In Texas, the general rule is “that an act of God does not relieve the parties of their obligations unless the parties expressly provide otherwise.” The novel Coronavirus (COVID-19) pandemic has caused many businesses to be unable to timely perform contractual obligations. These extraordinary circumstances may excuse performance of obligations due to the occurrence of a force majeure event or impossibility of performance. These FAQs address common questions about force majeure and impossibility of performance, and when relief may be available.
Force majeure is a contractual defense to a claim of non-performance and is typically used when a business is facing events beyond their control. It may completely excuse performance, or simply delay performance during the existence of the force majeure event. What constitutes a force majeure event is determined by the terms of the subject contract and applicable law, and is determined on a case-by-case basis.
Some force majeure clauses specifically refer to “epidemics” or “disease,” but even if the clause makes no mention of those specific events, other more generic events such as “acts of God,” “national emergencies” or “governmental action” may constitute a force majeure event.
Impossibility of performance is a defense to a claim of contractual non-performance that has been developed under common law and the Uniform Commercial Code dealing with the sale of goods. This defense can apply even when the parties’ contract is silent about impossibility of performance.
1. What does a force majeure clause normally cover?
Force majeure clauses typically refer to events beyond the control of the affected party. For example: “An event of force majeure is an event or circumstance which is beyond the control and without the fault or negligence of the party affected and which by the exercise of diligence that party affected was unable to prevent.” Typical clauses either specifically list specific events such as acts of God (e.g.,, floods, earthquakes, fires, etc.), wars, civil wars, riots, nuclear contamination, and terrorism, or provide a catch-all provision. Whether the list of force majeure events is exclusive or non-exclusive depends on how the clause is written.
2. Are force majeure clauses enforceable?
Yes. Whether a party is excused from performing a contract will depend on the language of the force majeure clause. The affected party will have the burden of proving that the event could not have been anticipated and was beyond its control and without its fault or negligence.
3. What proof is required that performance cannot be delivered?
This depends on the language of the force majeure clause. Some clauses use an impossibility standard. Under this standard, performance must be impossible. Others may use the standard of impracticability. Under this standard, performance must be impractical. Unlike the common law doctrine of impossibility, a party relying on a force majeure clause is not required to show that it exercised reasonable diligence to perform (unless the contract requires such proof).
4. If a contract’s force majeure clause is triggered, is performance excused completely?
Again, this depends on the contract language. Some contracts only extend the time for performance until the force majeure event ends, at which time performance may be due. Others completely excuse performance.
5. Is notice required to claim force majeure?
This answer depends on the contract. Some force majeure clauses require that notice be given promptly (or within a specified time). If notice is not timely given, the force majeure defense will likely not be available. Other contracts are simply silent on notice. Therefore, at the beginning of a force majeure event, it is essential that the party affected review its contracts that govern performance that might be affected to determine if notice, or a declaration of a force majeure, is necessary. And, it is advisable to discuss with the other party to the contract that performance will not be delivered, citing the force majeure event and the contractual provision excusing or delaying performance.
6. Can a force majeure clause be implied in a contract?
With the exception of Louisiana, in the United States force majeure is not implied in contracts. It must be specifically included in the parties’ contract. Louisiana’s civil code provides that an obligor is not liable for its failure to perform a contract when the failure is caused by a fortuitous event that makes performance impossible. What state’s law governs a contract is determined by the parties’ choice of law, or absent such a choice, application of the state’s choice of law rules.
7. If there is no force majeure clause, is there any other way to obtain relief from impossible or impractical contract performance?
Fortunately, legislatures and courts have developed rules for protecting contracting parties from contractual performance that has become impossible or impractical. These rules are not as broad as force majeure clauses, but they can provide relief when there is no force majeure clause.
Section 2.615(1) of the Uniform Commercial Code, which deals with the sale of goods, provides:
Delay in delivery or non-delivery in whole or part by a seller ... is not a breach of his duty under a contract for sale 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.
One Texas court described the impracticability defense as:
Where, after a contract is made, a party’s performance is made impracticable without his fault by the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made, his duty to render that performance is discharged, unless the language or the circumstances indicate the contrary.
The defense requires proof of (1) the death or incapacity of a person necessary for performance; (2) the destruction or deterioration of a thing necessary for performance; or (3) prevention by governmental regulation.
When drafting a force majeure clause, with the experience of COVID-19, be sure to specifically list “disease,” “epidemic,” or “pandemic,” as events that will excuse performance. Since force majeure clauses are narrowly construed, the list should be expansive and use language like “including, but not limited to” language. And, include a catch-all phrase (e.g., “any other cause whatsoever beyond the control of the respective party”). Be clear about what happens when a force majeure event occurs (extending time to perform or excusing performance).
When exercising a force majeure clause, look for governmental declarations or other reports to support the existence of the force majeure event. This evidence should be preserved early on. Communicate early in the force majeure event with the other contract party in order minimize confusion and misunderstandings about the parties’ positions. A dispute may be avoided by timely communication and through a negotiated amendment of the contract based on the force majeure event.
COVID-19, and the various governmental orders restricting work and travel, are creating serious obstacles to business as usual. The result is that businesses are unable to perform contracts, exposing them to significant risk and liability. We recommend that business managers immediately review the status of their contractual performance and if performance of contractual obligations is not possible, or not possible within contractual time frames, the following should be undertaken promptly:
1. Review contractual obligations and force majeure clauses;
2. Comply with notice provisions in force majeure clauses and initiate a dialogue with the other contracting party to seek an extension of performance or an adjustment of contract terms;
3. Consult with an attorney regarding force majeure and other statutory or common law defenses to performance; and
4. Review your insurance for business interruption insurance to determine if you have insurance coverage for COVID-19 related losses.
If you have any questions, please contact: