A reality of the COVID-19 pandemic is that many businesses are facing unexpected difficulties complying with their contracts. Do pandemics such as the spread of COVID-19 excuse parties from their contractual obligations? The answer is maybe, via a force majeure clause in the parties’ contract.
“Force majeure”—French for “superior force”—refers to an unexpected and uncontrollable event or effect that prevents one from honoring a contract. The term can include acts of nature, such as floods and hurricanes, and acts of people, such as strikes and wars,[1] but does not generally include mere economic hardship.[2] For example, a force majeure provision might state:
No party shall be liable or responsible to the other party, nor be deemed to have defaulted under or breached this Contract, for any failure or delay in fulfilling or performing any term of this Contract, when and to the extent such failure or delay is caused by or results from acts beyond the impacted party’s reasonable control, including, without limitation, the following force majeure events: (a) acts of God; (b) flood, fire, earthquake, or pandemic; (c) war, terrorist threats or acts, riot, or other civil unrest; (d) government order or law; (e) actions, embargoes, or blockades in effect on or after the date of this Contract; (f) action by any governmental authority; (g) national or regional emergency; (h) strikes, labor stoppages or slowdowns, or other industrial disturbances; (i) shortage of adequate power or transportation facilities; and (j) other similar events beyond the reasonable control of the impacted party.Ultimately, the types of events that constitute force majeure depend on the contract’s specific language.[3] To illustrate, in Gillespie v. Simpson, the Colorado Court of Appeals accepted a geothermal lessee’s argument that the government’s refusal to issue permits for the development of geothermal wells until certain regulatory actions occurred constituted a force majeure event, excusing the lessee from paying rent to the lessor. This was the case even though the lessee was actually able to pay rent—and did so—during the duration of the force majeure event. The contract defined force majeure as any action by the state that interferes with the lessee’s rights. The court reasoned that the interference was “obvious in that the lessee [wa]s deprived of an opportunity to generate income by development of the [wells] for payment of the rentals. Accordingly, it held that the lessee was entitled to a rent credit equal to the amount of rent paid during the force majeure event.[4]
One aspect that is not always clear from the language of the force majeure provision is the extent to which a party must be rendered unable to perform due to the force majeure. In Ergon-W. Virginia, Inc. v. Dynegy Marketing and Trade, the Fifth Circuit analyzed a natural gas clearinghouse’s claim that recent hurricanes constituted a force majeure preventing the clearinghouse from fulfilling its contractual obligation to supply plant managers with gas.[5] In doing so, the Fifth Circuit rejected the plant managers’ argument that the clearinghouse’s “physical capacity to continue supplying gas” and ability to “purchase gas on the spot market” prevented it from invoking the force majeure clause, which required that parties be “rendered unable” to perform.[6] A contrary interpretation, the Fifth Circuit reasoned, “would make the force majeure provisions essentially meaningless because it would mean that a seller could never invoke force majeure so long as there was some gas available anywhere in the world, at any price.”[7]
In a similar vein, jurisdictions are split regarding how to construe the scope of force majeure clauses in “take-or-pay” contracts—contracts requiring a buyer to take specified amounts of product or pay the seller a penalty. Some jurisdictions have explicitly or implicitly concluded that a force majeure excusing the buyer’s obligation to “take” also excuses the buyer’s obligation to “pay.”[8] This is so even though the force majeure does not make it impossible for the buyer to pay the penalty.[9] Other jurisdictions—including the Tenth Circuit—have concluded that a force majeure clause excusing the buyer from taking the product will not excuse the buyer from paying the penalty.[10]
All this is to say that parties should examine their existing contracts and consult with in-house or outside counsel to see if those contracts include a force majeure clause that may cover coronavirus—especially if the pandemic is impacting the parties’ contractual obligations. Parties should pay attention to any requirements that the party provide evidence of impacts or information, along with a notice that the party is invoking the force majeure clause, or that the party mitigate damages incurred as a result of the force majeure event. Going forward, parties should consider insisting that their contracts include epidemic or pandemic as a force majeure event in case performance becomes impossible due to COVID-19. Parties struggling to honor their contractual obligations might also consider a mutual solution, such as negotiating a contractual amendment to move performance to a time after the health crisis has passed.
Davis Graham & Stubbs LLP’s attorneys have experience litigating commercial contracts containing force majeure clauses. Please contact Shannon Stevenson or Gabrielle Robbie if you have further questions on this topic.
[1] Black’s Law Dictionary, “FORCE MAJEURE” (11th ed. 2019).
[2] 30 Williston on Contracts § 77:31 (4th ed.).
[3] Id.
[4] 588 P.2d 890, 892 (Colo. 1978).
[5] 706 F.3d 419, 422 (5th Cir. 2013).
[6] Id. at 424 n.5.
[7] Id.
[8] See, e.g., Atlantic Richfield Co. v. ANR Pipeline Co., 768 S.W.2d 777, 781–82 (Tex. App. 1989); Sabine Corp. v. ONG Western, Inc., 725 F. Supp. 1157, 1169–70 (W.D. Okla. 1989).
[9] Sabine Corp., 725 F. Supp. at 1170 (reasoning that if the force majeure clause did not excuse the obligation to pay, the intended effect of such clause—to excuse performance under the contract due to unforeseen events—would be rendered “nugatory”).
[10] Int’l Minerals & Chem. Corp. v. Llano, Inc., 770 F.2d 879, 885 (10th Cir. 1985) (“It is settled law that when a promisor can perform a contract in either of two alternative ways, the impracticability of one alternative does not excuse the promisor if performance by means of the other alternative is still practicable. [The contract] does not compel a different result; it would at most excuse [the buyer] from its duty to ‘take,’ not from its duty to ‘pay.’”); see also Am. Soil Processing Inc. v. Iowa Comprehensive Petroleum Underground Storage Tank Fund Bd., 586 N.W.2d 325, 333, 334 (Iowa 1998) (concluding that a force majeure provision is inconsistent with the risk allocation provisions typical in a take-or-pay contract).