Schools have been closed, sporting events and other large gatherings of people have been cancelled, travel has been curtailed or even banned, restaurants have been restricted to takeout only, many employees are working remotely, the stock market has tanked, there was an unusual run on toilet paper, and social distancing is now a commonly understood phrase. These are some of the impacts of the coronavirus (COVID-19). The coronavirus has taken a toll on many businesses. Recently I’ve seen a spike of people seeking temporary relief under their contracts or backing out of their contracts altogether. Each time the primary argument is force majeure.
Force majeure is generally understood as a contractual provision that suspends a party’s obligations under a contract when an extraordinary event occurs. Texas courts look to the specific contractual language of a force-majeure provision in determining its scope and effect. Thus, any question regarding force majeure must first begin by examining the terms of the provision.
If the contract does not have a force-majeure provision, a party generally cannot claim force majeure. An exception exists if the contract is for a sale of goods and falls within the Uniform Commercial Code, in which case UCC § 2-615 may act as force majeure.
If the contract has a force-majeure provision, its terms must be carefully examined to determine its applicability. Typical force-majeure provisions include a list of events invoking force majeure, and may also include a catchall provision of events, the standard for invoking, and notice requirements. Following is a force-majeure provision I recently encountered that contains each of these terms:
Should performance of any obligation created under this contract become illegal or impossible by reason of fire, flood, storm, act of God, governmental authority, labor disputes, war, or any other cause not enumerated herein but which is beyond the reasonable control of the party whose performance is affected, then the performance of any such obligation is suspended during the period of, and only to the extent of, such prevention or hindrance, provided the affected party provides reasonable notice of the event of force majeure and exercises all reasonable diligence to remove the cause of force majeure.
Under this provision, performance of the obligation must become illegal or impossible. Certainly operating a business in violation of a government mandate or order not to operate would be illegal, but it would not be illegal if it was only a government recommendation or best practice. It likely would not be impossible either, although there is some caselaw in the insurance context supporting the proposition that impossible also includes impracticable.
This provision also enumerates a list of events invoking force majeure. It does not include coronavirus, let alone any pandemic, epidemic, or outbreak. Hindsight is 20/20, but in light of recent coronavirus impacts, it would be best practice to account for similar events in the list of events invoking force majeure.
The list of events does include acts of God, governmental authority, and any other cause not enumerated herein but which is beyond the reasonable control of the party whose performance is affected. With respect to an act of God, the Texas Pattern Jury Charges says: “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.” Coronavirus might constitute an act of God under this definition, but there is certainly room for an attorney to make an argument to the contrary. Also, jurisdictions differ on what constitutes an act of God. Regarding governmental authority, there is a good argument that governmental authorities cancelling events, such as what happened with South by Southwest and the Houston Livestock Show and Rodeo, constitutes force majeure. With respect to the catchall provision, some courts require the event to be unforeseeable. While coronavirus may not have been foreseeable, future pandemics may be foreseeable after our recent experience.
This provision also includes a notice provision. It says only that reasonable notice must be provided. What is reasonable is determined in light of the circumstances. Best practice would be to provide notice immediately or as soon as possible and to provide such notice in strict accordance with the notice provisions in the contract.
These are just some of the issues to consider when dealing with circumstances that may trigger contractual force-majeure provisions. Force-majeure provisions vary greatly–some are short, simple, and generic, while others are lengthy and highly detailed. The terms of any force-majeure provision should be carefully negotiated with the assistance of a lawyer. It is not suggested to rely on boilerplate language or gloss over the terms of the provision altogether. As many business are about to find out the hard way, an ineffective or poorly drafted force-majeure provision can cause quite a bit of trouble.
Johnsen Law attorneys have deep experience both drafting and negotiating force-majeure provisions and handling force majeure related disputes for our clients. Contact Johnsen Law to learn more.
