and remedies under a contract, with the current climate in mind:

Understand what force majeure is, and how it can excuse nonperformance.

A force majeure clause traditionally provides a party relief from liability due to non-performance of contractual duties due to an occurrence beyond the control of that party.[1]  There is no universal definition of the requirements to successfully invoke force majeure.  In fact, the actual words force majeure itself may not appear in a contract.  If not, the applicable language is that which provides for a time extension or relief of the parties’ performance in the event of a delay caused by an act of god, act of government, or other event beyond the parties’ reasonable control.

The scope of a force majeure clause does not depend on any traditional definition; rather, it depends on the specific language in a contract.[2] Definitions the parties decide to agree on for force majeure can be: acts of God, earthquakes, floods, epidemics, typhoon, tidal waves, epidemic, other natural disasters, acts of government, declared or undeclared war, terrorism, and sabotage, among other things.  When the parties specify certain force majeure events, the unforseeability of an event is not needed to trigger the force majeure clause.[3]   Further, where “the parties have themselves defined the contours of force majeure in their agreement,” that dictates the application and scope of the force majeure provision, which the courts cannot “rewrite the contract or interpret it in a manner which the parties never intended.”[4]

Examine the contract to determine whether force majeure is available.

In the parties’ negotiation and drafting process, the parties may protect themselves through an explicit provision related to force majeure.  The contract may list all events that qualify for force majeure to protect the parties, or it may generally define a force majeure event as one beyond the parties’ control.  Different states and jurisdictions interpret broad, catch-all language differently.

If the alleged force majeure event is not specifically listed or defined in the clause, and instead is alleged to fall within the general terms of a “catch-all” provision, courts recognize that it is unclear whether a party has fully contemplated and voluntarily assumed the risk.  As such, unforseeability is used to “fill in the gaps”; in other words, in Texas, for a non-defined event to trigger force majeure, it will require a party to show that the event was unforeseeable.[5]

Does the event trigger the force majeure clause?

At the onset of this outbreak, it was unclear how widespread the coronavirus was going to be.  With recent developments, the outbreak is now widely known as a “pandemic.”  The federal, state and local governments continue to update their safety measures with each passing day.  The “pandemic,” however, will not automatically trigger force majeure in contracts.  States have and continue to respond differently in terms of limitations on businesses during the outbreak.

Depending on the wording of each respective contract, a “pandemic” may not constitute a force majeure event.  A party may argue that a scenario in which a business voluntarily suspends its operations temporarily to avoid the potential effects of a disease is distinct from a scenario in which the business is forced to temporarily close and suspend operations, or is prevented from carrying out its contractual obligations.  Depending on how the contract is drafted, a party may not necessarily be able to claim force majeure in circumstances where the contractual obligation was not objectively impossible to perform.  If the government forces the suspension of a business’ operations, in response to a disease outbreak, this directly affects the business, making it objectively impossible to perform, and therefore more likely to constitute force majeure under the contract (provided that such is appropriately defined).  Similarly, if the government quarantines a delivery site under a contract in which a business is obligated to make a delivery, force majeure would likely apply.  In contrast, if the government advises or recommends scaling back a business’ operations, but does not mandate it, it may be objectively possible to perform the contractual obligation.  To the extent a business advises workers proactively to not go into work, to avoid further spread of the coronavirus, this may not necessarily constitute a force majeure event.

Further, it is important to consider whether a party could have performed its contractual obligations if the coronavirus outbreak did not occur.  If other factors contributed to a party’s nonperformance, it may not necessarily trigger the force majeure clause.  If a party is unable to perform due to economic issues not directly related to the outbreak, the other party may contend that those issues—and not the coronavirus outbreak and the government’s subsequent response to it—were the reason for the nonperformance.

Courts have found that government acts that indirectly affect a contract are not necessarily force majeure events, absent additional language.[6]  In Seaboard Lumber Co. v. United States, Seaboard and the U.S. government entered into an agreement for the harvesting of timber on government-owned lands.[7]  When the contract was initially entered into, the price of timber was high.[8]  In the next several years, the government allowed interest rates to rise, and this led to a costly fall in the housing market, and consequently, the lumber market.[9]  As a result, Seaboard attempted to trigger the force majeure clause for “acts of government” that ultimately made its timber contract unprofitable.[10]  Seaboard argued that the government’s monetary control procedures led to the increase in interest rates and the resulting downturn in the housing and lumber markets. [11]  Court found that the force majeure clause listing “acts of government” as an excuse for performance was not to be interpreted as to include government fiscal policy, and that the force majeure defense failed.[12]  The Court found that “[a]t most, the government’s acts indirectly made performance … unprofitable.”[13]  The Court found that timber was still of sufficient quality, that Seaboard simply made a business decision not to harvest, and that “Seaboard must bear the market risk [of prices falling] in the absence of contractual language that directs otherwise.”[14]

Importantly, the Court emphasized the importance of the cause of the nonperformance and its relationship to the acts of government.  Seaboard argued that the slump in the timber market made Seaboard’s performance impossible (or in the alternative, “commercially impracticable”), and thus somehow excused its nonperformance; the Court disagreed.[15]  While the court found that performance “is only excused under this doctrine when it is objectively impossible,” it noted that it does not mean literal impossibility of performance, only commercial impracticability.[16]  In other words, it was “not enough for Seaboard to show it was incapable of performing on the contract; it must show that no similarly-situated contractor could have performed.” [17]  The Court did not side with Seaboard, as it noted that the “market fluctuation did not make Seaboard’s contract impossible to perform, only unprofitable.[18]  Other contractors performed on logging contracts during the same period … [thus] Seaboard’s performance was not objectively impossible and cannot be excused on that basis.”[19]  The Court found that both the government and Seaboard bore risks: the government bore the risk that prices for timber would rise, and the Seaboard bore the risk that there would be a change in the market.[20]

If the acts of government merely lead to a change in market conditions, and without additional language in the contract protecting the parties, force majeure may not be applicable.  But here, if the acts of government preclude businesses from operating, and its individuals from traveling, a party may argue that directly precludes performance.

If the event does trigger the force majeure clause, comply with all notice requirements.

In addition to the force majeure clause itself, it is important to review other surrounding, relevant provisions in the contract, such as those related to termination, cancellation, breach or inability to perform.  Force majeure clauses may be conditional upon certain notice requirements (e.g. informing the other party without delay).  If notice or other pre-requisite is not timely met, it may constitute a possible breach of the contract, and force majeure may not excuse nonperformance.

Examine the effect force majeure has on the parties’ obligations.

If force majeure applies, it may have wide-ranging implications.  A party may be relieved from liability from its nonperformance.  A party’s payment obligations may be paused or extinguished.  The parties may choose to agree to modify the terms of the contract, renegotiate, set new deadlines or conditions for performance, or simply terminate.

Companies must pay close attention to developments at the federal, state and local levels in the upcoming weeks and possibly months.  Several states and cities have started to issue “shelter-in-place” orders, which bar residents from leaving their homes except for “essential” activities.  It is possible there will be additional travel restrictions enacted in other areas.

Given the complexity of this area of law, a company addressing a force majeure provision should not go it alone but should have an attorney review your contract to determine your options and ensure that your rights are protected.

[1] Sun Operating Ltd. P’ship v. Holt, 984 S.W.2d 277, 283 (Tex. App.—Amarillo 1998, pet. denied).

[2] Virginia Power Energy Mktg., Inc. and Dominion Resources, Inc. v. Apache Corp., 297 S.W.3d 397, 402 (Tex. App.—Houston [14th Dist.] 2009, pet. denied); Zurich Am. Ins. Co. v. Hunt Petrol. (AEC), Inc., 157 S.W.3d 462, 466 (Tex. App.—Houston [14th Dist.] 2004, no pet.).

[3] TEC Olmos, LLC v. ConocoPhillips Co., 555 S.W.3d 176, 183 (Tex. App.—Houston [1st Dist.] 2018), review denied (Aug. 30, 2019).

[4] Allegiance Hillview, L.P. v. Range Texas Prod., LLC, 347 S.W.3d 855, 865 (Tex. App.—Fort Worth 2011, no pet.).

[5] TEC Olmos, 555 S.W.3d at 184.

[6] See Langham–Hill Petroleum, Inc. v. S. Fuels Co., 813 F.2d 1327 (4th Cir. 1987) (rejecting claim for relief under force majeure where the government of Saudi Arabia acted to cause a collapse in world oil prices, making a contract unprofitable for a buyer, who had sought to excuse performance); N. Ind. Pub. Serv. Co. v. Carbon County Coal Co., 799 F.2d 265 (7th Cir. 1986) (holding that a government order denying a request from a utility to pass increased coal prices along to its customers did not excuse utility from a long-term contract to buy coal even though contract became unprofitable).

[7] Seaboard Lumber Co. v. United States, 308 F.3d 1283, 1288 (Fed. Cir. 2002)

[8] Id.

[9] Id.

[10] Id. at 1291.

[11] Id. at 1291.

[12] Id. at 1295.

[13] Id. at 1294 (emphasis added).

[14] Id.

[15] Id.

[16] Id.

[17] Id.

[18] Id.

[19] Id.

[20] Id. at 1296.