At this point it is premature to determine how Texas courts will decide the breadth and applicability of a force majeure clause related to COVID-19 . That said, do not expect courts to allow a party to invoke force majeure if the event was not specifically identified and especially if it was foreseeable.

 

Force Majeure Clauses

Most of the COVID-19 force majeure cases in Texas are energy industry cases and though suits that were filed have not risen to the appellate level, they are instructive.  Generally speaking, the courts in Texas will focus on the intent of the parties and focus on the language of the force majeure provision.

Many of the force majeure clauses list specific events of applicability.  For example, they can contain an event that is beyond the control of the party affected or an event that is not foreseeable at the time of the agreement.  More often than not, the force majeure clause will contain a “catch-all” phrase similar to “any event beyond the reasonable control of the affected party.” Notwithstanding this broad language, Texas courts will limit the language to events relating to or arising out of the specific set of events listed.

 

Specificity and Enforceability

Somewhat instructive is an oil and gas Texas Court of Appeals opinion in TEC Olmos, LLC v. ConocoPhillips1.  There, the court of appeals held that the 2014-2015 drop in oil prices did not give rise to the invocation of force majeure for purposes of general force majeure contractual protection. The facts were that TEC Olmas was required to drill within a specified period of time.  During this time period, TEC Olmas could not obtain financing due to the glut in the global supply of oil and the drop in oil prices.  ConocoPhillips filed suit against TEC Olmos for $500,000 for breach of contract.

TEC Olmos argued that the force majeure clause in the farmout agreement excused it from performance. TEC Olmos argued that “fire, flood, storm, act of God, governmental authority, labor disputes, war or any other cause not enumerated herein but which is beyond the reasonable control of the Party whose performance is affected,” were sufficient to allow TEC Olmas to invoke the force majeure clause as it covered its inability to obtain financing during market downturns.  Id. at *1 (emphasis added). ConocoPhillips on the other hand, argued that unless the force majeure clause specifically referred to the foreseeable event, the  clause did not apply.

The court agreed with ConocoPhillips and found that unless the force majeure clause specifically included the force majeure provisions, it was not enforceable.  In this case, it did not include “fluctuations in the oil and gas market are foreseeable as a matter of law.” Id. at *5.  The court explained that the purpose of a force majeure clause was to deal with unforeseeable risks that the parties could not have been able foresee and thus bargain for the benefit of the party who should bear the risk.  In other words, because TEC Olmas should have foreseen market fluctuations, it should have addressed them in the contract.

Indeed, the court explained that the role of the force majeure provision is to neutralize unforeseeable risks that the parties could not have bargained for when negotiating the contract. Where a risk is clearly foreseeable, however, the parties are expected to have bargained over who will bear the risk and include it either expressly or implicitly within the terms of the contract. Accordingly, TEC Olmos was relieved of liability for “a circumstance that it was aware of but took no steps to specifically address in the contract.”  Id. at *6.

So, one can expect courts to follow this basic rule.  If the force majeure event is specifically stated and beyond the control of the party, then the court will obviously enforce, it.  And, if the event was foreseeable then it should be listed because the parties are required to bargain as to who bears the risk.

So, it is this author’s view that unless the force majeure clause contains a reference to the COVID-19 pandemic, the catch-all phrase will not protect the party seeking to enforce it.

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1.  555 S.W.3d 185 (Tex. App.–Houston [1st Dist.] 2018, pet. denied).

By Published On: September 10, 2020Categories: Business LawTags: , ,

About the Author: Bill Siegel

William L. (Bill) Siegel is a Shareholder and Section Head of the Cowles and Thompson Bankruptcy and Creditors’ Rights Practice Group as well as a member of the Corporate and Business Practice Group.