As COVID-19 and public health measures grind the U.S. economy to a halt, people and businesses are left scrambling to deal with the sudden economic fallout. The shock of the pandemic is disrupting existing contractual relationships, and Texans should keep in mind the available avenues that may excuse non-performance.
A force majeure clause may provide relief.
In Texas, an act of God generally does not relieve the parties of their contractual obligations unless the parties expressly provide otherwise – i.e., a force majeure clause. A force majeure clause in a contract can free both parties from their obligations if an extraordinary event prevents one or both from performing. Typically, these events must be unforeseeable, unavoidable and not attributable to either party.
The black-and-white terms of the force majeure provision are controlling. Accordingly, a successful force majeure defense depends purely on contractual interpretation. A court will not modify or fill in the gaps of the force majeure clause.
A downturn in the economy will likely not be considered a basis for force majeure when the terms of the contract did not include a market downturn as a force majeure event. Severe weather, such as a hurricane or a fire, will likely constitute an Act of God event under a force majeure clause, but no court in Texas has held that a pandemic like COVID-19 qualifies as such an event. An act of government is often a specifically enumerated term in a force majeure clause, which would raise the unanswered question of whether a shut-down type order related to COVID-19 is a force majeure event. Force majeure clauses also can include catch-all language, such as “and all other events outside the control of the parties.” Such clauses are usually limited to events similar to the specifically described events, but catch-all events must be unforeseeable. Use of the term pandemic or similar language in a contract likely creates the necessary certainty to preclude contractual obligations.
Non-performing parties should pay close attention to the specific language in a force majeure clause in the event the COVID-19 outbreak renders performance impossible as they may be entitled to relief.
What if my contract does not contain a force majeure clause?
Impossibility of Performance
In the absence of a force majeure clause in a contract, Texas law may still provide relief for non-performing parties. Under the supervening impossibility defense – often referred to as impossibility of performance, commercial impracticability and frustration of purpose defense – performance may be excused when the circumstances that render performance impossible could not have been anticipated at the time the contract was made and the party seeking relief was not responsible for creating those circumstances.
This defense has generally applied in three instances:
The shelter-at-home and related orders by state and local government raise a significant issue as to whether performance can be excused when the orders preclude commercial performance. In Texas, a contracting party has successfully defended breach of contract claims by demonstrating that a change in a governmental statute made performance impossible under the circumstances.
Section 2.615 of the Texas Business and Commerce Code
With respect to contracts for the sale of goods, the Texas Business and Commerce Code may provide non-performing parties some relief as well. Under Section 2.615, performance may be excused where rendered impracticable by good faith compliance with government regulation. This standard is generally less onerous than the common law supervening impossibility of performance.
As government regulations are currently ordering Americans to stay home, forcing businesses to close, restricting travel and banning gathering of more than 10 people, these non-contractual defenses may be invaluable. Non-performing parties should consider whether government regulations aimed at slowing the spread of COVID-19 have contributed to their non-performance as they may be entitled to relief.
Please contact Marcus Tucker, Rolf Krueger or Phelps’ Litigation team if you have any questions or need compliance advice and guidance. For more information related to COVID-19, please also see Phelps’s COVID-19: Client Resource Portal.