The Novel Coronavirus (COVID-19) Pandemic and Force Majeure: When Is Contract Performance Excused?
Is your company excused from meeting its contractual obligations during the novel coronavirus pandemic? Learn about some key considerations for invoking force majeure.
As countries around the world attempt to deal with the novel coronavirus outbreak and stabilize their economies, many businesses are being forced to ask whether performance under their contracts is excused temporarily or permanently based on the principle of force majeure. In this article, we provide an overview of force majeure clauses in business contracts and how they are interpreted and enforced under Texas law, and we offer some suggestions for companies that are struggling to meet their contractual obligations due to the highly dynamic nature of the novel coronavirus pandemic.
While much will depend on the full extent of the economic impact of the novel coronavirus (COVID-19) pandemic and its effects on a particular contract, at the outset, companies should consider the following three questions:
- Can your company invoke a force majeure clause based on the novel coronavirus pandemic?
- If so, what factors are applicable in light of the specific language used in the contract?
- What does your company need to do in order to invoke force majeure? Alternatively, what should you do if a counterparty is seeking to involve force majeure?
What is Meant By “Force Majeure“?
Generally speaking, force majeure describes the occurrence of an event outside of contracting parties’ control (i.e. government mandates in response to the COVID-19 outbreak) that makes performance under their contract impossible. When a force majeure event occurs, the party that is unable to perform may be relieved of its obligations, provided that it complies with all applicable conditions and requirements (i.e. a requirement to provide timely notice of its decision to invoke the force majeure clause).
Under Texas law, the effect of a force majeure clause depends on the specific language used in the parties’ contract and not on any traditional definition of the term. Furthermore, the occurrence of an “act of God” does not by itself relieve a contracting party of its obligations unless expressly provided for in the parties’ agreement. Additionally, prior to invoking a force majeure clause, a contracting party may be subject to a duty of reasonable diligence. In Texas, reasonable diligence is defined as, “such diligence that an ordinarily prudent and diligent person would exercise under similar circumstances,” and whether a party’s efforts to perform constitute reasonable diligence a fact-intensive matter that must be assessed on a case by case basis.
In any event, a party’s obligation to perform under a contract will not be excused simply because performance has become more economically burdensome than anticipated. For example, the Texas courts have stated that, “an economic downturn in the market for a product is not such an unforeseeable occurrence that would justify application of [a] force majeure provision.” In such circumstances, the party facing financial difficulties will generally be deemed to have assumed the risk of such a downturn.
Can Your Company Invoke Force Majeure Based on the Novel Coronavirus Pandemic?
If a contract requires your company to perform by a specific date and such performance is rendered impossible by government action taken in response to the novel coronavirus (COVID-19) pandemic or other circumstances related to the COVID-19 outbreak, your company may be excused from performing under the contract’s force majeure clause. However, if performance is more difficult or more costly but not impossible, then failure to perform may constitute a material default. If your company is facing a situation in which performance seems to be either impossible or prohibitively expensive, you should consult with legal counsel to determine whether your company can invoke the contract’s force majeure clause.
What Factors Need to Be Considered in Light of the Specific Language of the Force Majeure Clause?
Each force majeure clause must be analyzed in light of its specific language and the specific circumstances involved. In the absence of specific force majeure language (i.e. language referencing a “pandemic” or “national emergency”), the Texas courts generally look to whether a party’s non-performance was caused by circumstances beyond its reasonable control or an event that unforeseeable at the time the parties entered into their agreement. Additionally, force majeure provisions will require the party seeking to avoid liability to provide timely notice and accompanying documentation. In litigation under Texas law, invoking force majeure is an affirmative defense to non-performance, and this means that the burden of proof rests on the party seeking to avoid liability for a breach or default.
What is Required in Order to Invoke a Force Majeure Clause During the COVID-19 Outbreak?
As we discussed above, invoking a force majeure clause typically requires adequate and timely notice. When the decision to invoke a force majeure clause is made, it is necessary to determine if notice is required; and, if so, by what date and in what form (including whether supporting documentation is required). Regardless of whether it is required to specify the force majeure event in the notice, it may be advisable to state that the notice is based on the novel coronavirus pandemic or related government action. In any case, and considering the risks of a potential breach of contract, any decision to invoke force majeure should be made with exacting care and with due consideration of any alternatives that may be available.
If a counterparty invokes a force majeure clause in one of your company’s agreements during the novel coronavirus pandemic, you should have your company’s legal counsel review thenotice to ensure that it complies with the force majeure clause. It will also be necessary to evaluate any supporting documentation in order to determine whether your company should accept the notice or take responsive legal action.
Invoking Force Majeure During the Novel Coronavirus Pandemic: Considerations for Mitigating Legal Risk
The novel coronavirus (COVID-19) pandemic will undoubtedly have a significant impact on businesses and their ability to perform under their contracts. Companies seeking to rely on force majeure (or a related “impossibility” or “frustration of purpose” defense) to avoid liability for non-performance should take proactive measures in order to mitigate their risk of facing costly litigation. These measures include, but are not limited to:
- Reviewing All Relevant Contracts – Determine whether relevant contracts include a force majeure clause and objectively determine whether the language of each clause is sufficient to address the novel coronavirus pandemic. Also determine whether non-performance under the contract is truly rendered impossible by the pandemic or events related to the COVID-19 outbreak. Assess the likelihood of facing litigation and damages liability in each individual case, including the potential for any ripple effects for other agreements. Finally, determine whether any of your company’s insurance policies cover force majeure events and associated liabilities and losses.
- Taking Reasonable Measures to Mitigate Damages (and Documenting Those Measures Thoroughly) – Implement and memorialize all steps that are necessary to mitigate the counterparty’s damages due to your company’s non-performance. Also consider whether it is in your company’s best interests to implement these measures unilaterally or in consultation with the counterparty. Document the results of all mitigation efforts as well.
Discuss Your Company’s Options with an Attorney at Oberheiden P.C.
If your company is struggling to meet its contractual obligations during the novel coronavirus (COVID-19) pandemic, it is important that you engage experienced legal counsel before the circumstances get even further beyond your control. To discuss your company’s legal options (including the possibility of invoking force majeure) with one of our senior attorneys, call 888-680-1745 or tell us how we can help online today.
Dr. Nick Oberheiden, founder of Oberheiden P.C., focuses his litigation practice on white-collar criminal defense, government investigations, SEC & FCPA enforcement, and commercial litigation.