Attorney Blog, Human Resources

Coronavirus and Commercial Contracts

Attorney Harrison Oldham

As you may have heard, Coronavirus (COVID-19) is sweeping the country – and not in a good way. There has been plenty of discussions about working remotely and health precautions around the office. But, it’s also important to remember that Coronavirus may impact your commercial contracts as well.

If you have not yet begun to think about the Coronavirus’s potential impact, now is the time to start planning. The first place to look is your contract’s Force Majeure provision. “Force Majeure” is the provision in a contract that defines occurrences that are outside and beyond the control of the parties (acts of God, war, pandemic, and plague), and allows relief for non-performance in the event that such an occurrence is triggered. The possibility of the virus triggering a Force Majeure event increases as the Coronavirus continues to spread. With that in mind, you should become familiar with your contracts and terms should Coronavirus trigger a Force Majeure event.

Contract Contains A Force Majeure Provision

If a contract has been executed, now is a good time to review the agreement to ensure it contains Force Majeure language and to see if and when an event could be triggered. The fact that a contract contains a Force Majeure clause does not mean you have the right to invoke relief as a result of impacts to your business from the Corona virus. You will need to determine whether an event of force majeure under your contract has occurred. Force majeure clauses are generally drafted to identify specific events and take certain risks into consideration.

In Texas, courts construe Force Majeure provisions strictly. Courts have said that today, “[t]he scope and effect of a ‘force majeure’ clause depends on the specific contract language, and not on any traditional definition of the term.” So, “when the parties have themselves defined the contours of force majeure in their agreement, those contours dictate the application, effect, and scope of the force majeure provision’ and reviewing courts ‘are not at liberty to rewrite the contract or interpret it in a manner which the parties never intended.’”

In other words, if your agreement contains a Force Majeure, then you are pretty much bound by the terms of that section. Although these provisions may seem “boilerplate,” there are in fact many possible contours. For instance, different Force Majeure provisions may require timely notice be provided to certain individuals, that a party exercise “reasonable diligence” before utilizing the provision, and/or that the event causing the delay was “unforeseeable” at the time the contract was executed. All of those provisions, and more, can have a significant impact on how your contract will play out and when/if a party will successfully be able to utilize a Force Majeure provision in a contract.

However, one general rule is that in Texas courts generally recognize that the purpose of a force majeure clause is to excuse non-performance of obligations only when caused by circumstances beyond the reasonable control of the party.  However, contractual obligations cannot be avoided by a claim of force majeure “simply because performance has become more economically burdensome than a party anticipated.” Meaning that in most cases, just because performance is now more expensive, it does not excuse performance.

In any case, if you contract(s) contains a Force Majeure clause, now is a good time to take a close look and start understanding the finer aspects of it.

Contracts Does Not Contain A Force Majeure Provision

So, what if the reverse is true? What if you take a look at your most important contract and find out that it does not contain a Force Majeure provision? Well, even when a contract does not contain a Force Majeure provision, there are several principles that may be applied to avoid the contract’s requirements when performance is made impossible by, for example, a virus. Texas recognizes the doctrine of commercial impracticability, though Texas courts typically refer to the doctrine as “frustration of purpose” or “impossibility of performance.” Under this doctrine, performance is excused when a party’s performance is made impracticable, without its fault, by the occurrence of an event, the non-occurrence of which was a basic assumption on which the contract was made.

The classic example is that a contract to lease a building is rendered impracticable if the building is destroyed. Similarly, a change in law that makes the performance of a contract illegal also renders performance impracticable (and excuses it).

So, if the effect of the virus has rendered performance impossible, even in the absence of an express Force Majeure provision in the contract, a party may be able to rely on the frustration of purpose or impossibility of performance doctrines to avoid performance or defend a claim of breach of contract. However, as stated above, Texas courts generally interpret these things quickly – impossible generally means pretty dang close to impossible – not simply more difficult or more time consuming.

What To Do When A Force Majeure Provision Is Enacted

When notifying contracting counter-parties of a force majeure event, it is important to strictly comply with the requirements of the Force Majeure clause, which may specify the amount of detail required in the notice. In the absence of such guidance, a claim of Force Majeure should specify the event that is the cause of the claim, the anticipated duration of the claim, and efforts that are being made to avoid the effects of the delay, if any.

Similarly, when responding to claims of Force Majeure, a party should request the information above, such as the expected duration of the event and the efforts that are being made to avoid its effects. And if seeking deliveries of goods, the buyer should seek a reasonable allocation when any supply becomes available.

Finally, a party should be cautious of the general rule that Force Majeure can only be claimed so long as the Force Majeure event remains in effect and prevents performance. Many contracts place an affirmative duty on the party claiming force majeure to immediately notify the counter-party as soon as the event or its effects cease.

About Harrison Oldham

Harrison grew up in Mansfield, Texas. He attended Texas A&M University for his bachelor’s degree, where he met his wonderful wife, Kelsey. After graduating magna cum laude from Texas A&M, he attended SMU Dedman School of Law, graduating with honors in 2012. Today, Harrison and his wife live in Dallas, Texas with their son, Teddy.

Since graduating from SMU Law, Harrison has worked exclusively in the field of business law. He has spent time in private practice and in-house, working with clients of every size; from single person startups to Fortune 250 companies. Today his practice focuses on serving the diverse needs of businesses and individuals throughout Texas. You can learn more about Harrison by visiting his website, at: http://lonestarbusinesslaw.com/.

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