Force Majeure? More Like ‘Force Ma-Payment’: Dealing with Payment Excuses in the COVID-19 Era

Ross Angus Williams and Craig M. Warner of Bell Nunnally outline some common defenses to payment that may crop up as the COVID-19 pandemic continues and how to deal with them.

BY ROSS ANGUS WILLIAMS AND CRAIG. M. WARNER, BELL NUNNALLY

Many factoring companies may have to grapple with parties who assert that the COVID-19 pandemic should release them from their obligations under a factoring agreement or the invoices assigned under it. In many states, including Texas (where we primarily practice), the answer will most often depend both upon the language of the contract itself and upon whether the objective of the contract has become truly impossible to perform.

Force Majeure

Force majeure — French for “superior strength” — is a type of contract clause that can operate as a release when unforeseen circumstances prevent a party’s performance.

A typical force majeure clause might read as follows:

Should performance of any obligation ... become illegal or impossible by reason of fire, flood, act of God, governmental authority, labor disputes, war or any other cause not enumerated herein but which is beyond the reasonable control of the party whose performance is affected, then the performance of any such obligation is suspended during the period of, and to the extent of, such prevention or hindrance, provided the affected party provides reasonable notice of the event of force majeure and exercises reasonable diligence to remove the cause of force majeure.

As is the case in many states, Texas law on force majeure clauses is nuanced and well-developed. The upshot of the case law is the effect of a force majeure clause in a given case is limited to and controlled by the parties’ intent as expressed in the contract’s terms — the words used or left out matter. Courts are typically loathe to rewrite the parties’ force majeure clause or interpret it in a way that the clause itself does not suggest.

Courts in many jurisdictions, including Texas, won’t even require the party making the force majeure excuse to show they were reasonably diligent in trying to avoid the cause of their inability to perform, unless the contract expressly requires such diligence. So, in the context of COVID-19, a party could claim an outbreak that sidelined its workers excuses its duty to perform on the contract even if no precautions were taken to prevent the outbreak if the contract has a force majeure clause that does not expressly require the exercise of reasonable diligence.

Many courts, including those in Texas, will presume the parties to a force majeure clause intended to excuse contractual performance only when the intervening obstacle was unforeseeable. The fact that performance has become unprofitable, or even economically ruinous, does not, by itself, qualify under this standard because economic downturns are not unforeseeable. One could argue pandemics are similarly foreseeable, although they have occurred less frequently than economic downturns — at least in modern times.

Also, the fact that a calamitous event has a major historic impact does not, by itself, guarantee that courts will find that a particular force majeure clause encompasses that event. This is true in Texas and in other jurisdictions. Litigation in federal court in the months following the Sept. 11, 2001, attacks made this clear, as courts recognized severe economic hardship imposed by performing a contract following the terror attacks would not, by itself, be sufficient enough to trigger a force majeure excuse to performance. 

Finally, when a client attempts to evade a force majeure clause, it is critical to pay special attention to any notice provisions the clause contains. Many clauses require reasonable notice, within a specified time frame after the force majeure event — for example, a clause stating a party “shall give immediate notice thereof to the other party.” When a contract contains such a clause, courts have ruled it precludes reliance on a force majeure clause excuse. In the context of COVID-19, determining when the force majeure event occurred must be done on a case-by-case basis.

How do force majeure clauses apply when a party claims COVID-19 made the contract unworkable? It depends on how the clause is worded. If the force majeure clause expressly references pandemics, pathogens, quarantines or epidemics, the party seeking to be excused at least has a strengthened argument. References to governmental action, national emergencies, labor stoppages, military interventions or supply chain problems may also help the party trying to avoid keeping its promises if the alleged difficulties are claimed to have arisen under government orders to close or limit businesses and/or stay at home.

Without such language, the party trying to avoid its obligations has a weaker argument. Expect them to focus on the meaning of phrases like “act of God” contained in most force majeure clauses. Precedent reflecting on the meaning of this phrase in a situation like the COVID-19 pandemic is sparse, however. Certainly, there is an argument that this has been an unforeseeable event and thus within the realm of the “act of God” catchall phrase. On the other hand, this is not the first pandemic in human history.

The case law coming out of the pandemic so far suggests factoring companies, like other parties seeking to enforce a contract over COVID-19-based force majeure objections, should consider the following in assessing the chances of avoiding the force majeure excuse:

• Does the force majeure clause broadly cover events caused by conditions “beyond the reasonable control” of the party seeking to get out without listing any specific conditions or does it specifically reference “disease outbreak,” “pandemic,” or the like or cover only “acts of God” and “civil/military/government acts or action”?

• If the answer is yes to any, then does the force majeure clause excuse performance when “inadvisable” or “commercially/economically impractical” or when  performance is “impossible”?

• If the answer is yes, and the party has a reasonable argument this is the case, then does the contract expressly provide that performance is excused if the clause is triggered?

• If the answer is yes, then was notice of the alleged force majeure required and was the correct notice given in the correct form by the correct method and in a timely manner? If yes, then performance may well be excused under the clause.

A party’s complete failure or inability to show they qualify under any of the list items above will likely mean they cannot excuse themselves from their contractual obligations by invoking the force majeure clause for alleged COVID-19 reasons.

Impossibility of Performance

In the absence of an effective and timely invoked force majeure clause, a party breaching a contract may try to use the common law defense of “impossibility of performance.” 

With regard to the impossibility defense, Texas and many other jurisdictions follow the Restatement (Second of Contracts) Section 261:

“Where, after a contract is made, a party’s performance is made impracticable without his fault by the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made, his duty to render that performance is discharged, unless the language or the circumstances indicate the contrary.”

For deliveries of goods, Texas and many other jurisdictions have enacted the Uniform Commercial Code, which has a similar provision:

“Delay in delivery or non-delivery in whole or part by a seller who complies with Subdivisions (2) and (3) is not a breach of his duty under a contract for sale if performance as agreed has been made impracticable by the occurrence of a contingency the non-occurrence of which was a basic assumption on which the contract was made.”

Many courts have been loath to excuse performance on a contract under such a defense during the pandemic, reasoning if the parties’ contract did not provide for an excuse by force majeure, then they chose to take the risk that such events would not be allowed to excuse performance.

Although courts in almost all jurisdictions construe the “impossibility” defense narrowly, both sides of a dispute over an impossibility defense will be well-served to make substantial efforts to perform and to comprehensively document those efforts, the intervening circumstances and their impacts. For suppliers of goods, for instance, the disruption of supply chains may not be sufficient if the firm has not made substantial efforts to re-source and work around the problem. Likewise, the quarantine of a critical person may be sufficient to establish “impossibility,” but only if the company has made valid efforts to replace their contribution to the performance of the contract. 

Stay-at-home orders, similar government directives and workplace outbreaks that close certain businesses may provide adequate grounds for an impossibility defense in some contexts — but the details will matter. And if there’s one thing COVID-19 has taught us, it is businesses can many times find a way to keep moving forward during economically stressful times if they take advantage of the options available and take reasonable steps to keep moving. When it comes to payment excuses and COVID-19, if there isn’t an enforceable, applicable and complied-with force majeure clause, then impossible is often nothing.

The information provided in this article does not, and is not intended to, constitute legal advice; instead, all information, content and materials available are for general informational purposes only and may or may not be up to date.

Ross Angus Williams is a partner with Bell Nunnally in Dallas. He can be reached at rwilliams@bellnunnally.com.

Craig M. Warner is a partner with Bell Nunnally in Dallas. He can be reached at cwarner@bellnunnally.com.