1. Introduction

Houston, TX – The threat of COVID-19 has quickly changed—and in some cases halted—America’s day-to-day routines. Businesses and consumers wonder how the economic slowdown may impact their obligation to continue making payments or perform on the contracts they already entered.

Two common avenues allow a party to avoid its contractual obligations. The article covers the first: force majeure provisions in contracts. A force majeure clause is contractual language that excuses performance for circumstances beyond a party’s control. The second is the common law doctrine of impossibility, covered in another article available [here].

Force majeure is a pure function of contract in Texas: the parties bargained at the outset about who would bear the risk of contractual performance becoming impossible or illegal due to specified causes. “It is, after all, not uncommon for a contracting party to assume the risk of an event he cannot control[.]” United States v. Winstar Corp., 518 U.S. 839, 908, 116 S. Ct. 2432, 2471, 135 L. Ed. 2d 964 (1996).

2. Contractual force majeure provisions in Texas.

Force majeure excuses performance only in the circumstances that the contract defines. Sun Operating Ltd. P’ship v. Holt, 984 S.W.2d 277, 283 (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. . . when the parties have themselves defined the contours of force majeure in their agreement, those contours dictate the application, effect, and scope of force majeure.” Id. If parties do not include a force majeure provision in their contracts, then none is presumed.

Even when included, contract language can vary significantly, so the availability of relief depends on the contract terms and is determined on a case-by-case basis. A typical force majeure provision may excuse performance due to extreme weather conditions, acts of terrorism, war, governmental actions, and “acts of God.” Some provisions extend specifically to “quarantine” and “epidemic.” Anadarko Petroleum Corp. v. Noble Drilling (U.S.) LLC., No. CV H-10-2185, 2012 WL 13040279, at *16 (S.D. Tex. May 3, 2012) (“Force Majeure shall mean, Acts of God (other than adverse sea or weather conditions), war, . . . , acts of the public enemy, quarantine, epidemic, …”).

The provisions are often industry specific. Many also contain general catch-all language excusing performance for circumstances reasonably beyond a party’s control. The “act of God” language is sometimes used as a type of general, catch-all reference. Of these provisions, the government actions reference and the catch-all, “act of God” references are most applicable to the circumstances caused by COVID-19.

Regarding the first, the federal government and many state governments have declared a state of emergency. Local governments are rapidly following suit and taking even more extreme measures, closing schools and public transit, and prohibiting gatherings. These government actions will prevent the performance of many business contracts and provide.

Second, courts generally interpret the phrase “act of God” to mean natural causes like weather events. In one Court’s view, the term means “any accident that is due directly and exclusively to natural causes without human intervention and which no amount of foresight, pain or care, reasonably exercised, could have prevented. The act must be one occasioned by the violence of nature, and all human agency is to be excluded from creating or entering into the cause of the resulting mischief. The term implies the intervention of some cause not of human origin and not controlled by human power.” Transp. Ins. Co. v. Liggins, 625 S.W.2d 780, 782–83 (Tex. App.—Fort Worth 1981, writ ref’d n.r.e.) (citing jury instruction from trial court); Mid-Continent Cas. Co. v. Whatley, 742 S.W.2d 475, 478 (Tex. App.—Dallas 1987, no writ) (citing definition of “Act of God” in Liggins).

The Restatement (Second) of Contracts does not define “Act of God,” but uses the term to imply changes in circumstances that are not attributable to human causes, distinguishing the term from changes brought on by a “third party.” Restatement (Second) of Contracts § 261 (1981) (“Events that come within the rule stated in this Section are generally due either to “acts of God” or to acts of third parties.”). There is no convincing precedent in Texas on whether a pandemic, sickness, or illness may qualify as an act of God akin to a weather event.

Any other generalized language will likely be construed in the context of the clause where that language appears. The text will matter.

3. Parties must carefully define the cause of non-performance.

The response to COVID-19 has been multi-faceted, including mandatory actions (like court closings, as well as some states closing dining establishments) and voluntary actions (like social distancing). Further, the illness caused by the virus has directly caused non-performance of contracts as well as indirectly causing non-performance attributable to the sudden economic slowdown. And, simultaneous with COVID-19 response measures, other economic action (like the oil dispute between Russia and OPEC) have contributed to the economic downturn.

Thus, defining the actual root cause of any non-performance will be critical, especially if that ultimate cause is found to be an economic one. Economic downturns are generally not covered by a force majeure provision unless it is specifically defined, because changing economic conditions are considered foreseeable—and if foreseeable, the force majeure provision will not apply. See Valero Transmission Co. v. Mitchell Energy Corp., 743 S.W.2d 658, 663 (Tex. App.—Houston [1st Dist.] 1987, no writ) (“An economic downturn in the market for a product is not such an unforeseeable occurrence that would justify application of the force majeure provision, and a contractual obligation cannot be avoided simply because performance has become more economically burdensome than a party anticipated.”); see also Kodiak 1981 Drilling Partnership v. Delhi Gas Pipeline, Corp., 736 S.W.2d 715, 716, 720–21 (Tex. App.—San Antonio 1987, writ ref’d n.r.e.); TEC Olmos, LLC v. ConocoPhillips Co., 555 S.W.3d 176, 183 (Tex. App.—Houston [1st Dist.] 2018, pet. denied).

Even where a force majeure provision exists, disputes will likely arise about (i) what the ultimate cause of non-performance was, and (ii) whether that cause excuses performance under the specific contractual provision. This may be especially true where a party is relying on an “act of God” trigger to the provision and will have to show that the cause of nonperformance fits that definition—and likely that the cause was the exclusive cause of nonperformance.

For more information, please contact MH attorney Bobby Debelak.