By Logan Johnson and Andrew Hicks
The predicted wave of force majeure litigation related to COVID-19 has now become reality. Lawsuits are increasingly being filed by parties to contractual disputes, and practitioners are increasingly being called upon to evaluate such disputes. This article is intended to provide in-house lawyers and business executives with a guide for evaluating these disputes from their inception.
I. Case Study
In one recent force majeure dispute, EFS Midstream LLC, a subsidiary of Enterprise Products Partners L.P., filed suit against Sundance Energy Inc. in Harris County, Texas. A copy of EFS’s Petition is attached as Exhibit A (the “EFS Lawsuit”). In its suit, EFS has sought to recover, among other things, “Gas Deficiency Fees” due under a Gathering Agreement between the parties. In response, Sundance has argued that its obligation to pay these fees was cancelled as a result of the COVID-19 epidemic, citing a force majeure clause contained in the parties’ Gathering Agreement. The force majeure clause at issue in the EFS Lawsuit states:
13.1 Force Majeure. If either Gatherer or Producer is rendered unable by an event of Force Majeure to carry out, in whole or in part, its obligations hereunder, then, during the pendency of such Force Majeure, but only during that period, the obligations of the Party affected by the Force Majeure event (other than the obligation to make payments then due or becoming due, including Gas Deficiency Fees and Liquid Hydrocarbons Deficiency Fees shall be canceled or suspended, as applicable, to the extent required.
Here, the term “Force Majeure” is specifically defined in the contract,[1] as indicated by its capitalization, as follows:
The term “Force Majeure” as used herein, shall mean a nationwide strike in the energy industry or a strike at the facilities that are the subject of this Agreement, work stoppages due to labor organizing efforts, acts of God, acts of a public enemy, wars, insurrections, earthquakes, floods, loss of utilities and other causes beyond the control of Producer.
For this article, we have used the above-quoted force majeure clause and “Force Majeure” definition for illustrative purposes. As set forth below, the contract language is of paramount importance in a force majeure dispute, as the court’s analysis begins and ends with the language contained in the force majeure clause.
II. Anatomy of a Force Majeure Clause
U.S. courts narrowly construe force majeure clauses because they operate to undo contractual obligations that a party has voluntarily assumed.[2] A standard force majeure clause typically lists a series of events that the parties have agreed in advance will constitute a force majeure event sufficient to cancel a contractual obligation. Most clauses also contain a catch-all term covering additional events “beyond the reasonable control” of the contracting parties.
At the outset, it is important to clarify a common source of confusion: “force majeure” and an “act of God” are not the same thing. The meaning of “force majeure” is almost always specific to the applicable contract and is typically defined within that contract’s force majeure clause. An “act of God” is almost always included in the delineated list of force majeure events, but constitutes only one such event. An “act of God” is generally understood to mean “some inevitable accident as could not have been prevented by human care, skill, and foresight, but which results exclusively from nature’s cause.”[3] As the example above illustrates, a number of other force majeure events are also typically enumerated and often include wars, insurrections, earthquakes, and floods.
A typical contract will have four major components that are relevant when analyzing a force majeure claim: (1) a clause defining force majeure; (2) a list of events that constitute force majeure as defined in the contract (which almost always includes an “act of God”); (3) a catch-all clause at the end of the delineated events, which usually refers to “events beyond the reasonable control of the contracting parties”; and (4) a contractual clause describing the relief a party is entitled to should a force majeure event occur.
A. Delineated Force Majeure Events
Almost all agreements containing force majeure clauses will contain a definition of “Force Majeure” that delineate several events that the parties have agreed in advance constitute a force majeure event. Contractual losses arising from a coronavirus outbreak are likely to be caused predominately by governmental or private measures intended to halt the spread of the disease and their resulting economic impacts rather than the disease itself. As such, it is important to keep in mind when performing a force majeure analysis that arguably it is human agency (rather than the virus itself) that is frustrating performance due to COVID-19. Because state courts tend to construe force majeure clauses narrowly, a force majeure clause containing language that specifically encompasses epidemics, outbreaks of disease, or similar public health emergencies (as some do), or broadly encompasses governmental actions, will provide the best chance of the pandemic (and its attendant consequences) being deemed a force majeure event.
B. Is COVID-19 an “Act of God”?
It is possible—but unlikely—under current jurisprudence (more on this later) that the inclusion of an “act of God” in the list of possible force majeure events would support a party claiming force majeure as a result of COVID-19. In the United States, state law typically requires that an “act of God” arise exclusively from natural forces, events, or causes.[4] For example, the Illinois Supreme Court has held that an “act of God” must be caused directly and “exclusively by natural causes such as could not be prevented by human care, skill, and foresight.”[5] Because of this, under current jurisprudence, a force majeure clause’s “act of God” language is unlikely to excuse contractual non-performance arising from the actions of governments or actors within a supply chain, even if the natural phenomenon of disease is their ultimate cause.
C. Will Catch-All Language Covering Causes “Beyond the Reasonable Control” of a Party Include COVID-19?
As mentioned above, most force majeure clauses contain a catch-all clause that, in addition to the enumerated events, contemplates the possibility that other events might occur that are “beyond the reasonable control of the parties” and may also be excused as an event of force majeure.
In keeping with basic canons of contract interpretation, a U.S. court interpreting a catch-all phrase will seek to give effect to the intent of the parties. In doing so, U.S. courts tend to consider the entirety of the broader force majeure provision in determining the meaning of catch-all language.
Courts often apply the interpretive canon known as ejusdem generis[6] when evaluating the scope of a catch-all phrase in a force majeure clause. Under this principle, when general terms (i.e., “other causes beyond the reasonable control of the party”) follow more specific terms (i.e., wars, insurrections, earthquakes, and floods), the general terms will be limited to matters of the same general type as the specific examples listed.[7] Thus, language referring to “other causes beyond the reasonable control” likely will be interpreted as including only causes that are similar to and “of the same general class” as the force majeure events specifically enumerated in the subject contract.[8] In the case of COVID-19, a court would be most likely to excuse a party’s performance under the catch-all clause if the enumerated events referenced governmental action or public health in some respect.
i. The catch-all language only covers events that are not foreseeable
To fall within the catch-all clause, an event must not only be of the same type and kind as those expressly enumerated in the agreement, it also must not have been foreseeable at the time of contracting. This is because the list of events that are explicitly covered by a force majeure provision indicate what events the parties contemplated would constitute force majeure. Accordingly, when a party claims force majeure as an excuse for its failure to perform based on a catch-all provision (rather than an event explicitly contemplated in the contract), courts “extend [force majeure] only to those situations that were demonstrably unforeseeable at the time of contracting.”[9] In short, when a foreseeable event is omitted from a delineated list of force majeure events, it tends to be assumed that the parties intended the omission.[10]
ii. A major factor affecting the court’s interpretation will be which governmental actions are deemed foreseeable
Few states have directly defined when governmental regulation reaches the level of a force majeure event. In Northern Illinois Gas, an Illinois appellate court determined that the mere fact that a government agency issued a regulatory order denying a utility’s request to increase the rate at which it could sell gas did not rise to the level of a force majeure event justifying the utility’s breach of a supply contract. Instead, the court held that “[w]hat is required is that the [governmental] order clearly direct or prohibit an act which proximately causes non-performance or breach of a contract.”[11]
Common law rules have also been understood to inform and supplement contractual force majeure provisions.[12] In assessing the related doctrines of contractual impossibility and frustration, state courts have taken diverse positions regarding whether governmental action need be foreseeable in order to constitute a force majeure event. For example, New York courts have held that “a party seeking to rescind a contract must show that the intervening act was unforeseeable, even if the intervening act consisted of the actions of a governmental entity or the passage of new legislation.”[13] On the other hand, courts in other states, including Texas, have placed less emphasis on foreseeability in evaluating whether the doctrine of impossibility applies to contracts supervened by illegality and other forms of governmental authority.[14] Ultimately, whether or not an exercise of governmental authority (such as travel bans and lockdowns—assuming these rise to the level of a force majeure event) is foreseeable will be a fact intensive inquiry undertaken on a case-by-case basis.
Under the common laws of some states, parties are presumed to contract with knowledge of the underlying law.[15] Emergency measures are generally undertaken by government agencies pursuant to preexisting enabling legislation. While the law may presume that the contracting parties were familiar with that legislation, it is unclear whether courts would deem that familiarity sufficient to put the parties on notice that a governmental action premised upon the law could occur or could affect them in a certain way. It is similarly difficult to predict whether the parties’ knowledge regarding the enabling legislation would be deemed sufficient that the application of the statute was foreseeable. The difficulty of this analysis is underscored by the fact that the event precipitating the statute’s use (the outbreak of coronavirus) could be deemed unforeseeable. The extent to which courts may emphasize the unforeseeability of precipitating facts versus the unforeseeability of the legal action itself may have substantial significance in predicting the success of force majeure claims arising from government action taken in response to COVID-19.
III. The Role of Minimum Deficiency Payments or Minimum Volume Commitments in an Agreement
Turning back to the recently filed EFS Lawsuit discussed in the introduction, the parties’ contract required the driller to pay deficiency fees if it failed to deliver minimum amounts of revenue per year for gathering and processing gas and liquid hydrocarbons. Sundance failed to deliver the minimum revenues in 2019, and, accordingly, EFS billed Sundance for deficiency fees in February 2020. Sundance argues in the lawsuit that it is not required to pay the deficiency fees because the impact of COVID-19 was a force majeure event under the Gathering Agreement. However, legal precedent addressing the purpose of these types of contractual fees suggests that Sundance’s argument (based on the information contained in the Petition) is likely tenuous.
Where the parties have contracted in advance for the payment of specific fees or penalties to cover any losses that might arise during the contract term, some courts have treated such agreements as liquidated damages and enforced them regardless of subsequent events.[16] By way of example, a provision in a mining lease for a minimum royalty that was required regardless of the amount of minerals actually mined was found to be an absolute, express obligation of the lease that could be enforced regardless of whether the mineral was mined or was of sufficient quantity to be profitably mined. The court viewed the minimum royalty as a way for the lessor to have a guaranteed stated income from the lease. In cases such as these, legal defenses such as impossibility, impracticability, or mutual mistake have been held not applicable to excuse a party’s payment obligation.[17] While a court will interpret the language of the applicable contract based on the specific language used, there is no reason to believe that a different result would be reached where the defense being asserted is force majeure.
IV. Practitioner’s Checklist
Based on the discussion above, there is a fairly simple preliminary checklist a lawyer or business executive can apply to assess the potential strength of a declaration of force majeure. Below, we will use COVID-19 as the alleged force majeure event.
Force Majeure Checklist:
(1) Identify what event a party claims constitutes a force majeure event.
Answer: Supply chain disruption as a result of COVID-19.
(2) Review the definition of “Force Majeure” in the contract and evaluate the delineated events of force majeure. Are “pandemics,” “public health emergencies,” or “governmental actions” (in a broad sense) listed as force majeure events?
Answer: If “yes,” there is good chance that COVID-19 will constitute a force majeure event under the contract, and you should proceed to (7) below. If “no”, then proceed to steps (3) and (4).
(3) Is an “act of God” listed as a force majeure event?
Answer: If “yes” (almost all contracts will list “act of God” as a force majeure event), then the next step will be to determine whether COVD-19 constitutes an “act of God” under applicable jurisprudence. Again, as detailed above, it is unlikely that under current jurisprudence the party declaring force majeure will be able to find protection by claiming it was an “act of God.” In the United States, state law typically requires that an “act of God” arise exclusively from natural forces. The intervening human agency giving rise to the current slate of force majeure disputes—i.e., governmental actions in response to the virus—makes it unlikely that contractual performance will be excused pursuant to the legal definition of “act of God.”
(4) Does the force majeure clause contain a catch-all provision, such as “causes beyond the reasonable control of the parties”?
Answer: If “yes,” then proceed to (5).
(5) Was the cause—COVID-19 and the governmental response to it—foreseeable?
Answer: If “yes,” then the declaring party likely will not be relieved of its contractual duties per the catch-all provision. If “no,” then proceed to (6). Note that catch-all language typically only covers events that are not foreseeable. Foreseeability is a fact-intensive inquiry.
(6) Is the subject event of a like kind to any of the events specifically enumerated in the force majeure clause?
Answer: If “yes,” then proceed to (7). If “no,” then it likely is not a force majeure event. This is because if an event differs from those enumerated in the force majeure clause, then the catch-all provision will likely be of limited utility due to the canon of ejusdem generis. Ejusdem generis dictates that general terms (“causes beyond the reasonable control of the parties”) accompanied by an express enumeration of examples are understood to refer to matters of the same general type as the examples listed. Thus, if the answer to the questions contained above in (2) are “no,” then the catch-all clause is likely to have limited utility to the declaring party. However, if you are the party seeking to declare force majeure, the inclusion of “act of God” provides a basis for the argument that while the event may not fit squarely into the definition of an “act of God” given the level of human agency, it is of the same general type.
(7) Determine what relief the contract provides if subject event qualifies as a force majeure.
V. Conclusion: Beware of Rigid Analysis During These Historic Times
Throughout this article, references have been made to “current jurisprudence.” This term has been used carefully and is intended to denote the fact that we are living in very uncertain times. Not since the Spanish flu epidemic of 1918 has the world seen a contagion that has wrought this level of human and economic destruction. Thus, lawyers and executives alike should approach the courts knowing that legal precedent is just that: a history of prior decisions made in different times. While courts are to follow legal precedent, history has taught us (see, e.g., the Civil Rights era) that pivotal and historically significant times lead to new decisions that part with legal precedent and change the common law landscape. What courts will do when faced with decisions that may determine the viability of entire industries remains to be seen. Lawyers and executives should be cognizant of the broader implications of the legal outcomes they seek and make arguments based on those social and economic considerations when the equities favor them. In the current climate, these types of public policy arguments may be as effective as the strict legal arguments discussed above.
Andrew Hicks is the managing partner and Logan Johnson is a founding partner at Hicks Johnson PLLC. For more information, please contact [email protected] or +1 713 357 5152.
[1] Because the contract at issue in the EFS was not publicly available, for purposes of this analysis we have substituted a typical force majeure definition utilized in a similar energy industry contract (and which also dealt with minimum or guaranteed deficiency payments).
[2] See, e.g., Route 6 Outparcels, LLC v. Ruby Tuesday, Inc., 27 Misc. 3d 1222(A) at *4, 910 N.Y.S.2d 408 (Sup. Ct. 2010), aff’d, 88 A.D.3d 1224, 931 N.Y.S.2d 436 (2011) (“Further, it is [a] well established rule of contract law that force majeure clauses must be narrowly construed.”); Hess Corp. v. ENI Petroleum US, LLC, 86 A.3d 723, 727 (N.J. App. 2014) (“Force majeure clauses are narrowly construed.”).
[3] Gulf Oil Corp. v. Lemmons, 1947 OK 160, 198 Okla. 596, 598, 181 P.2d 568, 570.
[4] See Black’s Law Dictionary (10th ed. 2014) (defining “Act of God” as “an overwhelming, unpreventable event caused exclusively by forces of nature, such as an earthquake, flood, or tornado”) (emph. added).
[5] Wald v. Pittsburgh, Cincinnati, Chicago & St. Louis R.R. Co., 162 Ill. 545, 551, 44 N.E. 888, 889 (1896).
[6] Ejusdem generis literally translated from Latin means “of the same kind or class.” Black’s Law Dictionary (11th ed. 2019)
[7] See, e.g., Kel Kim Corp. v. Cent. Markets, Inc., 70 N.Y.2d 900, 902–03, 519 N.E.2d 295, 296–97 (1987); Save Our Little Vermillion Env’t, Inc. v. Illinois Cement Co., 311 Ill. App. 3d 747, 752, 725 N.E.2d 386, 390 (3d Dist. 2000) (“Under the doctrine of ejusdem generis, where general words follow an enumeration of specific things of a particular class, the general words are to be construed as applying only to things of the same general class as those enumerated.”).
[8] Save Our Little Vermillion Env’t, 311 Ill. App. 3d at 752.
[9] URI Cogeneration Partners, L.P. v. Bd. of Governors for Higher Educ., 915 F. Supp. 1267, 1287 (D.R.I. 1996); see also Clean Unif. Co. St. Louis v. Magic Touch Cleaning, Inc., 300 S.W.3d 602, 610 (Mo. Ct. App. 2009) (“The purpose of a general, catch-all phrase, such as ‘causes beyond [the parties’] control’ in a force majeure or escape clause is to relieve a party of liability when the parties’ expectations are frustrated due to an ‘unforeseeable occurrence’ beyond the parties’ control.”).
[10] See TEC Olmos, LLC v. ConocoPhillips Co., 2018 WL 2437449, at *6 (Tex. App. May 31, 2018).
[11] N. Illinois Gas Co. v. Energy Co-op., Inc., 122 Ill. App. 3d 940, 951–52, 461 N.E.2d 1049, 1058 (1984).
[12] See Watson Laboratories, Inc. v. Rhone-Poulenc Rorer, Inc., 178 F. Supp. 2d 1099, 1110 (C.D. Cal. 2001) (“Moreover, elements of the common law force majeure defense are often read into the force majeure provision of a contract.”); Kleberg Cnty. v. URI, Inc., No. 13-14-00158-CV, 2016 WL 363114, at *13 (Tex. App. Corpus Christi – Edinberg Jan. 28, 2016) (pet. filed) rev’d on other grounds by URI, Inc. v. Kleberg Cnty., 543 S.W.3d 755, 771 (Tex. 2018) (“Contractual terms are controlling regarding force majeure with common law rules merely filling in gaps left by the document.”).
[13] RW Holdings, LLC v. Mayer, 131 A.D.3d 1228, 1230, 17 N.Y.S.3d 171, 173 (N.Y. App. Div. 2015).
[14] See Centex Corp. v. Dalton, 840 S.W.2d 952, 954–55 (Tex. 1992).
[15] See Monroe Dearborn Ltd. P’ship v. Bd. of Educ. of City of Chicago, 271 Ill. App. 3d 457, 462 (1st Dist. 1995) (“The court must give effect to the intent the parties had at the time they entered into the agreement as evidenced by the language used in the contract . . . and it is presumed that the parties contracted with knowledge of the existing law.”) (internal citation omitted); see also Federated Am. Ins. Co. v. Marquardt, 108 Wash. 2d 651, 658, 741 P.2d 18, 23 (1987) (“A contract is not considered impaired by a statute or regulation in force when the contract was made, since it is presumed that the contract was made in contemplation of existing law.”).
[16] See, e.g., Virginia Fuel Corp. v. Lambert Coal Co., Inc., 291 Va. 89, 781 S.E.2d 162 (2016) (coal lease that required purchasers to make royalty payment regardless of whether any coal was mined was an enforceable unconditional guarantee of payment regardless of circumstances or conditions encountered during the mining process or the economic feasibility of continued mining); Babcock Coal and Coke Co. v. Brackens Creek Coal Land Co., 37 S.E.2d 519 (W.Va. 1946) (lessee who had agreed to pay minimum royalties during the contract term regardless of the quantity or quality of coal mined assumed the risk that the amount and quality of coal would be sufficient to aggregate the total of minimum royalties for the term of the lease).
[17] See Orlandi v. Goodell, 760 F.2d 78 (4th Cir. 1985) (where lease requires payment of minimum royalties that are not conditioned on amount of coal actually mined, lessee is liable for payment of such royalties, and the defense of mutual mistake of fact is not available).