COVID-19 – EXCUSAL FROM PERFORMANCE UNDER THE TERMS OF A CONTRACT

Businesses across Texas are facing many uncertainties with several counties and municipalities ordering citizens to either “shelter–in–place” or “stay–at–home” and banning gatherings of more than 10 people, all in an attempt to slow the spread of the novel coronavirus, also known as COVID-19. In mid–March, Governor Abbott issued an executive order restricting gatherings of people in–line with previous orders by some Texas cities and counties, resulting in the closing of exercise facilities, bars, schools and dining inside restaurants. In late March, Governor Abbott then issued an unclear directive to the citizens of the State of Texas that he later clarified as an order to “stay–at–home.”  As a result, many non–essential businesses whose employees are unable to work remotely and/or scheduled events with attendance of more than 10 people being cancelled or delayed are expressing their concern about little to no incoming revenue. Such business owners are requesting guidance as to whether their performance will be excused pursuant to the terms of their commercial contracts.

Generally, commercial contracts often contain a force majeure clause in the miscellaneous or boilerplate sections that excuses one or both parties’ performance of its obligations when circumstances arise that are beyond the parties’ control, making performance impossible, illegal or exceedingly impractical. In the event that a party’s contract contains a force majeure clause, then a party’s ability to invoke such clause begins with a review of the specific events listed therein. Although there is no standard force majeure clause and the terms contained in such clauses vary widely, there are certain events that are typically listed that may include one or more of the following: (i) catastrophic weather events such as wildfires, floods, hurricanes and earthquakes, which are frequently referred to as “acts of God;” (ii) war or acts of terrorism; (iii) acts of or orders by governmental authorities such as condemnation, changes in laws or regulations or quarantine; and (iv) strikes and labor disputes. Although rare and more often seen in contracts related to the health–care industry, force majeure clauses may contain epidemics, pandemics or diseases as one of the groups in the list of force majeure events. 

The events listed in a contract’s force majeure clause would then be applied to the facts and circumstances causing a party’s inability to perform. Determination of whether a party can invoke a force majeure clause is a fact intensive inquiry and the invoking party has the burden of proof under Texas law.[1] If the force majeure clause contains a specific reference to an epidemic or a pandemic, then the clause should be triggered by COVID-19. Some commentators have surmised that the occurrence of epidemics in the past, such as SARS and Ebola, results in these types of events as being foreseeable that would, therefore, require that pandemic, epidemic, diseases and/or quarantines be specifically included in the force majeure clause for it to be invoked for purposes of COVID-19. Pursuant to Texas law, however, the inquiry is opposite of the foregoing in that there is no need to make a determination of whether such event was unforeseeable or foreseeable when contracting parties specify certain force majeure events. The Court of Appeals for the Fifth Circuit, to which decisions by the district courts in Texas are appealed, has so held, which is in contrast to decisions in other circuit courts in the U.S.[2]

In the event that the force majeure clause doesn’t contain a specific reference to an epidemic or a pandemic, but it contains a governmental ruling or order, then the question becomes whether an order by a state, county or municipality requiring shelter–in–place, stay–at–home or restrictions on gatherings of people to a certain number excuses the party’s performance since such performance becomes impossible, highly impractical or illegal. As noted above, under Texas law, the party seeking to invoke the force majeure clause due to a governmental order would not have to prove that such event was unforeseeable. However, such party must still show that the COVID-19 pandemic has caused or resulted in its inability to perform under the contract due to impossibility, illegality or having become highly impracticable. A party’s performance becoming onerous or difficult or the party incurring additional costs will be insufficient to successfully invoke a force majeure provision. Furthermore, force majeure provisions often exclude monetary obligations as a triggering event. A common example of this type of exclusion occurs in commercial real estate leases. Therefore, if a non–essential retail business that must close its doors and the lease includes a force majeure provision that excludes the business’ ability to pay rent, then such business must review the other events within the force majeure provision or other provisions in such lease, if any, to determine if it may rely upon any provisions in its lease to excuse its obligation to pay rent.

If the party’s non–performance does not fall within any of events specifically listed, e.g., a local governmental order that has little impact on the business since its workforce is able to work remotely, but the pandemic occurring in other countries has caused the business’ supply chain to be severely interrupted or it has evaporated entirely, then the party may be able to trigger the force majeure clause by falling within a catch–all clause. Force majeure provisions often contain a broad catch–all clause, e.g., “or any other cause not enumerated herein, but is beyond the control of the party whose performance is affected” or “any other circumstance beyond the reasonable control of the parties.” Texas courts have consistently held that a catch–all clause will not relieve a contracting party of the obligation to perform unless the disabling event was unforeseeable at the time the parties entered into the contract.[3] If the event was foreseeable, then the contracting parties should have appropriately allocated the risk of such event’s occurrence by specifically identifying the event. Furthermore, Texas courts have interpreted such clauses narrowly through the application of the doctrine of ejusdem generis, which means that when specific items in a list are followed by a catch–all, then the latter must be limited to things similar to the former.[4] In Texas, therefore, a broad catch–all phrase in a force majeure clause will be narrowly construed and limited in scope to include events that are of a similar nature or class as those specifically listed in the preceding language. For the foregoing reason, Texas businesses should proceed with caution if they plan to rely upon the catch–all clause within a force majeure provision.

If a party concludes that the force majeure clause in its contract has been triggered, then the party seeking to invoke it must then review the contract to determine its next steps. Typically, the non–performing party is required to provide notice to the other party that it is unable to perform and to state with reasonable clarity the basis for its invoking the force majeure provision. If notice is required, it’s of vital importance that the contract’s procedure for notice is followed to assist in preventing a claim that it was not properly given. Specifically, Texas courts have held that failure to provide notice in accordance with what was required under the contract precluded reliance on the force majeure clause.[5] 

A determination should also be made with respect to what is allowed under the terms of the contract when the force majeure clause is triggered, such as termination of the contract as a whole; relief from performing for a certain period of time; relief from upcoming deadlines; etc. A thorough reading of the entire contract is necessary to ascertain whether it imposes additional requirements on the party invoking the force majeure clause, such as the duty to mitigate damages as just one example. 

If the contract doesn’t contain a force majeure clause, then all is not necessarily lost as there may be other provisions in the contract that may be applicable in the current economic situation, such as Texas common law with regards to “frustration of purpose” or “impossibility of performance”[6] or Texas statutory law such as the Uniform Commercial Code under the Texas Business and Commerce Code (the “UCC”). Section 2-615 of the UCC protects a seller’s delay in performance or non-performance where delivery is impracticable, which is subject to the seller’s ability to provide a commercially reasonable substitute pursuant to Section 2-614 of the UCC. Specifically, Section 2-615 of the UCC provides that a delay in delivery will not be considered a breach of the seller’s duty if performance has been made impracticable due to either (i) the occurrence of an event or contingency, the non-occurrence of which was a basic assumption underlying the contract, or (ii) good faith compliance with any applicable foreign or domestic governmental regulation or order. Section 2-615(3) of the UCC also requires the seller to provide “seasonable,” i.e., prompt or timely, notice to the buyer of such delay or non–delivery.

In sum, should your business be severely impacted by the COVID-19 pandemic, then it’s highly advisable to review the business’ commercial contracts to see if there is a force majeure or other provision that would be of assistance. Prior to taking any action, however, a thorough reading of the entire contract will be necessary to ensure that all obligations and responsibilities are met and followed. It would behoove the non–performing party to consult with legal counsel to ensure that such party is within its rights to invoke the force majeure or other contract provision, provides notice should it be required to do so and meet the party’s other obligations if any exist. 

In the not too distant future, the importance of boilerplate sections in a commercial contract, especially force majeure provisions, will become of greater importance and necessitate a review. If you have any questions regarding the contents of this blog post, assistance with a review of current contracts, revision of a contract to prepare for the future or other contractual questions, please feel free to contact me by email at lstapleton@meadowscollier.com or you can reach me by phone at (214) 749-2428 or (800) 451-0093.