The COVID-19 pandemic is a once in a lifetime event wreaking havoc on the world’s businesses. Many businesses have felt its impact, and many more will soon feel the pressure as quarantine efforts stifle economic activity. As a business owner in this environment, the question of whether to continue to meet your contractual obligations may arise. Delaying contractual obligations or withdrawing from those obligations altogether can expose you to significate liability. The first place you need to look in order to come to grips with the allocation of this liability is the force majeure clause.
Many commercial contracts include such a provision. The language used varies and often represents the experience of, and risks faced by, your business and its industry. Since Texas courts look to the specific language used when applying force majeure clauses, the terms of the provision and their plain meaning are important. As such, you should review your force majeure provisions together with your attorney as a proactive approach to your COVID-19 response strategy.
The first issue to address is whether the COVID-19 pandemic is one of the enumerated events included the provision. These provisions will include a list of events foreseen, and agreed to, by the contract’s parties. Typical examples of such events include “fire,” “flood,” “war,” or “riot.” Examples applicable to the COVID-19 pandemic might include “epidemic, pandemic, or other national emergency” or “order of necessity of the government.” If such language is included in your provision, you may have good cause to declare a force majeure event.
If the COVID-19 pandemic does not appear in your enumerated list, you may still declare a force majeure event by relying on the provision’s catch-all language. Often, the provision will include language such as “any other cause,” “any similar cause,” or “any like cause” in an effort to catch events that the parties did not foresee at the time they drafted the provision. In this case, Texas courts will apply the doctrine of ejusdem generis to determine whether the unforeseen event is captured. Under the doctrine, events captured by such catch-all language must be “similar in type” to the specific items enumerated in the provision. A careful examination of the force majeure provision’s exact language will be required in order to declare a force majeure event under catch-all language.
Once you determine that the COVID-19 pandemic qualifies as a force majeure event, you must determine whether it rises to the standard needed to excuse your performance. Again, the language of the force majeure provision defines the standard and varies provision to provision. Texas courts do not rely on the proposition that performance has become difficult or unprofitable. Rather, the courts will look to the specific language of the provision. Typical standards require that performance has become “illegal,” “impossible,” or “not reasonably possible.” Again, a careful examination of the exact language of your contract is required to determine whether you meet the standard to excuse performance.
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If the COVID-19 pandemic qualifies as a force majeure event and rises to the standard required to excuse performance, you must determine how and when to invoke the force majeure provision. Many such provisions require a specific notice procedure that details the form of notice and the timing of such notice. Failure to provide the correct notice will often prevent you from relying on a force majeure provision. As such, it is strategically important to determine when the event occurred and how long thereafter you have to provide notice. How long you have to provide notice will be provided for in the provision. When the event occurred, however, may be more difficult to determine. Did it occur when the virus was discovered in Wuhan? When national travel bans were imposed? When local governments imposed shelter-in-place directives? This requries examination of the provision’s language and the facts and circumstances giving rise to the difficulties in performing under the contract.
There is no doubt that the COVID-19 pandemic and associated quarantine efforts will impose significant pressures to existing contractual obligations. If those pressures become untenable, you may look to force majeure provisions for relief. As you can see, however, reliance on a force majeure provision is highly dependent on the exact language of the provision and the facts and circumstances applicable to your business. You should proactively examine your force majeure provisions, together with your attorney, if you believe the COVID-19 pandemic may affect your business.
Virginia Hammerle is a Texas attorney who authors the weekly LegalTalk Texas column. Find her columns and other writings on her blog at www.hammerle.com, at Timeless In Texas www.dallasnews.com/timeless-in-texas and her newsletter email@example.com.