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COVID-19 & Force Majeure – Perfect Partners?

  • Published: May 13, 2020

The onslaught of COVID-19 has shattered the very fabric by which we live, work, and play. Nations, businesses, and individuals alike around the world have been grappled with the realities of human tragedy. The virus’ human toll is undeniably the most readily apparent and immediately devastating. However, long after the last case of the virus abates, the even more pervasive and lingering threat of sustained economic disruption and hardship will likely continue to impact the business climate for months, if not years to come. We are already seeing such crippling economic devastation unfolding before us.

According to the United States Department of Labor, more than 26.5 million Americans have lost their employment as a result of the COVID-19 pandemic, an aggregate unemployment rate of some 20.6% as of April 23, 2020.[1] This is the highest unemployment rate since 1934 during the depths of the Great Depression. The economic detriments are not confined by borders. Worldwide, the gravity of the economic declines is just as large. The United Nations Labour Body estimates that the COVID-19 induced economic shutdown and associated externalities will result in a reduction in working hours globally equivalent to some 195 million jobs worldwide.

[2]Turning closer to home, while economists cannot readily agree on what the aggregate effect to the United States’ GDP will be, initial estimates opine that the cost of two months’ mitigation efforts will amount to some 10% reduction in U.S. GDP or approximately $2.14 trillion.[3] Making matters even worse, states with largely energy dependent economies, including Texas, will feel further pain given the record low prices in crude oil caused by both decreased energy consumption and price wars among nations leading to a glut in the oil market. Businesses and individuals, both large and small, have already defaulted on obligations or been left with little recourse other than to file for bankruptcy protection. Bankruptcy filings rose eighteen percent alone just in the last two weeks of March at the beginning of mitigation induced business shutdowns in the United States.

All of the above leads to potential significant impediments on the ability of parties to meet their contractual commitments. Agreements negotiated and executed in good faith just a short time ago have nearly instantly become frustrated or become unattainable for one or more parties to meet. Given that in many instances, but for the COVID-19 pandemic, parties would have been able to and would have otherwise fulfilled their contractual obligations, the question beckons if there is any recourse for parties unable to meet their contractual obligations as result of COVID-19. Contracts interpreted under Texas law, and many other jurisdictions, recognize that parties may decide to contract in advance for such unforeseeable or uncontrollable contingencies. Parties can contract in advance for discharging of parties’ duties arising under a contract in the event that certain events arise beyond the control of the parties. Such provisions in contract are referred to as force majeure clauses.

Texas courts recognize and will generally enforce force majeure clauses contained within a contractual agreement. Typically, any provision in a contract that excuses a party’s lack of performance of obligations if circumstances arise beyond the reasonable control of a party or by an event which is “unforeseeable at the time the parties entered into the contract” is considered a force majeure clause.[4] Such acts are commonly equated to acts of god or similar natural disaster type situations such as hurricanes, earthquakes, or tornados. Given the present world situation, astute minds and business owners are asking do force majeure clauses encompass a pandemic such as the current COVID-19 situation?

Courts do not mandate the establishment of any prescribed elements or points of construction that must be satisfied to enforce a force majeure clause. Meaning there are no statutorily provided requirements that a force majeure clause must meet in order to excuse a party’s obligations. Rather, the explicit terms of a contract’s force majeure clause must be given their plain meaning language on its face taken in context of the totality of the contractual agreements themselves. Of course, generally accepted restraints on contractual construction, including legality and unconscionability, are not excused. Meaning that an analysis on what events constitute an unforeseeable event triggering a force majeure clause is an introspective inquiry ordinarily confined to the four corners of the contract itself.

Both the triggering events and impact on party obligations are solely those enumerated in the relevant provisions of the governing contract. Courts will not otherwise modify or “fill in the gaps” of any otherwise claimed deficient provisions.[5] As such, no matter how much public policy and equity may lean in favor of a court finding that COVID-19 is an act beyond the control of a party, if the governing contract’s force majeure clause does not explicitly include COVID-19 or pandemic events in general, the court generally cannot find that a force majeure clause has been triggered and hence a party cannot be excused from their obligations.

That being said, alternatively, if a force majeure clause does not specifically list a pandemic type event, “catch-all” language may still permit excuse of a party’s obligation.[6] For example, if a force majeure clause begins with language to the effect of “any cause whatsoever beyond the control of a party”, COVID-19 may be a permissible excuse of performance as COVID-19 would certainly be reasonably considered to be included within a reasonable interpretation of “any cause whatsoever beyond the control of a party.” The key inquiry in evaluating the applicability of “catch-all” language is the order of placement of the language in the force majeure clause. To apply, to events other than those explicitly stated in the clause, the “catch-all” language must precede the listing of any specifically covered events excusing performance that may be listed in the force majeure clause itself.

Ultimately, if you or your business find yourself in a position where the COVID-19 pandemic has you asking if you can discharge or otherwise relieve yourself of obligations or duties arising under a contract, the following must be satisfied to excuse a commitment by way of operation of a force majeure clause:

The governing contract’s force majeure clause must directly include a pandemic type event as a covered event that excuses a party’s obligations under the contract.

Alternatively, to (1), the governing contract’s force majeure clause must include “catch-all” language that proceeds any listing of specific obligation excusing events.

The force majeure clause must contemplate that excused events are those outside the control of a party or otherwise unforeseeable.

Any required notice, response, or other timing provisions of the force majeure clause must be satisfied.

The interplay of COVID-19 against our traditional notions regarding force majeure clauses and language employed in developing and constructing force majeure clauses will forever be upended. Going forward, when negotiating any future significant contractual commitment, the importance of advocating for inclusion of language that includes pandemic type events in the agreement’s force majeure clause cannot be overstressed. In short, for better or worse, future contracts will likely see a permanent partnering of pandemics and force majeure.

References:

[1] https://fortune.com/2020/04/23/us-unemployment-rate-numbers-claims-this-week-total-job-losses-april-23-2020-benefits-claims/.
[2] https://www.theguardian.com/world/2020/apr/07/covid-19-expected-to-to-wipe-out-67-of-worlds-working-hours.
[3] https://www.mercatus.org/publications/covid-19-policy-brief-series/cost-covid-19-rough-estimate-2020-us-gdp-impact.
[4] Hydrocarbon Mgmt., Inc. v. Tracker Exploration Inc., 861 S.W.2d 427,435-36 (Tex. App.—Amarillo 1993, no writ).
[5] Sun Operating Ltd. P’ship v. Holt, 984 S.W.2d at 283 (relying on Texas City Ref., Inc. v. Conoco, Inc., 767 S.W.2d 183, 186 (Tex. App.—Houston [14th Dist.] 1989, writ denied)).
[6] See TEC Olmos, LLC v. ConocoPhillips Company, 555 S.W.3d 176, 183–84 (Tex.App.-Hous. (1 Dist.), 2018).

Gregory W. Marcum

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