Force Majeure and Coronavirus: “Act of God” or Breach of Contract?

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Education & Training with Freeman Law, PLLC

The following post is from Freeman Law, PLLC, and is available at www.freemanlaw.com.  

 

By Jason B. Freeman

 

Does a pandemic like the Coronavirus trigger a contractual force-majeure clause?  A force-majeure clause is sometimes referred to as an “act-of-god” clause. And perhaps nowhere are the concepts of “church” and “state” more integrally connected than where the secular law resorts to defining an “act of god.”  Where applicable, a force-majeure clause allows a party to stop performing its contractual obligations.

 

As the COVID-19 epidemic spreads, businesses across the globe are confronting “force majeure”-like circumstances.  Supply chains are broken; business operations shut down.  And work forces are self-quarantined or under orders to shelter in place, making contractual fulfillment difficult, if not impossible.  But whether the current state of affairs is sufficient to trigger a force-majeure defense may (like any good legal question) depend on the circumstances.  In Texas, at least, it depends on the underlying contract—whether it has a force-majeureclause in the first place, and, if so, its scope and definition.

The Impact on Chinese Partners

On March 11, 2020, the World Health Organization (“WHO”) officially declared the coronavirus a “pandemic.”  The coronavirus is believed to have originated in Wuhan, China, and Chinese businesses and logistics partners have been hit particularly hard by its fallout.  This, of course, may impact American businesses with Chinese relationships.  Notably, the People’s Republic of China (“PRC”) recognizes a force-majeure contract defense, and last month, the China Council for the Promotion of International Trade (CCPIT) issued thousands of “force majeure” certificates in an effort to legally protect Chinese exporters.  The PRC National People’s Congress Standing Committee’s Legislative Affairs Commission has also expressed its view that a liberal view of force-majeure relief is appropriate.

Under the “General Provisions of the Civil Law of the [PRC]” (中华人民共和国民法总则), as well as China’s Contract Law, “force majeure” is essentially defined as “an objective event or circumstance which is unforeseeable, unavoidable and insurmountable.”  北京市第二中级人民法院课题组,《正确处理“非典”疫情构成不可抗力免责事由案件》,《法律适用》2003年第6期.  The closest historical analogue for judging how the Chinese government and courts will treat the situation is the SARS crisis.  For that, we can look to a quote from the Beijing Second Intermediate People’s Court, which then stated:

“We are of the opinion that the SARS crisis is an unexpected abnormal event and an epidemic with worldwide impact, which is not only unforeseeable for the parties in dispute, but is also unforeseeable for medical experts with extensive medical knowledge. Since the outbreak of this crisis, there has been no effective method to stop its wide transmission, and the source of infection has not been precisely identified. Although many patients infected with SARS have been cured and have left the hospital, medical experts have not yet determined any effective treatment for SARS. Therefore, at least at present, such an abnormal event is an objective circumstance that is unforeseeable, unavoidable, and insurmountable by human beings. Legally speaking, it shall be deemed as a force majeure event, and specifically, a kind of natural disaster.”

If history is any indication, the Chinese government seems likely to treat the epidemic as a force-majeure event.  And, in any event, it appears that the Chinese government and courts, at least at this stage, are taking a liberal view with respect to Chinese law and concepts of force-majeure relief applicable to Chinese exporters.

How do Force-Majeure Provisions Operate in Texas?

force-majeure provision is a common contractual clause.  And force-majeure clauses are enforceable in Texas.

However, there is no stand-alone doctrine or absolute concept of “force majeure.”  The force-majeure defense, in other words, must be based on an express provision in the contract at issue.  Said another way, “force majeure” is not a fixed or universal rule of law that regulates the content of all force-majeure clauses, but instead is a term that describes a particular type of event—e.g., an “Act of God,” that may excuse performance under the contract if so specified.

The theory of force-majeure has been historically linked to “impossibility of performance.” The concept of force-majeure itself derives from French civil law, and the phrase’s etymological roots derive from the Latin vis major, meaning “superior force.”   It has historically embodied the idea that parties may be relieved of performing their contractual duties when performance was prevented by causes beyond their control—such as an act of God.[1]  However, today the scope and application of the legal concept is governed more by the specific terms of the contract than by common law theory or etymological nuance.[2]    Indeed, much of the legal concept’s historic underpinnings have given way, and “force majeure” is now really just a descriptive phrase that does not carry much inherent substance.  Its scope and application, for the most part, are completely dependent upon the terms of the contract in which it appears.[3]

As such, when the parties to a contract have themselves defined the contours of the force-majeure rights in their agreement, that definition dictates the application, effect, and scope of the force-majeure rights.[4]  Therefore, courts look to the language that the parties specifically bargained for in the contract to determine the parties’ intent with respect to whether the event complained of excuses performance.[5]

So Will a Force-Majeure Clause Apply? 

As this demonstrates, whether a force-majeure defense is applicable will depend on the terms of the contract.  The following questions may be informative:

  • What law governs the contract? Is there a choice-of-law provision?
  • Were there other (non-Coronavirus) factors that may have been contributing causes to the party’s failure to perform?
  • Does the contract’s force-majeure clause refer to health pandemics, epidemics, or similar phenomena?
  • Does the provision reference government intervention or an act of government?
  • Does the provision reference language in the nature of “disease” or “quarantines?”
  • What does the phrase, “act of God,” mean in the context of the specific contract? Are there contextual terms that may shed meaning or imply the scope of the phrase?
  • Does the contract have a catchall provision?
  • Does the contract have a notice requirement?
  • Does the provision give rise to a termination right?
  • Are there legal mitigation obligations?

Parties may also need to consider other similar defenses, such as whether the Coronavirus-related circumstances lead to a frustration of the contract’s purpose, giving rise to the doctrine of frustration.  Or whether the contract contains a material-changes clause?  Finally, when all else fails, parties may need to read their insurance policies carefully.

Parties in doubt should seek legal advice and may have time-sensitive obligations to exercise notice rights or to meet other legal requirements.  Force-majeure defenses are fact sensitive and highly dependent on the circumstances.  Freeman Law’s litigation attorneys regularly litigate complex contractual disputes and provide guidance in complex litigation matters.

 

For more Coronavirus-related posts, see:

Speedy Trial Rights and the Coronavirus

Families First Coronavirus Response Act

A Fresh Start for Many? Economic Downturn Means an Upturn in Favorable Tax Settlements

TEXAS COMPTROLLER OFFERS ASSISTANCE TO TEXAS BUSINESSES DURING THE CORONAVIRUS OUTBREAK

Latest IRS Coronavirus Guidance on Deadlines

Additional IRS Guidance on Coronavirus Tax Relief: New People First Initiative

 

[1] 6A CORBIN, CORBIN ON CONTRACTS § 1324 (1962); Sun Operating Ltd. P’ship v. Holt, 984 S.W.2d 277, 282–83 (Tex. App. 1998).

[2] Tejas Power Corp. v. Amerada Hess Corp., No. 14-98-00346-CV, 1999 WL 605550, at *3 (Tex. App. Aug. 12, 1999).

[3] Id.

[4] Sun Operating Ltd. P’ship v. Holt, 984 S.W.2d 277, 283 (Tex. App. 1998).

[5] Perlman v. Pioneer Ltd. P’ship, 918 F.2d 1244, 1248 (5th Cir. 1990).

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