In any business transaction, extreme events, commonly referred to as force majeure events, may arise and prevent the impacted party from performing under the contract. For example, a natural disaster can negatively affect a seller’s ability to deliver goods under an agreement.

I. Judicial Interpretation of Force Majeure

If the Contract is Silent on Force Majeure

Typically, a Force Majeure provision is not implied into any contract by United States courts. Rather, it is left up to the parties to negotiate Force Majeure provisions, such as the scope and any notice requirements. If the contract in question has no Force Majeure provision, there are some protections available to the frustrated party.  For instance, contracts for the sale of goods under the Uniform Commercial Code (“UCC”) are subject to section 2-615 of the UCC, which excuses performance where it has become impracticable either:

• “by the occurrence of a contingency the non-occurrence of which was a basic assumption on which the contract was made.”[1]
• “by compliance in good faith with any applicable foreign or domestic governmental regulation or order whether or not it later proves to be invalid.”[2]

In service contracts that lack a Force Majeure clause, common law principles of impracticability, frustration of purpose, or prevention by government regulation are available in most states and are incorporated into the Restatement (2d) of Contracts, which is followed in most state jurisdictions.  Under the doctrine of impracticability, a party’s contractual obligations may be discharged if, after the contract is made, the party’s performance becomes impracticable due to the occurrence of an event that is (1) outside of a party’s control; and (2) a basic assumption on which the contract was made.[3]

Similarly, under the doctrine of “Frustration” of contract, a party’s contractual obligations may be discharged if, after the contract is made, the party’s principal purpose is substantially frustrated (1) without the party’s fault; and (2) where the occurrence or non-occurrence of an event was a basic assumption on which the contract was made.[4]

Parties may also be discharged from their obligations if the performance of a duty is made impracticable by having to comply with a governmental regulation or order, the non-occurrence of which was a basic assumption on which the contract was made.[5] These defenses are available to all contracts, including contracts governing the sale of services and those governing the sale of goods.

If the Contract has a Force Majeure Clause

Where a contract has a Force Majeure clause, its scope and applicability are generally determined by the language used in the contract.[6] A contract that has specific language as to what constitutes a Force Majeure event usually gives little room to the courts to consider other circumstances outside of those enumerated and courts prefer to interpret Force Majeure clauses narrowly.[7] However, where the language is ambiguous or open ended, Texas courts have generally held that Force Majeure covers events that were unforeseeable at the time the contract was entered into or that were beyond the control of the invoking party.[8] Force Majeure usually encompasses “acts of God” and the D.C. Circuit provides a useful guidepost as to what is considered an “act of God.”[9] In addition to acts of God, Force Majeure clauses usually also include war, acts of terror, acts of governmental entities, changes in law, and sometimes labor disputes or strikes. However, it should be noted that in Texas the scope and application of a Force Majeure clause still depends heavily on the terms of the contract.[10]

The issue of whether the spread of an infectious disease constitutes a Force Majeure event, where it is not specifically enumerated as such in the contract, has not been broached by many United States courts. At least two non-Texas cases seem to indicate that it can be considered Force Majeure.[11] The Rexing case does serve to make an important point—that while avian flu likely was an unforeseen event that qualified as a Force Majeure event, a drop in consumer demand due to the avian flu outbreak, which hurt Rexing financially was not an Force Majerure event.[12] Importantly, Rexing was not actually prevented from fulfilling its contracts, it was just hurt financially by the avian flu outbreak. The court went on to say that even a drastic drop in consumer demand is a foreseeable part of business and therefore Force Majeure is not applicable.

Already declared a pandemic,[13] courts may logically find the spread of COVID-19 to be beyond the “reasonable control of the party” and therefore fall within the meaning of Force Majeure. However, even if the virus itself does not qualify as a Force Majeure event, it is very likely that the quarantines and travel restrictions put into place by governments constitute a valid “Governmental Entities” act and thereby qualify as a Force Majeure event excusing a party from performing a contractual obligation if performance if prevented due to a government restriction.[14] It should be noted that it is possible in some instances that a court may find that businesses restricted from opening their premises by quarantine orders are not actually restricted from selling their goods and services, they just cannot do so on-site, and therefore the government action does not actually prevent the business from fulfilling obligations in contracts.

II. How does this effect general purchase and sales contracts?

Determining what actions may be excused by invoking the Force Majeure clause in a contract depends almost entirely on the language of the contract. In a standard contract for goods or services the Force Majeure clause may excuse the timely performance of the contract, or performance entirely. However, some Force Majeure clauses may specifically exclude monetary obligations and as such the party paying for the goods or services may still need to make payments under the terms of the contract and then pursue their available remedies. Further, a Force Majeure clause may give the paying party the right to terminate the contract if performance is not fulfilled within a set period (usually between sixty and ninety days). If performance is excused entirely, the party with the obligation to pay will not be required to render payment for goods and services not received. The Force Majeure clause should be reviewed carefully to determine each party’s obligations. It is not uncommon to see Force Majeure clauses that limit the ability of the paying party to terminate the contract because of a delay. It should also be noted that different Force Majeure clauses excuse different rationales for non-performance such as: impossibility of performance, impracticability of performance and illegality of performance. Each has a unique legal definition and covers different circumstances.

The effect of COVID-19 on ongoing service contracts (i.e. where payment and services are rendered at set intervals) will likely be similar to its effect on run of the mill goods and services contracts. The COVID-19 crisis and/or the government response at different levels (quarantine, business closures, social-distancing requirements, etc.) are likely events that were unforeseeable or as events that were outside the control of the parties and could possibley qualify as Force Majeure events. Accordingly, this might excuse any non-performance of these service agreements should the provider invoke the Force Majeure clause.[15] As with the other types of contracts discussed above, the exact effect on the obligations of both parties to these contracts will depend on the language of the particular contract in questions and may vary greatly.

A generally recognized premise of contract law is that where services are not rendered, payment is not required. Therefore, if a service provider invokes the Force Majeure clause in their contract it may excuse the provider from meeting its obligations. However, this may similarly excuse or alter the obligations of the party that was to receive the services in regard to payment. Depending on the language of the contract this may entitle the party that was supposed to receive the services to a refund of payment for the period of time in which the services were not able to be provided or to render payment at a pro-rated rate due to a reduction in service. Any Force Majeure clause in the service agreement should be carefully reviewed to determine exactly what is required of each party in such an instance.

III. How does this effect real estate?

Few leases are likely to have specific language regarding pandemics like COVID-19, this is why it is critical for landlords and tenants to review their lease agreement to determine the scope of their Force Majeure clauses. Parties should also confirm whether notice of a Force Majeure event is required and give it promptly.

Rent is most likely still due in full. In most lease agreements payment of rent or other financial obligations are independent covenants and even if it is not, Force Majeure does not usually apply to financial obligations or hardship as noted above. Therefore, tenants need to make all payments as required by their lease even if there has been a closure of their premises or a reduction in services provided, unless the tenant has negotiated for rent abatements.[16] For example if the state or applicable governmental entities have mandated that landlords close common areas such as gyms and swimming pools,[17] this likely qualifies as an action by a governmental entity, and the landlord is likely excused from providing these services for as long as required by the order. While the Texas Supreme Court has stayed all eviction proceedings until April 19, 2020, some cities and counties have taken this a step further and mandated that no new eviction proceedings may be filed, while others have merely chosen to stay the eviction hearings. Tenants and landlords should check their city and county ordinances to determine exactly how their city has applied this moratorium.

The COVID-19 pandemic creates particular problems for retail and restaurant tenants. Tenants should understand their existing rights and obligations under their leases, including:

1. Operating covenants. Leases usually require tenants to operate their business during agreed hours and days. Tenants should confirm their rights prior to suspending operations.

2. Co-tenancy. Many tenants are not required to operate their business, or may pay a reduced rent, if certain major tenants, or an agreed percentage of all tenants, are not also open for business. Tenants should review their leases to understand their co-tenancy rights, including rights to:

a.pay reduced rent; and

b.cease operating.

3. Gross sales termination right.Some tenants may have negotiated for a right to terminate the tenant’s lease if gross sales fall below a certain threshold. If the tenant has this right, the tenant must determine what notice and financial documents must be provided to the landlord to exercise this right.

4. Permitted use review. Many restaurants must discontinue on-premises food service and are restricted to pick-up services or delivery services. Tenants must verify that their permitted use under the lease and their business licenses allow for this change in operation.

5. Percentage rent. Landlords should verify if their share of percentage rent includes sales from restaurants through pick-up and delivery services and should also determine the financial impact to the landlord for sales being low and not triggering a break-pointfor payment of percentage rent to the landlord.

6.Landlord lien issues. The tenant should determine if the landlord has lien rights on the tenant’s personal property and equipment in case the tenant needs to sell equipment to generate cashflow.

IV. Drafting

As evidenced above, the drafting of a Force Majeure clause can be a critical factor in deciding its scope. A provision that expressly lists events considered Force Majeure is more likely to have a court interpret the provision narrowly (i.e. the court is less likely to allow other events that are not listed to be considered as covered by the provision). Contrast this with a more broadly stated clause that includes a couple of specific events but also includes a qualifier such as “and all similar events” or “but not limited to”. These clauses give more room to the court to interpret what events may be covered.

If the goal is to limit the types of Force Majeure events the best drafting policy is to expressly state in the contract what qualifies as a Force Majeure event. Language indicating that the list is exhaustive is also helpful. Conversely, if the intent to is have a broader definition then the drafter should avoid any type of listing of specific events and instead opt to rely on the Texas standard of events beyond the control of the party that prevent performance. If it is the drafter’s intent to include disease related events as part of the Force Majeure clause, special care should be taken in deciding terminology. Outbreak, epidemic, and pandemic each have a slightly different definition and scope that may have a major impact on deciding whether each has occurred for the purposes of a contractual provision.[18]

Example of contract language that takes a more neutral approach that specifically excludes the common carve out for monetary obligations:

Force majeure. No party shall be liable or responsible to the other party, nor be deemed to have defaulted under or breached this Agreement, for any failure or delay in fulfilling or performing any term of this Agreement when and to the extent such failure or delay is caused by or results from acts beyond the impacted party’s (“Impacted Party”) reasonable control, including, without limitation, the following force majeure events (“Force majeure Event(s)”): (a) acts of God; (b) flood, fire, earthquake, outbreak, or explosion; (c) war, invasion, hostilities (whether war is declared or not), terrorist threats or acts, riot or other civil unrest; (d) government order, law, or actions; (e) embargoes or blockades in effect on or after the date of this Agreement; (f) national or regional emergency; (g) pandemic, epidemic, or outbreak of infectious disease {insert or other similar events beyond the reasonable control of the Impacted Party.}

[1] UCC 2-615(a).

[2] Id.

[3] Restatement (2d) Contracts § 261.

[4] Id. at § 265.

[5] Id. at § 264.

[6] See Sun Operating Ltd. v. Holt, 984 S.W.2d 277, 283 (Tex. App.—Amarillo 1998)(“In other words, when the parties have themselves defined the contours of force majeure in their agreement, those contours dictate the application, effect, and scope of force majeure”).

[7] Wisconsin Elec. Power Co. v. Union Pac. R. Co., 557 F.3d 504, 507 (7th Cir. 2009)(“[T]he general words are not to be given expansive meaning; they are confined to things of the same kind or nature as the particular matters mentioned”); Air Lines v. McDonnell Douglas Corp., 532 F.2d 957 (5th Cir. 1976)(“Specifically enumerated force majeure events do not need to be unforeseeable”).

[8] Perlman v. Pioneer Ltd. P’ship, 918 F.2d 1244, 1248 (5th Cir. 1990); TEC Olomos, LLC v. Conoco Phillips Co., 555 S.W.3d 176 (Tex. App.—Houston [1st Dist.] 2018, pet. filed.

[9] See, Am. Nat. Red Cross v. Vinton Roofing Co., 629 F. Supp. 2d 5, 9 (D.D.C. 2009) (“‘[a]n Act of God’ is the result of the direct, immediate and exclusive operation of the forces of nature, uncontrolled or uninfluenced by the power of man and without human intervention, and is of such character that it could not have been prevented or avoided by foresight or prudence”).

[10] Zurich Am. Ins. Co. v. Hunt Petrol.(AEC), Inc., 157 S.W.3d 462, 466 (Tex. App.—Houston [14th Dist.]

2004, no pet.)(“Regardless of its historical underpinnings, the scope and application of a force majeure clause depends on the terms of the contract”); Sun Operating Ltd. P’ship v. Holt, 984 S.W.2d 277, 282-83 (Tex.App.—Amarillo 1998, pet. denied)(“Much of the historic meaning of the phrase force majeure is gone and, therefore, the scope and application of the doctrine is utterly dependent upon the terms of the contract in which it appears”).

[11] SNB Farms, Inc., v. Swift & Co., No. C01-2077, 2003 WL 22232881, at *10 (N.D. Iowa 2003); Rexing Quality Eggs v. Rembrandt Enterprises, Inc. 360 F. Supp. 3d 817, 841-42 (S.D. Ind. 2018)

[12] Rexing; 260 F. Supp. 3d at 841.

[13] There are substantial differences in the definitions of pandemic, epidemic, and outbreak.  See drafting language section.

[14] See, e.g., Harriscom Svenska, AB v. Harris Corp., 3 F.3d 576, 580 (2d Cir. 1993) (finding that government’s prohibition on sale of goods classified as military equipment to be “government interference” within the meaning of the FORCE MAJEURE clause).

[15] Provided also that the FORCE MAJEURE clause covers such an event.

[16] Tenants should confirm the scope of any rent abatements in their lease, before taking any controversial action.

[17] Harris County Stay Home Stay Safe Order, Judge Lina Hidalgo (https://www.readyharris.org/stay-home).

[18] The Centers for Disease Control (“CDC”) define an epidemic as referring to an increase, often sudden, in the number of cases of a disease above what is normally expected in that population, in that area. The CDC defines an outbreak as similar to an epidemic, but limited to a specific geographic area.  The CDC defines a pandemic as an epidemic that has spread over several countries or continents, usually effecting a large number of people. (https://www.cdc.gov/csels/dsepd/ss1978/lesson1/section11.html).