In light of the widespread flooding, physical devastation, and economic disruption caused by Hurricane Harvey, an evaluation of force majeure provisions in relevant contracts may be in order. Affected companies should consider the following:
Texas courts interpret force majeure clauses based on the words used, not common law principles.
In Texas, the actual terms of the force majeure clause at issue are controlling, and common law rules “merely fill in gaps,” if there are any. Texas courts have observed that “force majeure is now little more than a descriptive phrase without much inherent substance.”
Thus, several common law concepts, such as reasonable control over the force majeure event and reasonable efforts to overcome such an event, will be applied based on the actual language in the clause itself. Many other states require that the force majeure event not be within the reasonable control of the party claiming force majeure and apply a reasonable efforts requirement after the event, even if such language is not included in the force majeure clause.
Most force majeure clauses do contain “outside of reasonable control” language. Typically, clauses enumerate certain events of force majeure then state “or other circumstances or events not within the reasonable control of a party.” Those clauses are enforced as written in Texas. Moreover, the location of the “reasonable control” requirement within the force majeure clause matters; such a qualification at the beginning of the clause may not apply to the list of specific events that follows, whereas when a “reasonable control” requirement comes after a specific list of events, that clause will typically be read to require that any such event not be within a party’s control.
Similarly, in the absence of express language, Texas courts do not typically require that a party use reasonable efforts to overcome a force majeure event. And even when force majeure clauses require a party to attempt to avoid the effects of force majeure, Texas courts may limit the reach of that requirement. For example, a gas supplier was prevented by force majeure from delivering to the location specified in the customer’s contract, but admitted that it had the ability to deliver to a different location. It was held that, even though the contract contained an obligation that the supplier use reasonable efforts to avoid the adverse impacts of the force majeure event, the clause could not require the supplier to deliver to a location that it had not agreed in the contract to deliver to. The court found that such a reading would render the force majeure clause meaningless.
In the absence of a force majeure clause, Texas courts have adopted several common law principles that may apply.
Even when a contract does not contain a force majeure provision, there are several principles that may be applied to avoid the contract’s requirements when performance is made impossible by, for example, a flood. Texas recognizes the doctrine of commercial impracticability, though Texas courts typically refer to the doctrine as “frustration of purpose” or “impossibility of performance.” Under this doctrine, performance is excused when a party’s performance is made impracticable, without its fault, by the occurrence of an event, the non-occurrence of which was a basic assumption on which the contract was made.
The classic example is that a contract to lease or insure a building is rendered impracticable if the building is destroyed. Similarly, a change in law that makes the performance of a contract illegal also renders performance impracticable (and excuses it). Thus, if the effect of the storm has rendered performance impossible, even in the absence of an express force majeure “out” in the contract, a party may be able to rely on the frustration of purpose or impossibility of performance doctrines to avoid performance or defend a claim of breach of contract.
Harvey represents a classic force majeure event, but what is required afterwards?
Because Texas courts rely on the clause as written over common law principles, if a contract contains a force majeure clause, read it and strictly comply with its terms. Is there a notice requirement, i.e., a date certain by which force majeure must be claimed? Are there obligations to attempt to avoid the impact of the force majeure event? Are there restrictions on how long a force majeure claim can last?
In the absence of specific direction from the contract itself, suppliers often find themselves in post-force majeure events where they have limited inventory and must allocate that limited supply to numerous customers. In such circumstances, the supplier must make a “fair and reasonable” allocation. The following factors have been deemed to be not “unreasonable” as a matter of law in making that allocation: past sales history, customer loyalty, customer needs, relationship between the seller and the buyer, and seller’s projections concerning potential future sales to a given buyer.
On the other hand, allocation has been found to be unreasonable in the following circumstances: the supplier had no criteria for allocation, the supplier allocated to customers that were not regular customers and not under contract at the time the supplier became unable to perform, and the supplier allocated to its own subsidiary and favored its own needs over the needs of its customers.
When notifying contracting counter-parties of a force majeure event, it is important to strictly comply with the requirements of the force majeure clause, which may specify the amount of detail required in the notice. In the absence of such guidance, a claim of force majeure should specify the event that is the cause of the force majeure claim, the anticipated duration of the force majeure claim, and efforts that are being made to avoid the effects of the force majeure, if any.
Similarly, when responding to claims of force majeure, a party should request the information above, such as the expected duration of the force majeure event and the efforts that are being made to avoid its effects. And if seeking deliveries of goods, the buyer should seek a reasonable allocation when any supply becomes available.
Finally, a party should be cautious of the general rule that force majeure can only be claimed so long as the force majeure event remains in effect and prevents performance. Many contracts place an affirmative duty on the party claiming force majeure to immediately notify the counter-party as soon as the event or its effects cease.