Almost every facet of our daily lives has been affected by the coronavirus outbreak. The majority of residents in the United States have been urged or, in some cases, ordered by authorities to stay home and to shelter in place, social distancing quickly has become an inescapable part of our daily lives and common vernacular, and toilet paper is being treated like a precious metal. Businesses have been forced to adapt and to make tough decisions overnight, the stock market is experiencing extreme volatility, and unemployment claims in the U.S. are at an all-time high. With such immediate and far-reaching effects and the World Health Organization’s declaration of a global pandemic, it seems like this is truly an unexpected “superior force,” or as the French say, a “force majeure.” However, whether the COVID-19 virus outbreak excuses contractual performance is not a simple issue and, perhaps unsatisfyingly, the answer is a lawyerly one—“it depends.”[1] While there is no simple and universal answer, we can provide some helpful guidance on the topic.
Force Majeure is Not a Specific Legal Doctrine but Rather a Creature of Contract
Force majeure is not a common law concept with specific static elements—rather, each force majeure clause is contract specific. After all, contracting parties are free to decide how to allocate risk and there is no “one size fits all” approach for doing so across different industries and for different contractual relationships. Accordingly, the first step in determining whether force majeure may apply is to look to the specific contractual language.[2] A court will evaluate the contractual language in accordance with the basic tenants of contract law.[3] Due to the variation in language used from contract to contract, the current pandemic could be considered a force majeure under some of a business’s contracts but not under others.
Common Force Majeure Provisions
While contracting parties are free to come up with their own risk allocation method, most force majeure clauses have some common elements. Most provide, in some manner, that 1) the disruptive event could occur either in the presence of absence of human intervention, 2) the disruptive event could not have been reasonably foreseen by the parties, and 3) the disruptive event was beyond the control of the parties, such that the consequences of the disruptive event could not have been prevented.
Force majeure clauses frequently list specific events such as a fire, storm, flood, war, terrorism, strike, an “act of God,” etc. While some pre-COVID-19 contracts do specifically list pandemics, epidemics, or quarantine, it would be rare to see such language outside the context of the healthcare industry.
Many force majeure clauses include a catchall provision. A narrower catchall would be one that covers “other similar events,” while a broader one may cover “any other event outside the reasonable control of the parties.” At this point, it is not known how broadly or narrowly courts will apply these catchall provisions to the COVID-19 pandemic. Typically, such events must be completely unforeseeable.[4] There is likely going to be inconsistency from jurisdiction to jurisdiction, and even perhaps from judge to judge within jurisdictions, until there is some precedent on the issue. After all, there are persuasive arguments to be made on both sides. On the one hand, this is an unprecedented global pandemic that seemingly no one was prepared for or saw coming. On the other hand, parties conceivably could have allocated risk for epidemics, pandemics, and/or disease prior to the current outbreak and in light of the SARS outbreak from 2002-04, the MERS outbreak in 2014, the H1N1 flu pandemic in 2009, and even the 1918 flu pandemic. The courts are likely to see many cases in which this issue will be front and center, so judicial guidance likely is on its way.
What is an Act of God, Anyway?
A very understandable question is, “What constitutes an act of God under a force majeure clause?” While there is no universal answer across all jurisdictions, most courts have required the event to have been caused solely by nature and without any human intervention. For a recent example, Texas courts have recognized Hurricane Harvey as an act of God.[5] Of course, even if courts deem the COVID-19 pandemic an act of God that does not automatically mean it will excuse a party from performing under its contract. Under Texas law, an act of God does not relieve a party of its contractual obligations unless the contract expressly so provides.[6] Thus, without language that excuses performance due to an act of God, the occurrence of an act of God is not a legal excuse for not performing.[7]
Post-COVID-19, Specify Who Bears the Risk of Pandemics
Post-coronavirus, a pandemic most likely will be considered a foreseeable event that must be stipulated in the force majeure clause to be applicable. Thus, moving forward, contracting parties should specifically list pandemic, epidemic, quarantine, and shelter-in-place orders in their force majeure clauses if they want these events to excuse or to delay performance. If a force majeure clause lists a specific event, then there is no need to show that the occurrence of the subject event was unforeseeable, which can prevent unnecessary uncertainty and legal fees.[8]
Limitations Even If it is a Force Majeure Event
Even if pandemic is listed under a force majeure provision, contractual performance is not automatically suspended. Parties must still exercise diligence and attempt to perform, and if they cannot perform as contemplated by the contract, they should and are probably required to notify the other party. Many force majeure clauses require that notice be provided to the other party in order to exercise the clause. It can be difficult to determine the exact triggering date of a force majeure event related to a pandemic—was it when the World Health Organization declared a global pandemic on March 11, 2020, or when a governmental authority issued an order, such as Dallas County’s Shelter-in-Place Order effective on March 23, 2020? As a rule of thumb, it is best to notify the other party as soon as there is significant doubt about the ability to perform under the contract.
Force majeure clauses often require that performance under the contract has been prevented or made illegal, impossible, or impracticable as a result of the occurrence of the subject event. These all establish different standards, so it is very important to carefully analyze the specific language.
Intuitively, there is a causation requirement and the disruptive event must actually be the cause of a party’s inability to perform. Before invoking a force majeure clause, it is important to evaluate whether COVID-19 is the true cause of non-performance. Some jurisdictions require the force majeure event to be the sole cause, while others require only that it is the dominant cause. Also, a party risks anticipatorily repudiating a contract if it invokes a force majeure clause without a proper basis, so it is important to assess the risks and alternatives before doing so.
Further, a force majeure clause often does not fully excuse performance—rather, it often only delays performance until the contract can be performed. Accordingly, while the COVID-19 pandemic may give certain parties more time to perform certain impacted contractual obligations, it is unlikely an avenue to get out of a particularly regrettable contract.
Contracts Without Force Majeure Language
If a contract does not have a force majeure clause, frustration of purpose, which is sometimes referred to as impossibility or impracticability in Texas, could still be a possible defense for failure to perform. This defense, and most of its variations, generally require a few elements to be met, including: 1) substantial frustration of the principal purpose of the contract, 2) the nonoccurrence or occurrence of the frustrating event was a basic assumption upon which the contract was made, and 3) there is no fault on part of the defendant.[9] Courts will factor in the foreseeability of the occurrence when this defense is raised.[10] For more information on frustration of purpose, please visit FBFK’s brief article on the topic here.
Further, in the context of contracts for the purchase or sale of goods, the Uniform Commercial Code provides that a seller may be excused for delay in delivery or non-delivery “if performance as agreed has been made impracticable by the occurrence of a contingency the non-occurrence of which was a basic assumption on which the contract was made or by compliance in good faith with any applicable foreign or domestic governmental regulation or order whether or not it later proves to be invalid.”[11] A seller relying on this provision must “seasonably” notify the buyer of the delay or non-delivery and must comply with other provisions of the UCC.[12]
Closing Thoughts and General Advice for Navigating the Uncertainty
Unfortunately, uncertainty is the new normal and there is no avoiding the risk created by this situation. In these unprecedented times, we highlight a few of FBFK’s Fundamentals:
- Speak Straight—We’re all experiencing unexpected uncertainty right now. Be direct about potential issues in fulfilling contractual obligations. While some disputes are inevitable, direct communication could avoid many issues from escalating.
- Be Transparent—None of us have all the answers right now. But be forthcoming about what you do know so other businesses and stakeholders can be better informed when making tough decisions.
- Get Clear on Expectations—Create clarity on what can be performed, what cannot, and what is still unclear. While this is an inherently uncertain time, provide clarity on what you can, even if it is as simple as being clear about when you will revisit an issue.
- Maintain Perspective—Finally, maintain perspective. A lot is outside of our control right now—so focus on what you can control and do your best, but take this time to especially focus on the well-being of yourself, your family, and those around you.
[1] This note is intended to provide general guidance on this topical issue. The laws of different jurisdictions treat this issue slightly differently and this article is informed primarily by Texas law. Further, the specific facts of each situation have a significant effect on the analysis. Accordingly, we recommend consulting with an attorney about any specific situation before invoking a force majeure or other similar provision.
[2] See, e.g., Zurich Am. Ins. Co. v. Hunt Petroleum (AEC), Inc., 157 S.W.3d 462, 466 (Tex. App.—Houston [14th Dist.] 2004) (“Regardless of its historical underpinnings, the scope and application of a force majeure clause depend on the terms of the contract.”) (citing Sun Operating Ltd. P’ship v. Holt, 984 S.W.2d 277, 282–83 (Tex. App.—Amarillo 1998, pet. denied) (“Force majeure, is now little more than a descriptive phrase without much inherent substance. Indeed, its scope and application, for the most part, is utterly dependent upon the terms of the contract in which it appears.”); Tex. City Ref., Inc. v. Conoco, Inc., 767 S.W.2d 183, 186 (Tex. App.—Houston [14th Dist.] 1989, writ denied)).
[3] See, e.g., WC 1899 McKinney Ave., LLC v. STK Dallas, LLC, 380 F. Supp. 3d 595, 603 (W.D. Tex. 2019); Virginia Power Energy Mktg., Inc. v. Apache Corp., 297 S.W.3d 397, 402 (Tex. App.—Houston [14th Dist.] 2009, pet. denied).
[4] See TEC Olmos, LLC v. ConocoPhillips Co., 555 S.W.3d 176 (Tex. App.—Houston [1st Dist.] 2018).
[5] See Bayou Place Ltd. P’ship v. Alleppo’s Grill, Inc., No. CV RDB-18-2855, 2020 WL 1235010, at *8 (D. Md. Mar. 13, 2020); In re Downstream Addicks, No. 17-9002, 2020 WL 808686, at *9 (Fed. Cl. Feb. 18, 2020) (finding Harvey was a 2000-year storm that “could not have been reasonably expected or provided against.”); Landgraf v. Nat. Res. Conservation Serv., No. 6:18-CV-0061, 2019 WL 1540643, at *2 (S.D. Tex. Apr. 9, 2019) (finding flooding caused by storm surge from Harvey attributable solely to an Act of God).
[6] See Bayou Place, 2020 WL 1235010, at *8 (D. Md. Mar. 13, 2020) (quoting GT & MC, Inc. v. Texas City Refining, Inc., 822 S.W.2d 252, 259 (Tex. App.—Houston [1st Dist.] 1991)).
[7] See Bayou Place, 2020 WL 1235010, at *8 (D. Md. Mar. 13, 2020) (quoting Metrocon Const. Co. v. Gregory Const. Co., 663 S.W.2d 460, 462 (Tex. App.—Dallas 1983)); Miller v. Durham, No. 07-14-00087-CV, 2014 WL 4101762, at *4 (Tex. App.—Amarillo 2014).
[8] See TEC Olmos, LLC v. ConocoPhillips Co., 555 S.W.3d 176, 183 (Tex. App.—Houston [1st Dist.] 2018, pet. denied) (“We agree that when parties specify certain force majeure events, there is no need to show that the occurrence of such an event was unforeseeable.”).
[9] See Restatement (Second) of Contracts § 261 (1981); Centex Corp. v. Dalton, 840 S.W.2d 952, 954 (Tex. 1992).
[10] Centex Corp., 840 S.W.2d at 954.
[11] See UCC § 2-615(a); Tex. Bus. & Com. Code § 2.615(1).
[12] See UCC § 2-615(c); Tex. Bus. & Com. Code § 2.615(3).