Just over a century ago, a new strain of influenza arose and quickly spread throughout the world. This new illness, the Spanish flu, quickly reached the level of a worldwide pandemic in the early twentieth century. In the U.S. alone, half a million people died of the Spanish flu. For perspective of how devastating this pandemic was, the Spanish flu claimed the lives of more than twice the number of Americans who died during World War I, the largest scale military conflict in human history up to that time.
History is filled with examples of how pandemics can be more devastating than wars, political conflicts, and natural disasters. Today, a short century after the Spanish flu touched every populated area on the planet, we are faced with another pandemic: the coronavirus. The uncertainty accompanying this latest pandemic and the health concerns we all have for our family, friends, and neighbors cannot be understated. That same uncertainty has resulted in disruption to our everyday lives and, on a more mundane level, on commerce.
The issues of whether the pandemic excuses contractual performance and associated risk allocation are new facts of life. Given the severe impact the coronavirus pandemic is taking on businesses across not just Texas but the entire world, it is critical to have an understanding of one’s contractual rights and obligations. To start, you should review your contract’s force majeure clause.
Force majeure is a contractual term that dates back more than a century. The term refers to an event, often referred to as an “Act of God”, beyond the parties’ reasonable control that intervenes to render performance under the contract impossible and, therefore, excused. Corbin on Contracts § 1324 (1962).[1] If the term force majeure itself at one time carried significance, courts in recent history have found “much of [force majeure’s] historic underpinnings have fallen by the wayside.” Sun Operating Ltd. Partnership v. Holt, 984 S.W.2d 277, 282–83 (Tex.App. Amarillo,1998).
Texas courts now find the term force majeure to be without substance standing alone and is utterly dependent on the terms of the contract in which it appears. Hydrocarbon Management, Inc. v. Tracker Exploration, Inc., 861 S.W.2d 427 (Tex.App.—Amarillo 1993, no writ).
Texas courts do not view the term force majeure, without any further specification between the contracting parties as to what force majeure covers, as demonstrative of any rights or obligations. Id. It is not a magic phrase, relieving a promisor of contractual obligations in the face of an event that could be described as an Act of God. Rather, force majeure is a contractual term that describes a particular type of event which may excuse performance under the contract.
Perlman v. Pioneer Ltd. Partnership, 918 F.2d 1244, 1248 (5th Cir. 1990). When the contract sets out the parameters of what force majeure covers, those parameters dictate the “application, effect, and scope of force majeure.” Sun Operating at 83; citing Texas City Ref., Inc. v. Conoco, Inc., 767 S.W.2d 183, 186 (Tex.App.—Houston [14th Dist.] 1989, writ denied).
Contracts usually address the parties’ rights and obligations in situations that are outside their control through force majeure clauses. A pandemic, such as the coronavirus, would seemingly qualify as an Act of God and fall under such an event outside of the parties’ control. However, the deciding factor of whether coronavirus falls under the scope of a force majeure clause rests entirely on the language of the clause itself. Texas courts interpret force majeure clauses narrowly. Id.; Gulf Oil Corp. v. Southland Royalty Co., 478 S.W.2d 583 (Tex. Civ. App. El Paso 1972). Therefore, it is instructive to review an example of such a clause that explicitly covers a health event such a coronavirus and a clause that may cover coronavirus under a “catch all” provision.
Force Majeure – Neither party shall be liable to the other for any delay or failure in performance due to any Act of God, fire, flood, severe weather, earthquake, strike, or other labor problem not caused by the employees of either party, terrorism, war, governmental actions, civil disturbances, pandemics, epidemics, quarantines or other health crisis.
Courts are substantially more likely to enforce a force majeure clause in a contract when the clause clearly lists the event complained of to excuse performance. In this first example the parties specifically bargained for a force majeure clause that included pandemics, epidemics, quarantines, or other health crisis.
Under this example, a party seeking excuse for non-performance due to the coronavirus pandemic would argue the language of the contract demonstrates that the parties intended such an event to excuse performance. As the force majeure language clearly covers a health event such as the coronavirus, the court would be hard pressed to deny that excuse for non-performance. Sun Operating at 283, citing PPG Indus., Inc. v. Shell Oil Co., 919 F.2d 17, 18 (5th Cir.1990). [2]
Force Majeure – Neither party shall be liable to the other for any delay or failure in performance due to any Act of God, fire, flood, severe weather, earthquake, strike, or other labor problem not caused by the employees of either party, terrorism, war, or any causes beyond the parties’ control.
In this second example, the force majeure clause does not include language that identifies an event such as the coronavirus pandemic. The party seeking excuse for nonperformance in this case would argue that the coronavirus pandemic would fall under the force majeure “catch all provision”: any causes beyond the parties control qualify as force majeure. The question is when such a catch all phrase sufficiently captures the event at issue.
The First District Court of Appeals in Houston recently addressed this question of when a catch all provision in a force majeure clause is sufficient to capture an event that was not specifically enumerated in the force majeure clause. In TEC Olmos, LLC v. ConocoPhillips Company, the issue was whether an inability to obtain financing because of a downturn in the oil and gas industry qualified as a force majeure event in the contract. TEC Olmos, LLC v. ConocoPhillips Company, 555 S.W.3d 176, 183–84 (Tex.App.-Hous. (1 Dist.), 2018). The contract provision in TEC Olmos did not specify an economic downturn as a force majeure event, but did contain a “catch all provision.”
The court utilized a two-step analysis to determine whether an economic downturn constituted a force majeure event. First, the court applied common law notions of force majeure, including foreseeability, to “fill in the gaps” in the force majeure clause. TEC Olmos at 184; citing Sun Operating at 283. The court found that since fluctuations in the oil and gas market are foreseeable as a matter of law, it cannot be considered a force majeure event unless it is specifically listed as such in the contract. Id.
The second step in the court’s analysis involved the doctrine of ejusdem generis. Under this doctrine, when specific items in a list are followed by a catch all language, for instance in Example 2 above the language “or any causes beyond the parties’ control”, the catch all phrase is limited to things like the specific items listed. Id. at 185; citing Ross v. St. Luke’s Episcopal Hosp., 462 S.W.3d 496, 504 (Tex. 2015)[3].
The force majeure clause in TEC Olmos specified the terms “fire, flood, storm, act of God, governmental authority, labor disputes, war” followed by “any other cause not enumerated herein but which is beyond the reasonable control of the Party whose performance is affected.” Id at 186. Applying the doctrine of ejusdem generis, the court limited the catch all phrase to the types of events specified before, i.e. fire, flood, storm, etc., and determined that the catch all phrase did not cover an economic downturn as a force majeure event.[4] Id.
The coronavirus presents the global community with the most serious pandemic in the past hundred years. As businesses are forced to shut down, the effects of this pandemic are palpable on every level of our economy. As this pandemic has affected all industries, an understanding of the potential effects the coronavirus regarding contractual obligations. In this new world, parties entering into contract would be well served to include appropriate, detailed force majeure language based on the pertinent case law. The evil an obligor will want to avoid is being unable to perform under the contract because of a pandemic event, but not being excused from performance based on the language of the contract.
Francis is a native Houstonian with proven courtroom experience in both civil and criminal courts. Francis routinely represents general contractors, subcontractors, manufacturers, developers, insurance companies, owners and individuals in complex litigation, insurance defense, and worksite accidents. Known for his “straight talk” communication style, Francis is a strategic legal advisor to his clients that prioritizes their business objectives.
Francis has drafted and successfully argued countless motions and taken numerous depositions. He has also obtained successful trial verdicts for his clients, both as a first chair and second chair attorney.
Anam provides legal counsel with respect to construction law and commercial litigation issues. She routinely represents residential and commercial construction clients throughout the litigation and arbitration processes. Anam’s experience covers a variety of disputes involving construction defects, breach of contract claims, payment disputes, liens, negligence, insurance coverage, and personal injury issues.
Anam has successfully represented general contractors, subcontractors, manufacturers, insurance companies, owners, and individuals in litigation matters.
