Between a Rock and a Hard Place- Force Majeure Considerations Amidst a Global Pandemic
The COVID-19 pandemic has caused many businesses to consider force majeure provisions in their contracts. In response to the COVID-19 virus, governments and businesses have implemented measures to prevent or curtail the spread of the virus in the form of stay at home orders, travel bans, heightened border security (and in some cases border closures), restrictions on gathering sizes, closure of non-essential stores and businesses, cancelation of public events (including concerts and sporting events), and other similar measures. Consequently, many businesses are simply unable to perform their contractual obligations and have invoked force majeure clauses to eliminate or limit liability due to their inability to perform such contractual obligations. In general terms, “force majeure” refers to a contractual provision that limits liability due to unforeseen events outside the control of the parties that delay performance of the contract or prevent performance entirely. A force majeure analysis begins and frequently ends with the language in the parties’ contract, which typically answers the key questions: (i) what conditions qualify for force majeure treatment, (ii) what must a party do to satisfy those conditions, and (iii) exactly what performance is excused, and for how long. Applicable notice provisions must also be complied with. A careful analysis of (rarely invoked) force majeure clauses are critical to understand in these uncertain times.
What Conditions Qualify for Force Majeure Treatment?
Force majeure clauses are found in a variety of contracts and these provisions routinely enumerate events that would excuse contractual performance if such events prevented a party from being able to perform. Unfortunately, there is no boilerplate, standard force majeure clause. Rather, the specific contractual language chosen by the parties will determine the scope of the force majeure provision. The party seeking to assert the force majeure clause typically has the burden of proving its applicability, including that the event was beyond its control and without its fault or negligence.
Many contracts specifically provide that certain events qualify as force majeure. To determine whether an event triggered force majeure, you should first consider the clause’s enumerated “laundry list” of force majeure events. Events such as fires, floods, named storms, acts of God, governmental orders, curtailments, wars, strikes, and rebellions are all commonly included terms. COVID-19’s classification as a “pandemic” by the World Health Organization will likely trigger a force majeure clause that expressly accounts for “pandemics.” Even if “pandemics” is explicitly listed, this is still a fact-based analysis that will require reviewing the relevant contract and the specific impact of the COVID-19 “pandemic” on the impacted party’s ability to perform under the contract.
Assuming that no force majeure clauses include “COVID-19,” and few include “pandemics,” one may be looking to an “act of God” as the expressed force majeure event. But case law on what does or does not qualify as “act of God” varies across the country. Some jurisdictions have opinions suggesting that “acts of God” may be limited to matters solely caused by forces of nature. See, e.g., McWilliams v. Masterson, 112 S.W.3d 314, 320 (Tex. App.-- Amarillo 2003, pet. denied). Generally, courts consider “acts of God” as those without “human intervention.” Travelers Ins. Co. v. Williams, 378 S.W.2d 110, 113 (Tex. App.—Amarillo 1964, writ ref’d n.r.e.). Hurricanes and unprecedented floods are the types of natural, extraordinary events that typically constitute “acts of God.” See, e.g., HRD Corp. v. Lux Int’l Corp. at *11–12 (S.D. Tex. July 17, 2007). At present, it is unclear whether a Texas court would hold that COVID-19 is an “act of God.” What makes the issue complex is any subsequent government action in response to OCVID-19 could arguably preclude a party from invoking the defense because of this “human intervention.” A contrary argument suggests that the incentive for government action arose solely from the “act of God,” and therefore, the entire event constitutes force majeure. Of course, those very government actions may themselves constitute a basis for force majeure if the contract so provides.
The analysis is even more complicated when the parties include a “catch-all” phrase that does not specifically enumerate triggering events. Examples of “catch-all” phrases in a force majeure clause include:
• any other cause . . . beyond the reasonable control
• any other similar cause
• any like cause
• any other cause, whether of the kind herein enumerated or otherwise
• any similar or dissimilar occurrences.
Under Texas law, catchall provisions are subject to the requirement that the event be unforeseeable, while specifically enumerated events might not be similarly restricted. See TEC Olmos, LLC v. ConocoPhillips Co., 555 S.W.3d 176, 184 (Tex. App.—Houston [1st Dist.] 2018, pet. denied). Thus, where “catch-all” phrases are used as the basis of force majeure, courts will typically not apply force majeure when the parties could have expected the event at issue to occur at the time of contracting. The foreseeability of the coronavirus is likely to be subject to debate. A party to a contract executed prior to the escalation of the virus spread and its classification as a pandemic could be more likely to successfully rely on a force majeure clause. On the other hand, parties who elected to enter into contracts with reasonable knowledge of the virus’s potential consequences, such as after the virus began to attract large attention in China, may have a more difficult foreseeability argument. The point at which this balance tipped will be a question for the court based on the industry, the parties, the particular disruption, and the specific language of the clause.
It is important to note that many events enumerated in a typical force majeure provision may be implicated by the spread of COVID-19. The following list non-exclusive triggering events, if listed in a force majeure clause, may be implicated by COVID-19 and current events:
• Communicable disease outbreak
• Lack of or inability to obtain fuel, power, components, or materials
• Disruption of supply chains
• Disruption of transportation systems
• Disruption of labor force
• National emergency
• Act, order, or requirement of any governmental authority
• “Act of God”
• A “catch-all” phrase
The more specific the language, the more likely that the provision applies. As a starting point, businesses should review their contracts closely to determine which triggering events are listed within their contracts’ force majeure clauses, and whether the problems they are facing in fact were caused by the triggering event as defined by the specific language of the contract. For example, has their workforce fallen ill, or been advised or mandated to stay home? Has a facility been ordered closed by the government or is procurement of supplies merely more expensive? Has an event space closed or travel become ill-advised or prohibited? Has the government urged the public not to engage in a certain industry such as the cruise industry?
If Your Provision Applies, what Performance is Excused?
Even though, for example, “pandemics” may be expressly listed as an event that could constitute force majeure, other elements of the clause must still be met in order for a party to invoke a force majeure provision. Even if the appropriate conditions for force majeure are identified in the contract, one must determine what standard applies to measure diminished performance. Typical standards of diminished performance in force majeure clauses include the more severe (and hard to prove conditions) such as: illegality, impossibility, and impracticability, to the easier to prove conditions such as a party was merely prevented or hindered in its performance of the contract. The question here is does the force majeure condition have to make performance illegal or impossible, or something less, such as delayed, hindered, or not reasonably within a party’s control?
If the condition applies and meets the standard to excuse performance, then the party must determine exactly what the provision excuses. The typical provision excuses delayed performance during the period of delay caused by the force majeure event. Once the force majeure event ends, or the party is able to find a solution to the delay, the excuse ends and performance must continue. Force majeure provisions rarely completely excuse all performance, which would effectively terminate the contract. Additionally, the parties may expressly provide that certain obligations under a contract, such as payment of money or the obligation to indemnify, are not excused or suspended even if caused by an event of force majeure.
Invoking Force Majeure
The foregoing analysis means little if you fail to give proper notice under the contract, when it is required. Businesses should also carefully review the notice provisions in their contracts and make sure they comply with any specific requirements for invoking a force majeure clause or raising an inability to perform. Force majeure clauses vary in their notice requirements. Some require notice within a certain timeframe of the occurrence of an event of force majeure (e.g., “notice must be within 10 days of the event”), whereas others only require prompt or “reasonably” prompt notice. In the context of the coronavirus pandemic, one important consideration for any notice provision will be when “the event” of force majeure occurred. In the context of COVID-19 outbreak, determining when the event occurred could be a key issue because of the many factors affecting this pandemic, including the effect of various government “recommendations” and “orders” and the timing of the outbreak through the various regions.
Careful thought should be applied before relying on a force majeure clause. If a party declares force majeure but is not contractually entitled to do so, it may expose itself to a claim for repudiatory breach of contract and the other party may be entitled to claim damages as a consequence. In light of these issues, businesses should consider the following questions in evaluating the impact of COVID-19 on existing contractual relationships:
1. What is the triggering event preventing or impacting performance? (Pandemic, governmental response, economic downturn, supply chain issue, workforce issue, etc.)
2. Is the triggering event expressly included by the force majeure clause term? If not, is there a catch-all term that could apply? Was the triggering event foreseeable?
3. How did the triggering event affect performance? Is performance impossible or impracticable? Could non-performance have been avoided? Were any efforts taken to mitigate the effects of force majeure?
4. What remedies does the force majeure clause provide with respect to performance or otherwise under the contract (e.g., does it allow for termination of the contract, excuse performance of certain obligations with the contract continuing, or permit a delay for as long as the force majeure continues)?
5. What steps does one need to take to exercise these rights (e.g., is there a notice requirement) and what remedies or options does the other party have?
6. What state’s law governs the contract?
The difficulty for a party seeking to assert force majeure is to answer each of these questions in a coherent manner that ties together the surrounding factors, relevant contractual language, and particular jurisdictional requirements.
Ultimately, the question of whether an impacted party can avail itself of the remedies available during a force majeure event per the terms of the contract or under applicable law is fact-based. For example, even if COVID-19 qualifies as a “pandemic” expressly covered by the force majeure language of an agreement, performance will still not be excused if it isn’t the pandemic itself that prevented a business from performing thereunder, but rather some separate downstream effect, or if the performance is not actually prevented, but merely inconvenient. If you believe you may need to invoke the terms of a force majeure clause or you are concerned that a counterparty to your contract may do so, we highly recommend consulting with your attorney as soon as possible.
Farnsworth & vonBerg, LLP is continuing to monitor issues affecting clients and businesses in response to the coronavirus pandemic. If you have any questions, for more information on the topics mentioned above, or for assistance with addressing insurance issues, supply chain problems, development of best practices and protocols, or other matters affecting your business, please contact any of us here at F&V: email@example.com; firstname.lastname@example.org; email@example.com; firstname.lastname@example.org.
This publication should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own lawyer on any specific legal questions you may have concerning your situation.