Covid-19 Business Contract Disputes – Contract Law and “Force Majeure” in Texas

Contract law has come to the forefront of legal disputes in Texas. Covid-19 has scrambled lots of plans in Texas and everywhere. Among the legal areas affected are business contracts where performance of long-standing obligations has become senseless, impossible, or hugely burdensome. The pandemic has roiled the energy sector, bankrupted businesses, shuttered restaurants, and scuttled sales of goods. The Texas Republican Party lost its site for an in-person convention in Houston. More terrifying still, consider the bride who must now unbook a wedding venue planned long in advance.

Enter the concept of “force majeure,” a legal doctrine which refers to unforeseeable circumstances that prevent someone from fulfilling a contract. Force majeure may not only excuse performance but protect the defaulting party from penalties associated with a breach of contract. In Texas, however, there are limits to the circumstances under which the doctrine can be invoked. The related common-law concepts of “impossibility of performance” or “frustration of purpose” may provide some relief to a defaulting party.

Kilgore & Kilgore Lawyers Understand Texas Contract Law

It is important to understand that it is still too early for a specific body of Covid-19 law to have developed. But Texas businesses have had long experience with unprecedented events – from hurricanes to international disruptions in the oil industry. There are certain well-developed rules for applying force majeure in contract disputes. Our commercial litigation attorneys can help those caught between the rock of an international pandemic and the hard place of contract compliance. If you have questions on this topic, reach out to us using this link Contact Kilgore Law.

Contract Law and Force Majeure Basics

Force majeure is an old legal idea (hence the French), but as it has evolved, several limits have become fairly standard. In general, in determining whether force majeure will excuse performance under a contract, courts will look at whether:

  • there was a contract (the doctrine has no common-law equivalent in Texas – if there is no contract, there is no force majeure defense);
  • the cause of the failure to perform was an event specified in the contract and not some other event;
  • the risk of nonperformance was unforeseeable or could not have been mitigated; and
  • performance was truly impossible, not just inconvenient or expensive.

Above all, however, courts will look at the specific language of the contract to determine whether it encompasses the unforeseeable event. A generic force majeure clause may read something like:

“Neither party shall be considered in default in the performance of its obligations under this agreement to the extent that performance of its obligations is prevented or delayed by any cause beyond its reasonable control, including, without limitation, acts of God; acts or omissions of governmental authorities; strikes, lockouts, or other industrial disturbances; acts of public enemy; weather; wars; acts or threats of terrorism; blockades; riots; civil disturbances; war, hurricanes, fires, earthquakes, terrorism and any other similar events, acts, or omissions beyond the control of the parties.”

Some contracts, especially in the shipping industry, may also include “pandemics, epidemics or outbreak of infectious disease” in the list of examples, but these additions are relatively rare. So, when does Covid-19 excuse contract performance in Texas?

In Texas, Force Majeure is Construed Narrowly in Contract Law

Texas courts construe force majeure clauses narrowly. If the event is not listed, performance is generally not excused. Frequently, however, as in the example above, the list of specific events in the contract will be followed by a general, catch-all phrase such as “any other similar events, acts, or omissions.”

When interpreting these non-specific provisions, Texas courts may:

  • fill any contract gaps with common-law concepts, including the requirement of
    unforeseeability, and
  • stress that a contractual obligation cannot be avoided simply because performance has
    become more economically burdensome than anticipated.

The application of Texas law is especially important, since many companies in the energy sector, even those not domiciled in Texas, specify that Texas law will be used to resolve disputes. It also tends to be very industry and very fact specific.

For example, with respect to the energy sector, Texas courts have held in the past that market downturns do not generally constitute force majeure events. In a case called TEC Olmos LLC v. ConocoPhillips Co., the Texas Court of Appeals found that the force majeure defense was not available because “fluctuations in the oil & gas market are foreseeable as a matter of law.” However, in a case called Atlantic Richfield Co. v. ANR Pipeline Co., government actions were deemed force majeure events excusing performance.

Under Texas law, an “act of God” usually will not relieve a party to a contract of its obligations under a commercial lease unless the parties expressly provided so in an applicable force majeure provision. Nonetheless, many commercial tenants are currently seeking relief from their lease obligations due to their inability to occupy their premises and conduct business from those premises and generate revenues.

Contract Law, Covid-19 and Force Majeure Circumstances in Texas

Even if a court determines that force majeure is not available, all is not lost for the hapless defaulter. Three related common-law defenses, impossibility, impracticability, and frustration of purpose may provide some relief. All three defenses focus on unforeseeable events. Usually, they are limited to situations where supervening events, not imagined at the time the agreement was made and not caused by the party claiming the defense has made performance impossible, impracticable, or commercially pointless. In some cases, these doctrines may cover intervening government regulation. The Texas Business and Commercial Code specifically permits the impracticability defense in the sale of goods. The defense is less available, if at all, in the oil & gas industry or commercial leases.

Reach out to Kilgore & Kilgore to Learn More About Force Majeure in Contract Law

Our Texas commercial litigators can help you assess your legal situation and advise on the best strategy for tackling this and related situations. If you would like to know more about how Covid-19 or other unforeseen events may affect your contract expectations and obligations, click this link Dallas Commercial Litigation Attorney. We offer a free evaluation of the facts of your case. To get this process started, use this link Contact Us to reach us.

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