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Ask Stephanie: Should I update my Contracts in Response to COVID-19?

As we watch the Nation shut down major events, restaurants, and bars as well as limit social gatherings to a small amount of people, what happens to contracts that may not be able to be fulfilled because of the rippling effect of COVID-19, the “Coronavirus”? The answer lies in whether the parties have a written contract. And, if the terms of that contract contain a “Force Majeure” clause that may be triggered by a pandemic event as we have seen in the recent days.

Most contracts contain a “Force Majeure” clause that potentially allows a party to not fulfill its obligations due to an unforeseeable event. Typically these Force Majeure clauses reference an “Act of God” and other specific events that would invoke the clause and allow a party to get out of the contract without penalty. But, what really is an event that is covered under the clause and what does it mean to be unforeseeable? Is a pandemic considered an Act of God?

The answers to these questions lie in the text of the contract and the specific wording of the Force Majeure clause in your own contract. There is not a standard clause used in all contracts so the specific terms will vary from document to document. Many courts, including in Texas, rely on the plain meaning of the words used in the contract to determine the meaning and interpretation of contract clauses. That means that the actual words used in your contract will ultimately be the deciding factor as to whether the Force Majeure clause may be invoked.

Force Majeure provisions list specific events that trigger the clause. If a specific event is listed, the clause will likely be invoked if and when certain standards are met. The standard required to invoke Force Majeure again depends upon the words used in the contract. Typically the standard is that the event must make fulfilling the terms of the contract illegal, impossible, impracticable, or otherwise not reasonably possible. Further, contracts typically have  “catch all” language to attempt to allow for more events to trigger the clause than what are listed specifically. In Texas, courts have limited the applicability of catch all phrases stating that while an event specifically listed may not have to be unforeseeable to trigger the clause, an event not specifically listed must be unforeseeable to be invoked. Therefore, it is best to specifically list any event that could possibly occur to avoid this confusion. Contract provisions may also have a notice requirement stating when and how a party must notify the other party to invoke the Force Majeure clause. If this notice is not given in accordance with the contract, the Force Majeure clause may not apply. Again, invoking and enforcing the Force Majeure clause will depend on the language used in your contract.

Before the recent events surrounding COVID-19, most contracts likely did not specifically list items such as pandemics or epidemics in the Force Majeure clause. To avoid confusion and possible litigation to determine if something like the Coronavirus invokes the Force Majeure clause in your contract, it is now time to review and edit your contracts to specifically list this type of event if it is the desire of the parties to do so.

 

Disclaimer:
"This blog is for informational purposes only and is not intended to create an attorney-client relationship. It is recommended that you speak to an attorney licensed in your jurisdiction before relying on the information in this blog."

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