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"Force Majeure: One Size Does Not Fit All"

  NOTE: This article was composed for the State Bar of Texas - Corporate Law Section Internet Site.  

 

Force Majeure: One Size Does Not Fit All

Last year's hurricane season underscored the need to include a force majeure provision in contracts. Merely including a clause is not enough. There is no “one size fits all” force majeure clause that will protect all clients, and counsel cannot rely on the common law to fill in the blanks. Under Texas law, contract language controls what qualifies as a force majeure. Accordingly, protecting the client requires carefully crafting the clause to meet each client's needs.

Common Law Force Majeure v. Contract Force Majeure: Texas courts abandoned the common law concepts of force majeure in favor of contractually defined force majeure. At common law, a “force majeure” was an unforseeable event or condition which rendered a party's performance impossible, and which was beyond the party's control. Under current Texas law, a force majeure event is quite simply whatever the contract says that it is. Force majeure events may be manmade (sabotage), societal (riots, terrorism), political or governmental (changes in law or even ruling regimes), market conditions (inability to obtain goods), or natural occurrences (hurricanes, floods, tornadoes). A contract clause can excuse nonperformance whether the clause is captioned “force majeure” or the term “force majeure” dos not appear in the contract at all. Often the language excusing nonperformance is embedded within clauses such as delay, transfer of risk, or performance obligation clauses. Since force majeure is contractually defined, the question becomes, what should be considered when drafting or evaluating a force majeure clause?

Controlling law: The threshold issue is which state's law will control? If Texas law controls, then the contract defines the circumstances which excuse nonperformance. On the other hand, if the law of another state controls, that state's law needs to be reviewed as it will likely vary significantly from Texas. Unlike Texas, many states do rely on common law concepts of force majeure. In Texas the nonperforming party always has the burden of proving a force majeure exists. Others states often imply a force majeure clause even if the contract is silent. Texas law will not imply terms or conditions, nor fill gaps with principles drawn from the common law. In Texas, absent a force majeure clause, the obligation to perform is absolute and cannot be excused even though performance may be impossible due to causes beyond the party's control. Texas law restricts itself to interpreting unambiguous force majeure clauses based on plain grammatical meaning.1

Syntax: Although the use of the phrase “force majeure” is not necessary to excuse nonperformance, the syntax of a force majeure clause can determine whether a party is excused. Consider this clause:

Example 1: Either seller or buyer will be excused from the obligations of this contract to the extent that performance is delayed or prevented by any circumstances (except financial) reasonably beyond its control or by fire, explosion, mechanical breakdown, strikes or other labor trouble, plant shutdown, unavailability of raw materials…. 2

This contract, like many, references circumstances “beyond control” and follows the reference with a list of specific force majeure events. In contrast, Example 2 lists the specific events and then references the forces beyond control.

Example 2: When drilling or other operations are delayed or interrupted by lack of water, labor or materials, or by fire, storm, flood, war, rebellion, insurrection, riot, strike differences with workmen, or failure of carriers to transport or furnish facilities for transportation, or as a result of some order, requisition or necessity of government, or as a result of any cause whatsoever beyond the control of the lessee…. 3

In terms of content, the two examples are similar. But the legal effect is very different. In the first example, the court held because the reference to “reasonably beyond its control” language was followed by “or”, the party was excused if one of the listed events occurred even if the party could have prevented the event. The events (fire, explosion, etc.) listed after the “or” were force majeure events independent of whether the events were reasonably beyond control of the nonperforming party. The party did not have to prove the explosion was beyond its control. In contrast, in the second example, the court held that because the phrase “any cause whatsoever beyond the control” occurred after the list of events, the phrase modified the preceding items. The enumerated events were force majeure events only if the events were also beyond control. In the latter, the party did have to prove the event was beyond control.

Impossibility: At common law impossibility of performance or events “beyond control” were essential to the force majeure event. Texas courts hold that impossibility is not necessary for an event to be a force majeure unless the contract says it is. The courts hold that if the clause does not require “impossibility” or that the events or conditions be “beyond control,” then impossibility will not be implied. 4 Consider a contract where “inability to obtain transportation” was a force majeure. The contract also provided that the mode of transportation was “rail unless otherwise agreed.” Is there a force majeure when there is an inability to obtain rail transportation, even if the goods could be transported by truck? The court said yes, that absent the prior mutual agreement to use other transportation, the inability to obtain “rail” transport excused performance.5

Duty to mitigate: A corollary issue is whether the force majeure clause should include a duty to abate the event or mitigate the effects. Again, if the contract does not express the duty, none will be implied. Clearly forces of nature, such as hurricanes, are events that cannot be controlled by a party to a contract. However, market forces, such as availability of goods or transportation, may be controlled to some extent. For example, many clauses excuse performance based on inability to obtain labor, and after Katrina many parties claimed force majeure based on unavailability of labor or goods. Yet some companies were able to obtain both. Is there a duty to obtain labor at all costs? Not unless the contract says there is. Some contracts temper this “all or nothing” approach to duty by requiring a party to use “commercially practicable” efforts to resume contract compliance.

Priority: Counsel also need to consider the priority of force majeure clauses within the contract as a whole. The force majeure may be inconsistent with other terms. For example, one clause provides that the “operator shall assume liability at all times for damage...” to equipment. The force majeure clause provides that neither party is responsible for damages resulting from events beyond the parties' control. Is the operator liable for damages resulting from uncontrollable forces? Predictably, one party argued that “at all times” meant exactly that, and the operator had liability despite the force majeure. The other party argued the force majeure clause trumped the operator liability clause. In the end, the clause was deemed ambiguous and became a fact issue for the jury.6 If the force majeure clause is intended to control, a statement to the effect may save the client from the courtroom.

Notice: Should notice be required, and if so, should it be a condition precedent to relief? Contracts commonly require notice to ensure the other party has the opportunity to cure or to at least mitigate damages. Frequently clauses go further and make notice a condition precedent, or provide that failure to give notice within a set number of days waives any right to claim relief from the force majeure. Texas courts have not addressed whether such a condition is enforceable in events, such as Katrina, where actual knowledge is undisputed. Further, any notice requirements need to be reviewed in the context of Texas Civil Practice and Remedies Code 16.071, which voids requirements that a claimant give notice in less than 90 days as a condition precedent to suit.

Type of relief: Force majeure clauses excuse performance, sometimes temporarily, sometimes permanently. Force majeure clauses may also specify the relief available such as providing entitlement to costs incurred in resuming contract performance, or allowing partial performance, such as the seller's allocation of product among all buyers.

In sum, the greater the downside to nonperformance, the more important the force majeure clause. When reviewing or drafting force majeure clauses, do not rely on boilerplate provisions and do not rely on the common law to fill in the gaps. Given the court's repeated insistence on interpreting the plain language and its refusal to imply terms, the time to craft a clause that serves the client's interest is time well spent.

Endnotes:

1 See Sun Operating Ltd. P'ship v. Holt, 984 S.W.2d 277, 282-85 (Tex. App. - Amarillo 1998, pet. denied).

2 PPG Indus., Inc. v. Shell Oil Co., 727 F. Supp. 285, 287 (E.D. La. 1989), aff'd, 919 F.2d 17 (5th Cir. 1990).

3 Sun Operating Ltd. P'ship, 984 S.W.2d at 280.

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

5 See Jon-T Chem., Inc. v. Freeport Chem. Co., 704 F.2d 1412 (5th Cir. 1983).

6 Zurich Am. Ins. Co. v. Hunt Petroleum (AEC), Inc., 157 S.W.3d 462 (Tex. App. - Houston [14th Dist.] 2004, no pet.).

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