WHAT TO KNOW ABOUT FORCE MAJEURE CLAUSES IN LIGHT OF COVID-19 AND HOW YOU CAN PLAN NOWPDF
The economic impact of the COVID-19 virus will result in parties across many industries breaching their contracts. As a result, disputes will arise from breaching parties seeking to excuse their failure to perform by reliance upon contractual language commonly referred to as “force majeure” clauses. Black’s Law Dictionary defines force majeure as a “superior or irresistible force,” but it commonly refers to a failure to perform an obligation due to a cause outside the control of the failing party, such as an “act of God.” Common law and statutory defenses to performance failures, such as impossibility of performance and commercial impracticability doctrines, rarely resulted in a performance failure being legally excused. Therefore, use of force majeure language arose in part to contract around the limitations of these doctrines. No accepted standard wording for a force majeure clause exists. Because the specific language of a force majeure clause varies per agreement, courts review the clauses on a case-by case basis and their analysis is extremely fact specific. Despite this, there are a few general guidelines to force majeure clauses that typically apply under Texas law. First, courts will look for a specific reference to the cause of the performance failure. Second, if the cause of the breach was not specifically listed, Texas courts will rely on canons of contract interpretation, with special emphasis on the placement of any “catch all” phrases. Thirdly, Texas courts may require the cause of the breach to have been unforeseeable and/or outside the control of the party asserting relief under force majeure. Finally, any notice requirements in the contract for declaring a force majeure event should be strictly followed.
Most important consideration: the words of the clause
Courts will first look to see if the force majeure clause identified specific causes of nonperformance. Some clauses contain a “laundry list” of events excusing performance, but outside of the healthcare industry, few clauses will specifically identify viral outbreaks or pandemics. Many clauses will include “act of God.” “Act of God” in the context of a force majeure clause remains undefined under Texas law. Absent a definition in the applicable contract, courts may use the Texas Pattern Jury Charge definition of an act of God defense to tort liability: “An occurrence is caused by an act of God if it is caused directly and exclusively by the violence of nature, without human intervention or cause, and could not have been prevented by reasonable foresight or care.” This definition requires the force majeure event to be the sole cause of the breach and to be unforeseeable. Whether a pandemic like COVID-19 will be considered an “act of God” remains an open question under Texas law.
Force majeure clauses also often list acts of governments as excused events. Such language raises the issue of what exactly was the cause of the breach: the virus or any shutdown ordered by a governmental authority? The actual cause is important because specifically listed causes in a force majeure clause can be foreseeable and still be enforced, but only unforeseeable events can be excused by a “catch all” provision. Courts have reasoned that a specifically enumerated force majeure event does not need to be unforeseeable because the parties obviously had some foresight into the possibility of such events occurring; hence, the inclusion of such events in the clause.
Many force majeure clauses contain “catch all” language, often referring to all events beyond the reasonable control of a party. Under Texas law, when a force majeure clause lists events giving rise to the defense—fire, government regulation, oil spill, plant explosion, etc., then lists a catchall provision such as “and all other events outside the control of the asserting party,” those “all other events” are limited to events similar to those specifically enumerated. In contrast, if the catch all provision is listed first, then the specific events are listed as examples (“including but not limited to”), Texas courts have found that the listed events do not limit the scope of the triggering events.
An event must be unforeseeable to be excused by the catch all provision of a force majeure clause under Texas law. See, e.g., TEC Olmos, LLC v. ConocoPhillips Co., 555 S.W.3d 176 (Tex. App. – Houston [1st Dist.) 2018). Generally, Texas courts have found that economic or financial causes of breach, such as failures of funding a project or sudden changes in prices or expenses, are foreseeable. We expect that Texas courts may reach differing conclusions on the issue of foreseeability related to COVID-19 contract breaches, even under similar underlying circumstances.
When force majeure fails, or if the contract contains no force majeure clause, look to the Restatement or the Uniform Commercial Code.
Force majeure is not implied by law in the United States. If a contract fails to include a force majeure clause, defenses such as impracticability, prevention by a governmental regulation or order, and frustration of purpose may be asserted in its place.
A party may assert the defense of impracticability when their performance was made impracticable due to a supervening event and the occurrence or non-occurrence of that event was a basic assumption of the contract. (See, Restatement (2d) of Contracts § 261). Many courts will also require the supervening event to be unforeseeable.
In the context of COVID-19, this section can be asserted along with Restatement (2d) of Contracts § 264—Prevention by Governmental Regulation or Order. For example, pursuant to an executive order, all gyms must be shut down indefinitely. A gym may be able to assert § 264 in defense to a breach of contract claim because the gym was required by law to comply with the government order and shut down.
Note that both §§ 261 and 264 have been adopted by Texas law. See Centex Corp. v. Dalton, 840 S.W.2d 952, 954 (Tex. 1992).
Frustration of purpose
To assert the frustration of purpose doctrine, the frustration must be substantial and hinder the very purpose of the contract. (Restatement (2d) of Contracts § 265). In some circumstances, a court will temporarily excuse timely performance if the court views the supervening event as temporary. Depending on the context, this temporary suspension may be more just than discharging the obligation altogether. However, note that Texas law has not adopted § 265.
UCC § 2-615
If the contract is for sale of goods, UCC § 2-615 may apply. § 2-615 acts much like the impracticability doctrine of the Restatement. Pursuant to § 2-615, a delay in delivery (or non-delivery) in whole or part by a seller ... is not a breach of his duty under the contract if performance has been made impracticable by the occurrence of a contingency that the non-occurrence that contingency was a basic assumption on which the contract was formed.
In preparation for litigation
Pay attention to notice requirements
If you are asserting a force majeure claim or attempting to recover under a business interruption or other insurance policy, review the contract immediately for notice requirements. Bear in mind that notice deadlines may vary depending upon the cause of the force majeure event, and you may want to send multiple notices based on different events as alternatives, especially as the governmental response to the pandemic has resulted in incrementally greater business restrictions and/or effects.
What is the standard of care of the breaching party?
Force majeure clauses vary as to the standard of care required for the breaching party to have its performance excused: was performance illegal, impossible, commercially impractical, or not reasonably possible? Documentation of efforts to meet the performance standard should be created and preserved.
Many force majeure clauses delay performance as opposed to excusing it completely. Documentation of efforts to perform when possible should be created and preserved.
Burden of proof
The burden falls on the party asserting the claim to prove the force majeure event, and the claiming party may also have to prove that it was unforeseeable. Therefore, if you anticipate asserting this defense, begin to collect evidence supporting the claim early. Conversely, parties responding to the defense should also practice document and evidence retention to refute the force majeure claims—showing there were alternatives available, extension of time options, notice failures, and the like.
Because some sources claim COVID-19 may return next year, review your contracts and consider adding force majeure language or revising your force majeure clauses to include specific reference to COVID-19. Also, consider including specific force majeure language in new contracts. Also consider the impact that choice of law clauses may have on your force majeure language.
In summary, Texas courts will typically ask the following general questions:
- What specific causes of breach did the contract language excuse?
- What actually caused the breach?
- Was the actual cause specifically listed, or an event within the catch-all provision?
- Was the cause of the breach foreseeable?
- What standard of care is required of the party in breach?
- Did the party in breach comply with any notice requirements?
Start preparing now to provide the answers.