As the novel coronavirus (or COVID-19) continues to spread, the World Health Organization officially declared it a pandemic on March 11, 2020. Less than a week later, Mayor Turner ordered the closure of Houston restaurants and bars to encourage “social distancing” in an attempt to stop the spread of the virus. We continue to see the cancelation of public events, schools, and Spring Break trips, and many companies are having employees work remotely.
Some cancelations and closures come accompanied by contractual terms dictating what will happen in the event of a catastrophic incident. As a result, some companies have asserted (or threatened to assert) the coronavirus outbreak constitutes a force majeure event and/or gives rise to other legal methods of excusing contractual performance. Many doing business in Texas are reminded of similar circumstances from Hurricane Harvey in 2018, which caused massive flooding and interruptions to businesses and events across the Gulf Coast region.
What Is Force Majeure?
Generally, force majeure (literally translated as “superior force” and frequently referred to as an act of God) does not relieve contracting parties of their obligations unless they expressly agree otherwise. To avoid liability in these instances, contracts frequently contain force majeure clauses, which are enforceable under Texas law. The scope and effect of such a clause depends on the specific language written into the contract, and not on any legal test or definition. When the parties define their own force majeure clause in an agreement, those words will govern in the event the clause is triggered. In Texas, reviewing courts have limited authority with regard to interpretation; in interpreting force majeure clauses, courts are to determine the parties’ intent.
Many contracts have force majeure clauses that permit contracting parties to suspend or terminate performance when certain circumstances arise that are beyond their control. Terrible events like the recent rapid pandemic have wide-ranging impacts, including rendering parties unable to perform their contractual obligations. Where an event (or series of events) triggers a force majeure clause, the party invoking the clause may suspend, defer, or be released from its duties to perform, often without liability. These clauses, if applicable, could potentially save a contracting party millions of dollars in penalties and fees.
In light of the widespread economic disruption caused by COVID-19, companies need to evaluate the force majeure provisions in their relevant contracts, noting the following:
- Coronavirus Law Is Novel: Currently, it is unclear whether a Texas court will find the coronavirus falls within a “catch-all” force majeure provision and/or whether it will be deemed “foreseeable.”
- Use Specific Language: With the rising fears surrounding coronavirus and uncertainty as to how it will continue to affect businesses, add “disease” or “pandemic” to the list of events constituting force majeure when possible. Texas law allows parties to protect themselves through precise contractual drafting, and businesses should take advantage of it. Specificity should be exercised not only in drafting a force majeure clause, but in invoking the clause, and in making a claim under the clause. If a force majeure clause lists specific force majeure events, the party seeking protection under the clause does not need to prove that event was unforeseeable, only that it happened. In invoking a force majeure clause, one should specify the event that is the cause of the claim, the anticipated duration of the claim, and the efforts being made to avoid the effects.
- Pay Attention To Time Limits: Force majeure clauses typically contain notice requirements and deadlines that may be a condition precedent to seeking relief under the provision.
- Reasonable Efforts: In the absence of express language, Texas courts do not typically require a party use reasonable efforts to overcome a force majeure event.
- When It’s Over: Force majeure can only be claimed as long as the event remains in effect and prevents performance or completion. Many contracts place an affirmative duty on the party claiming force majeure to notify the other party or parties to the contract as soon as the event and/or its effects cease.
- No Clause? Other Options: Even if a contract does not contain a force majeure clause or does not contain language covering COVID-19, a breaching party may claim that its failure to perform is excused by other legal doctrines, including frustration of purpose (also known as impossibility of performance) and/or commercial impracticability.
Sample Industries Affected By Coronavirus
In Houston and throughout Texas, most industries will be hard hit by the coronavirus aftermath. Below are potential issues arising in various sectors of the economy:
Oil and Gas
The U.S. is the world’s largest producer of crude oil, so anything affecting the petroleum industry affects us all. While oil prices did bounce back slightly after President Trump stated the Department of Energy would buy crude for the nation’s strategic petroleum reserve, both the demand for oil and oil prices have plummeted in recent weeks with no signs of rebounding anytime soon.
Retail
As more than 30 major U.S. retailers – including huge brands such as Nike and stores as ubiquitous to the mall-going experience as Nordstrom – have now temporarily closed in an unprecedented move to prevent the spread of the coronavirus, we can easily see how the retail industry will be affected. Even stores that remain open are seeing less foot traffic as people opt to stay inside and self-quarantine to avoid the risk of contracting the disease. As it remains unclear what the depth of the fallout from COVID-19 will mean for the retail sector with supply chain disruptions and the stockpiling of certain items by panicked consumers, retail businesses list the pandemic as a top concern.
Hospitality
With the coronavirus pandemic spreading across the United States and around the world, the situation for restaurants, bars, and other hospitality businesses may soon become dire. As most major cities order closures of dine-in food service and bars and travel fears are at an all time high, the hospitality industry stands to suffer serious long term effects from COVID-19. Numerous restaurants in other cities have already closed permanently in the face of the crisis. Bar owners expect to see cuts in operations and expendable operating costs, starting with labor. In addition to the risks of the virus itself, retailers and those in the hospitality industry may also face lawsuits from guests, patrons and shareholders based on their response to the epidemic.
Established Lawyers For Uncertain Times
Founded in 1946, MehaffyWeber is a civil litigation firm with decades of trial experience. We are recognized for our litigation prowess by Chamber & Partners, ranked nationally as a Tier 1 Law Firm by U.S. News & World Report, and have been recognized as a “Go-To Law Firm” for litigation by Corporate Counsel. MehaffyWeber stands ready to assist your business with issues related to contracts and the coronavirus, so please let us know how we can help.