The unprecedented economic disruptions caused by COVID-19, including government ordered closures of some businesses, have increased unemployment, have had drastic impacts on supply and demand, and have had a significant impact on business relationships. In many instances, companies are legally, economically and/or logistically unable to fulfill contractual obligations.
In this climate, frequently laypeople, and even lawyers, continuously use terms such as “force majeure,” “Act of God,” and/or “impossibility of performance” to explain or justify the failure to perform contractual obligations. These three terms are frequently used interchangeably and are almost uniformly used to suggest that a breach of contract is legally excused.
Regardless of whether a party is the one being injured by nonperformance or the one that is unable to perform, it is first important to understand what these three different legal rubrics mean, the circumstances when they are applicable, and evaluate how to move forward.
What do these Terms Mean and When are They Applicable:
At one time, force majeure had an independent meaning in Texas common law, but now is commonly used as a shorthand for a type of event that may excuse performance pursuant to the terms of a contract. R.R. Comm’n v. Coppock, 215 S.W.3d 559, 566–67 (Tex. App.—Austin 2007, pet. denied). Accordingly, the scope and applicability of force majeure is entirely dependent on the terms of the contract and its language. See Zurich Am. Ins. Co. v. Hunt Petroleum (AEC), Inc., 157 S.W.3d 462, 466 (Tex. App.—Houston [14th Dist.] 2004, no pet.); Sun Operating Ltd. P’ship v. Holt, 984 S.W.2d 277, 282-83 (Tex. App.—Amarillo 1998, pet. denied).
Frequently, force majeure clauses have a “catch-all” clause that references “other” events that prevent performance. “Catch-all” provisions establish the parties’ intent that all force majeure occurrences outside the performing party’s reasonable control excuse performance. Sun Operating P’ship v. Holt, 984 S.W.2d 277, 287 (Tex. App.—Amarillo 1998, pet. denied). At the same time, whether a particular event excuses performance based on a “catch-all” provision hinges on whether the event in question was reasonably foreseeable. See TEC Olmos, LLC v. Conocophillips Co., 555 S.W.3d 176, 182 (Tex. App.—Houston [1st Dist.] 2018, pet. denied)(“Thus, the question we must decide is whether this ‘catch-all’ provision includes events that are foreseeable, such as a fluctuation in the oil and gas market that affects a party’s ability to obtain financing.”). Events that were foreseeable at the time the parties contracted are not excused by a “catch-all” force majeure provision in a contract. Id. There may be considerable litigation in the next few years regarding whether previous epidemics/pandemics (ex. Spanish Flu, H1N1, SARS, MERS and/or Ebola), or even the emergence of COVID-19 in China prior to its arrival in the USA, made the COVID-19 pandemic foreseeable.
Force majeure may also have an independent meaning beyond the contractual terms when it is used in a warranty or supply contract. See TEC Olmos, LLC v. Conocophillips Co., 555 S.W.3d 176, 196 (Tex. App.—Houston [1st Dist.] 2018, pet. denied). However, in TEC Olmos, the court held that price fluctuation or changes in market conditions could not qualify as force majeure events in a gas supply contract, but rather “there must be an ‘element of uncertainty or lack of anticipation’ surrounding the event’s occurrence, and the event ‘must affect the availability and the delivery of gas’ to excuse compliance with the contract that warrants a certain supply.” Id. at 194–196. Additionally, “routine mechanical repairs at one supply source” did not qualify as a force majeure that would excuse performance. Thus, force majeure’s application in supply contracts and warranty contracts must be something that could not have been anticipated at the time of contracting. In other words, the event be must something the parties could not reasonably anticipate would disrupt or prevent the ability to perform.
Act of God:
Unlike force majeure, the term “act of God” still has a common-law meaning and application in Texas; however, it is typically applied as a defense in tort cases. “An occurrence is caused by an act of God if it is caused directly and exclusively by the violence of nature, without human intervention or cause, and could not have been prevented by reasonable foresight or care.” Texas Pattern Jury Charges 3.5; Dillard v. Tex. Elec. Coop., 157 S.W.3d 429, 432 n.5 (Tex. 2005) (quoting same). To avoid liability due to an act of God, the defendant must show that “1) the loss was due directly and exclusively to an act of nature and without human intervention, and 2) no amount of foresight or care which could have been reasonably required of the defendant could have prevented the injury.” McWilliams v. Masterson, 112 S.W.3d 314, 320 (Tex. App.—Amarillo 2003, pet. denied). This typically requires that “the act of nature must be unusual or unprecedented,” though it need not be the worst of such events ever experienced. Id. Act of God defenses are typically seen for natural disasters or weather events like tornados. See, e.g., Transport Insurance Company v. Liggins, 625 S.W.2d 780, 782 (Tex. App.—Fort Worth 1981, writ ref’d n.r.e.) (employee sought recovery of worker’s compensation after he was injured by a tornado while operating a truck, and employer asserted act of God defense).
A party relying on an act of God to defend a tort claim must first convince the court that the COVID-19 pandemic is unusual, unforeseeable, and purely caused by nature. Opposing parties will likely argue that: 1. Prior epidemics/pandemics mean that the disease was not unprecedented; and 2. the pandemic was the result of man-made actions and decisions, not events purely outside the control of man.
In contrast to tort cases, in contract cases there must be a contractual clause for a party to be entitled to an act of God defense, much like a force majeure clause. GT & MC, Inc. v. Tex. City Ref., Inc., 822 S.W.2d 252, 259 (Tex. App.—Houston [1st Dist.] 1991, writ denied). Without that contractual clause, a party cannot raise an act of God defense in a jury instruction. See id. Accordingly, parties to a contract that does not have a force majeure or act of God clause will likely be contending with the doctrine of impossibility of performance.
Impossibility of Performance:
Impossibility of performance is a common-law contract defense that does not depend on contractual language, but rather on the intervening events during the contract’s performance. See Centex Corp. v. Dalton, 840 S.W.2d 952, 954 (Tex. 1992); Restatement (Second) of Contracts § 261, cmt. d. The doctrine of impossibility excuses performance under the contract when a party would suffer “unreasonable loss or difficulty” or “risk of injury” from performing. Chevron Phillips Chem. Co. LP v. Kingwood Crossroads, L.P., 346 S.W.3d 37, 60 (Tex. App.—Houston [14th Dist.] 2011, pet. denied).
The Texas Supreme Court has also explicitly approved the application of the impossibility doctrine when performance would become illegal due to a change in the law. Centex Corp., 840 S.W.2d at 954. In sum, Texas courts have excused performance of contracts due to: “(1) the death or incapacity of a person necessary for performance, (2) the destruction or deterioration of a thing necessary for performance, and (3) prevention by governmental regulation.” Tractebel Energy Mktg. v. E.I. du Pont de Nemours & Co., 118 S.W.3d 60, 65 (Tex. App.—Houston [14th Dist.] 2003, pet. denied). This last factor certainly has application to COVID-19 because of states and local governmental entities issuing “stay-at-home” and “shelter in place” orders enforceable by law. We anticipate that some parties will also argue that actions by foreign countries that interrupt international supply chains also made performance impossible. Additionally, cancelation of events or activities because of the threat of COVID-19, even where governmental regulations would have allowed the activity or event to go forward, will also be argued as creating situations where it was impossible for a party to perform.
Critically, a party relying on the impossibility doctrine “must demonstrate it took virtually every action within its powers to perform its contractual duties,” but was still unable to do so. Chevron Phillips Chem. Co. LP, 346 S.W.3d at 59.
Practical Advice in Evaluating Your Situation
Regardless of whether your company is being injured by others’ non-performance or your company’s ability to perform has been hampered, or in both, engaging experienced and competent corporate or business ligation counsel is the best way to evaluate your options and proceed. Engaging counsel early will allow you to analyze your situation and determine possible strategies, and put you in the best position to pursue those strategies, now or in the future.
Because of the financial calamity caused by COVID-19, demanding performance or finding alternate sources that can perform may not be viable solutions. In many instances, both parties to the existing business relationship are facing great financial stress, including but not limited to, reduced amounts of available cash with which to pursue or enforce legal remedies.
Thus, bringing suit immediately is frequently an option that is short-sighted and possibly counterproductive. In the present economic environment, in many instances, filing suit will only necessitate or precipitate a bankruptcy filing that will produce little value and will interfere with the ability to negotiate a modification of contract terms that could maintain a long-term business relationship. Accordingly, the business may be served best by preserving legal remedies, while trying to adjust contract terms to find an interim solution that maintains some performance by temporarily modifying the business arrangement between the parties. As the economy re-opens and begins recovery, maintaining long-term business relationships may be critical to returning and maintaining profitability. Thus, regardless of your company’s position, it may be best served by negotiating terms that will carry the relationship through COVID-19 and any financial aftermath.
Doing nothing in the face of a breach of a contract may not be an option. If you are the party being injured by the failure to perform, you must make certain that you put the other side on notice and reserve all of your legal remedies, or you may be deemed to have waived those remedies and/or forgiven the failure to perform.
Obviously, your company does not want to lose any remedies or defenses it may have under the contract or law. Carefully consider all communications with the other party once there is a breach or any failure of communication, because these communications or even the lack of communications may be the basis for taking the position that the breach of contract or a defense under the contract was waived. Therefore, any communication, especially written communication, with the other party should be reviewed by your counsel.
In the end, whether you maintain the relationship or terminate the relationship, experienced corporate counsel and/or business litigators can help you to evaluate the alternatives and put you in the best position to pursue one or more of those alternatives.
One last important factor to keep in mind is the statute of limitations. Under Texas law, the statute of limitations for breaches of contract is four years and for most business torts is two years. Thus, you need not file suit immediately, especially where you have far better uses for current assets to maintain and re-grow your business. However, it may take some time to properly evaluate claims and draft a lawsuit, so if you do plan to file suit, you should inform your counsel at least a few months prior to the statute of limitations’ expiration.