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Application of Force Majeure Clauses and Common Law Doctrines of Impossibility and Frustration of Purpose in the Wake of COVID-19 under Texas, New York, and Delaware Law

By Lauren Neeley & Amy Kearney
McGuire, Craddock & Strother
April 1, 2020

In an effort to minimize the financial ramifications of the global coronavirus or “COVID-19” pandemic, clients and practitioners alike are turning to contractual provisions and common law doctrines to defer, and even excuse, performance of contractual obligations. The first two sections of this article briefly summarize the treatment of three oft-cited safe harbors for non-performing parties—contractual force majeure clauses and the common law doctrines of impossibility and frustration of purpose—under Texas, New York, and Delaware law. The third section provides a step-by-step guide to determining the viability of a force majeure or common law defense and some practical considerations when invoking, or responding to, these legal defenses. When considering the validity of the predictions set forth in this article, it is important to keep in mind that courts will be applying traditional interpretations of these defenses to novel, evolving circumstances. Consequently, our initial forecast of the legal climate may shift as the nation—and our courts—address the effects of COVID-19.

FORCE MAJEURE CLAUSES: THE FIRST LINE OF DEFENSE

Texas law provides that when a contract contains a force majeure clause, the scope and application of such clause is, for the most part, “utterly dependent upon the terms of the contract” in which the force majeure clause appears.[1] The party seeking to excuse its performance under a contractual force majeure provision bears the burden of proof to establish that defense.[2] Catch-all phrases that follow a list of specific events within a force majeure clause, such as “and other similar events beyond the parties’ control,” may extend the reach of a force majeure provision through the application of the doctrine of ejusdem generis, which includes events like those specifically listed within the scope of the force majeure clause.[3] However, Texas courts will not construe catch-all provisions to encompass events that are foreseeable.[4] For example, in Valero Transmission Co. v. Mitchell Energy Corp., a Texas court held that a catch-all phrase excusing a party’s performance “due to causes beyond its reasonable control” did not justify a party’s failure to continue purchasing natural gas in accordance with the terms of its contract due to an economic downturn.”[5] According to the court, “an economic downturn in the market for a product is not such an unforeseeable occurrence that would justify application of the force majeure provision, and a contractual obligation cannot be avoided simply because performance has become more economically burdensome than a party anticipated.”

Like Texas, New York law construes force majeure clauses narrowly, excusing contractual obligations only if an event specifically enumerated in the contract prevents performance or frustrates the contract’s purpose.[6] “When parties have defined the contours of force majeure in their agreement, those contours dictate the application, effect and scope of the force majeure.”[7] If the event precluding performance is not expressly mentioned but the force majeure clause contains a catch-all phrase, New York courts also apply the doctrine of ejusdem generis.[8] As in Texas, non-performing parties bear the burden of proof and must establish that failure to perform was the unavoidable result of an event beyond their control.[9] Further, “[m]ere impracticality or unanticipated difficulty is not enough to excuse performance.”[10] For example, similar to Texas courts, New York courts routinely reject financial hardship or a global economic downturn as grounds for non-performance, reasoning that economic factors, while unpredictable, “are never completely unforeseeable” since they constitute “an inherent part of all sophisticated business transactions.”[11]

Delaware law adopts an interpretation of force majeure clauses similar to that of Texas and New York, focusing on the plain meaning of contract language to determine their applicability.[12] As in Texas and New York, a non-performing party must prove that the event thwarting performance was beyond its control and without its fault or negligence.[13] Delaware law also supports the premise that reasonable, unextreme economic hardship alone falls short of a force majeure event.[14] When determining the scope and application of force majeure clauses and any catch-all phrases included within them, Delaware courts focus more on the intent of the drafting parties than the strict characterization or, absent a nonforeseeability condition in the contract, the foreseeability of the claimed, triggering event.[15] In Stroud v. Forest Gate Dev. Corp., for instance, a Delaware court analyzed the parties’ intent and concluded that, given the underlying purpose of the parties’ contract, the parties expected the catch-all phrase “any reason whatsoever beyond the control of [non-performing party],” to include “delays” even though only “fire, strikes, and acts God” were listed.[16]

In light of this legal precedent, each COVID-19 force majeure case hinges on a contract’s express terms. The devil is truly in the details. A party hoping to use a force majeure clause as a defense must (i) carefully review and analyze the exact language to determine whether the claimed event (here, the COVID-19 outbreak) qualifies as a specified force majeure event or falls under a catch-all phrase, and (ii) establish a causal link between such event and non-performance unattributable to such party’s fault or negligence and depending on the jurisdiction, unforeseeable. Cases in New York and Delaware indicate that the chances of success for a party that fails to perform its rental obligations under a contract increase if a non-performing party’s force majeure clause lists governmental acts as a supervening event.[17] In Burnside v. Nassau Regional Off-Track Betting Corp., for instance, the defendant lessee, a regional off-track betting corporation, evaded its rental obligations when the court construed a town ordinance restricting the location of off-track betting parlors as a “governmental action” under the force majeure clause and invalidated its lease.[18] Similarly, in Reade v. Stoneybrook Realty, LLC, a New York court ruled that a judicial temporary restraining order fell within the meaning of the term “governmental prohibition” and must be accounted for when determining rent abatement obligations under the parties’ commercial lease.[19] As governmental authorities direct business closures and quarantine citizens, courts may fit COVID-19 within force majeure clauses specifically referencing governmental acts or even enumerated public health events, such as pandemics or disease outbreaks.

PLAN B: COMMON LAW DOCTRINES OF IMPOSSIBILITY AND FRUSTRATION OF PURPOSE

In the absence of a force majeure clause expressly set forth in a contract, the common law defense of impossibility remains available, albeit limited in its application. Under Texas law, the defense of impossibility (also known as the defense of impracticability) excuses contract performance when, after a contract is made, a party’s performance is made impracticable by the occurrence of an event, the non-occurrence of which was a basic assumption on which the contract was made, and the occurrence of which  was not a result of any act or omission of the non-performing party.[20] Under New York law, the defense of impossibility only applies when “the destruction of the subject matter of the contract or the means of performance makes performance objectively impossible.”[21] Such impossibility “must be produced by an unanticipated event that could not have been foreseen or guarded against in the contract.”[22] Likewise, under Delaware law, only fortuitous impossibility excuses liability.[23] Stated differently, a party invoking this doctrine must provide affirmative evidence that its performance is “rendered impossible by an act of God, law or the other party,” and cannot be performed “by any means.” [24]

While not available as a defense in Texas,[25] both New York and Delaware also recognize the doctrine of frustration of purpose, which may be used as a defense upon the satisfaction of three factors: “(1) the purpose that is frustrated must be the principal purpose of the contract; (2) the frustration of that purpose must not be the fault of the party seeking to be excused from performance; and (3) the occurrence of the event must not have been foreseen at the time of the contract’s formation.”[26] Non-performing parties face an uphill battle when citing this defense. The doctrine only applies if the frustration is substantial and strikes at the heart of the contract’s main purpose.[27] As with force majeure clause cases, mere financial difficulty – even to the extent of bankruptcy or insolvency – does not discharge performance.[28]

While COVID-19 may constitute a fortuitous event, these common law constructs require well-documented proof that the challenged contract is truly incapable of being performed. Despite this higher evidentiary standard, however, ample authority suggests that courts may excuse performance if governmental measures render performance impossible.[29] In Bush v. Protravel Int’l, Inc., for example, a New York court excused a party from its failure to cancel a travel contract in accordance with its terms when, immediately following the September 11, 2011 attacks, “New York City was in the state of virtual lockdown with travel either forbidden altogether or severely restricted.”[30] Specifically, the court held that measures taken by the State and City governments, including a declaration of a State of Emergency, rendered performance impossible.[31] As more governmental regulations and executive orders indefinitely suspend travel and business operations, courts may exercise judicial leniency and uphold these common law defenses with greater frequency.

THE PRACTICALITIES OF SUSPENDING OR ENFORCING PERFORMANCE

Keeping the above-referenced case law in mind, below is a step-by-step guide to determining the viability of a force majeure defense. Whether the goal is to suspend or enforce performance, the analysis will be relatively the same.

STEP ONE: Consult the terms of the contract to determine whether it contains a force majeure clause. If no force majeure clause exists, skip to STEP SEVEN below.

STEP TWO: Identify the governing law of the contract.

STEP THREE: If a force majeure clause does exist, review the list of force majeure events to see whether the COVID-19 pandemic qualifies as a force majeure event specified under the contract. In particular, see if the enumerated events include acts of government and/or public health-related issues, e.g., pandemics or disease outbreaks. Also, determine whether the force majeure clause defers or entirely excuses performance and note when such deferment or excuse takes effect.

STEP FOUR: Review catch-all phrases, if any, in the force majeure provision. Depending upon the jurisdiction, consider whether (i) the claimed event is similar to those specifically listed in the force majeure clause, (ii) the parties intended to expand the scope of the force majeure clause to further the purpose of the contract, and (iii) the claimed event is foreseeable and not caused by the party claiming the defense.

STEP FIVE: Assess whether a causal link exists between the claimed force majeure event (i.e., the COVID-19 pandemic) and non-performance.

STEP SIX: Review the contractual requirements, if any, for notice. Force majeure clauses may either require (i) a minimum amount of notice in advance of the triggering event, or (ii) notice within a certain period of time after the triggering event. Failure to provide timely notice may bar relief under a force majeure clause, even if the specific event is enumerated.[32] Also consider the following:

A. The practical implications of the timing of notice: A party wishing to invoke a force majeure clause by sending notice should be careful to avoid any claims for breach of contract or anticipatory repudiation.

B. The proper notice method (e.g., the required form of notice, party(ies) to whom such notice must be sent, and manner in which it must be sent) and whether notice must be accompanied by supporting evidence.

Notwithstanding the particulars of a contract’s notice provisions, a party seeking relief via a force majeure clause should maintain accurate records of its efforts to resume performance or mitigate the effects of non-performance following the occurrence of the alleged triggering event. Conversely, a party receiving a notice invoking force majeure should require the notifying party to supply regular mitigation reports and other evidence of its inability to perform. In the event of a dispute, the parties may rely on these records to prove or disprove the non-performing party’s continued efforts to perform its contractual duties despite the occurrence of an event beyond its control and without its fault.

STEP SEVEN: Absent a force majeure clause, determine whether the common law doctrine of impossibility may justify non-performance. Specifically, assess whether the claimed event renders performance objectively impossible.

STEP EIGHT: If the dispute is governed by either New York or Delaware law, assess whether a defense to non-performance exists under the frustration of purpose doctrine. In particular, determine whether the principal purposes of the contract have been frustrated by an event that could not have been foreseen at the time of contract execution.

STEP NINE: When all else fails, use common sense. Faced with impeding legal fees and court costs, the smartest, and perhaps most commercially reasonable, option may be to amend the contract to defer (or excuse) performance while governmental restrictions prevent performance. An analysis of the relevant case law reveals the importance of making this decision on a case-by-case basis, taking the willingness of the parties, the contract language, and any potential insurance proceeds or governmental assistance into account. The benefits of reducing an agreement to writing, however, present parties with a unique opportunity to infuse certainty into an increasing uncertain economic climate.

For more information or for advice specific to your contractual relationships, please contact Lauren Neeley at [email protected] or Amy Kearney at [email protected].

This correspondence should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult a lawyer concerning your own situation and legal questions.

[1] Sun Operating Ltd. P’ship v. Holt, 984 S.W.2d 277, 283 (Tex. Civ. App.—Amarillo 1998, pet. denied).

[2] Virginia Power Energy Mktg., Inc. v. Apache Corp., 297 S.W.3d 397, 402 (Tex. Civ. App.—Houston [14th Dist.] 2009, pet. denied).

[3] TEC Olmos, LLC v. ConocoPhillips Co., 555 S.W.3d 176, 185 (Tex. Civ. App.—Houston [1st Dist.] 2018, pet. denied).

[4] Id. at 182.

[5] Valero Transmission Co. v. Mitchell Energy Corp., 743 S.W.2d 658 (Tex. Civ. App.—Houston [1st Dist.] 1987, no writ).

[6] Kel Kim Corp. v. Cent. Markets, Inc., 70 N.Y.2d 900, 902–03 (1987).

[7] Constellation Energy Servs. of New York, Inc. v. New Water St. Corp., 146 A.D.3d 557, 558 (N.Y. App. Div. 2017); Route 6 Outparcels, LLC v. Ruby Tuesday, Inc., 88 A.D.3d 1224, 1225 [3d Dept.2011]).

[8] See Team Mktg. USA Corp. v. Power Pact, LLC, 41 A.D.3d 939, 942–43 (2007); but see Castor Petroleum v. Petroterminal De Panama, 107 A.D.3d 497 (2013) (holding that the attachment of plaintiff’s oil due to lawsuits fell within the contract’s “relatively broad” catch-all provision—“or other similar or dissimilar event or circumstances”— and excused defendant’s contractual obligations despite the fact that the force majeure clause only listed “government embargo or other interventions” as triggering events).

[9] Constellation Energy, 146 A.D.3d at 559; see also Aukema v. Chesapeake Appalachia, LLC, 904 F. Supp. 2d 199, 210 (N.D.N.Y. 2012).

[10] Aukema, 904 F. Supp. 2d at 210 (citing Phibro Energy, Inc. v. Empresa De Polimeros De Sines Sarl, 720 F.Supp. 312, 318 (S.D.N.Y.1989)).

[11] Macalloy Corp. v. Metallurg, Inc., 284 A.D.2d 227, 227–28 (2001).

[12] VICI Racing, LLC v. T-Mobile USA, Inc., 763 F.3d 273, 287 (3d Cir. 2014); see also Stroud v. Forest Gate Dev. Corp., No. CIV.A. 20063-NC, 2004 WL 1087373, at *5 (Del. Ch. May 5, 2004) (providing that the application of a force majeure provision, as with any other contractual provision, starts with the words chosen by the drafters).

[13] Gulf Oil Corp. v. F.E.R.C., 706 F.2d 444, 452 (3d Cir. 1983).

[14] VICI Racing, 763 F.3d at 288 (3d Cir. 2014).

[15] VICI Racing, 763 F.3d at 289 (3d Cir. 2014).

[16] Stroud, No. CIV.A. 20063-NC, 2004 WL 1087373, at *5 (parenthetical added).

[17] Castor Petroleum, 107 A.D.3d at 968; Aukema, 904 F. Supp. 2d at 210; In re Atl. Gulf Communities Corp., 369 B.R. 156, 166–67 (Bankr. D. Del. 2007).

[18] Burnside 711, LLC v. Nassau Reg’l Off-Track Betting Corp., 67 A.D.3d 718, 719 (2009).

[19] Reade v. Stoneybrook Realty, LLC, 63 A.D.3d 433, 434 (2009); see also Bouchard Transp. Co. v. New York Islanders Hockey Club, LP, 40 A.D.3d 897, 898 (2007) (holding that a labor dispute involving a league-wide lockout ordered by the Commissioner of the National Hockey League, of which lessor was one of 30 teams, was a cause “beyond the lessor’s control,” within the meaning of force majeure clause of lease agreement, thereby excusing lessor’s nonperformance under said lease).

[20] Samson Expl., LLC v. T.S. Reed Properties, Inc., 521 S.W.3d 766, 775 (Tex. 2017).

[21] Kel Kim, 70 N.Y.2d at 902.

[22] Kel Kim, 70 N.Y.2d at 902.

[23] See Martin v. Star Pub. Co., 50 Del. 181, 188 (1956) (citing Corbin on Contracts § 1329 and holding that impossibility originating from financial incapacity affords no excuse).

[24] Bell Atl. Dir. Servs., Inc. v. Delaware Law Ctr., Inc., No. CRIM.A. 1997-07-083, 2000 WL 33654061, at *1 (Del. Com. Pl. Dec. 14, 2000).

[25] Walden v. Affiliated Computer Servs., Inc., 97 S.W.3d 303, 317 (Tex. Civ. App.—Houston [1st Dist.] 2003, pet. denied).

[26] In re Atl. Gulf Communities Corp., 369 B.R. at 166–67 (citing the Restatement (Second) of Contracts § 265).

[27] Rockland Dev. Assocs. v. Richlou Auto Body, Inc., 173 A.D.2d 690, 691 (1991).

[28] Rivas Paniagua, Inc. v. World Airways, Inc., 673 F. Supp. 708, 715 (S.D.N.Y. 1987).

[29] Bush v. Protravel Int’l, Inc., 192 Misc. 2d 743, 750 (Civ. Ct. 2002); In re Atl. Gulf Communities Corp., 369 B.R. at 166–67.

[30] Bush, 192 Misc. 2d at 750.

[31] Bush, 192 Misc. 2d at 750.

[32] Toyomenka Pac. Petroleum, Inc. v. Hess Oil Virgin Islands Corp., 771 F. Supp. 63, 68 (S.D.N.Y. 1991) (noting that a force majeure notice outside the applicable notice period may waive the applicability of a force majeure clause if the parties intended such notice to be a condition precedent to such clause’s effectiveness).