CHAPTER 5 FORCE MAJEURE 2020: CAN WE PLEASE BE EXCUSED?

• Jurisdiction: United States

Bankruptcy and Financial Distress in the Oil & Gas Industry: Legal Problems and Solutions (Oct 2020)
CHAPTER 5
FORCE MAJEURE 2020: CAN WE PLEASE BE EXCUSED?
Paul J. Lopach
Lynn P. Hendrix
Zachary W. Fitzgerald
Bryan Cave Leighton Paisner LLP
Denver, Colorado

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PAUL J. LOPACH is managing partner in the firm's Denver office. He previously served as a member of HRO's Executive Committee and is a multi-faceted litigator who focuses his practice on complex commercial litigation, product liability and negligence cases, natural resource litigation, banking, and intellectual property litigation. A skilled trial lawyer, Mr. Lopach has tried numerous jury and bench trials in state and federal court. He recently represented a medical device distributor in a five-day federal jury trial and obtained a $957,000 verdict (including pre-judgment interest) on claims for breach of contract and civil conspiracy. Mr. Lopach has tried cases on behalf of natural resource companies and railroads. He was a member of the defense team in Austin v. Montana Rail Link, Inc., which the National Law Journal recognized as the Top Toxic Tort Defense Verdict of 2001. Mr. Lopach has represented corporate clients in toxic tort litigation in several Western states, including personal injury and property damage claims arising from mixed chemical releases and asbestos-related exposures.

LYNN HENDRIX is a partner in the Denver office. Lynn maintains a multi-disciplinary transactional practice relating to a variety of types of property and industries, with particular emphasis on energy and natural resources law, intellectual property law and finance and lending law. Lynn also counsels clients, from individuals to large corporations, on general commercial and corporate law. The breadth and depth of Lynn's practice allows him to bring unique ideas, concepts and solutions to transactions and business relationships. Since 1978, Lynn has represented clients in virtually all types of transactions, including project development, mergers, acquisitions, financing, alliances, ventures and other commercial transactions. Lynn's energy and natural resources practice includes project development, mergers, acquisitions and financing, primarily in the oil and gas and mining industries. These matters have involved both producing and nonproducing properties, gas plants, refineries, transportation and gathering systems and facilities and exploration and production activities. Lynn also is involved in alternative energy projects, including biomass, wind and synthetic fuel. Lynn's intellectual property law practice emphasizes transactional aspects, not only in connection with energy and natural resources, but also software, computer technology and the Internet as well as a variety of other technologies and processes. Lynn is a registered patent attorney with the United States Patent and Trademark Office. Lynn has represented banks, borrowers and investors in a variety of lending and other finance transactions, with a particular expertise in financing involving energy, natural resources and mining.

I. Introduction

As the COVID-19 pandemic spread across the globe and interrupted business operations, government services, schools and daily life, parties to commercial agreements naturally looked to contract terms and common law defenses that might excuse performance and afford relief from contractual obligations. Conversely, parties concerned with enforcing favorable contract terms have been equally motivated to avoid these same arguments. Normally a relatively sleepy legal principle, force majeure has enjoyed popularity in 2020 not seen since perhaps Y2K or Hurricane Katrina. And as the pandemic continues to generate adverse market forces that stress numerous sectors of the economy, force majeure will likely continue to command the attention of commercial lawyers this calendar year and (unfortunately) beyond.

This paper will discuss the background of force majeure and related common law principles excusing contractual performance, present practical drafting and strategic enforcement considerations and broadly summarize force majeure in select jurisdictions.¹

II. Background of Force Majeure

"Force majeure" is French for "superior force." Black's Law Dictionary defines it as "An event or effect that can be neither anticipated nor controlled; esp., an unexpected event that prevents someone from doing or completing something that he or she had agreed or officially

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planned to do. The term includes both acts of nature (e.g., floods and hurricanes)² and acts of people (e.g., riots, strikes, and wars)."³

Force majeure clauses, as we know them in the United States, began as a way for English merchants to allocate the risk that an event beyond the control of either party would make performance of a contract either impossible or dangerous. Indeed, not having such protection in an agreement led to harsh results. In 1825, a Massachusetts court applying English common law, held that in the absence of a force majeure clause, a cargo carrier must pay damages for failing to pick up cargo in a foreign port.⁴ The court held the carrier liable even though its ship would have violated the foreign government's order not to dock and would have risked spreading an outbreak to the ship's occupants.⁵ In the absence of a force majeure clause, the court held that "[i]n these and similar cases, which seem hard and oppressive, the law does no more than enforce the exact contract entered into."⁶ Consequently, force majeure evolved as a bargained-for contract term to avoid performance under certain defined circumstances.

Force majeure is closely related, but separate from, the doctrines of impossibility, impracticability and frustration of purpose. Although all four are defenses to the non-performance of a contract and share many elements in common, the parties must specifically contract for force majeure. In contrast, if a contract does not have a force majeure provision, state contract law may nevertheless imply similar protections and benefits alleviating performance in the event of impossibility, impracticability or frustration of purpose. Where an agreement involves the sale of goods subject to the Uniform Commercial Code, Section 2-615 of the UCC provides that "delay in delivery or non-delivery" is not a breach if performance "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 or by compliance in good faith with any applicable foreign or domestic governmental regulation or order whether or not it later proves to be invalid."⁷

To be clear, the existence of a force majeure clause in an agreement does not guarantee that a party's performance will be excused. Whether the force majeure ultimately excuses performance depends on the particular facts and circumstances, and the language of the clause plays a critical role in the agreement's interpretation. The contract itself defines what events constitute a force majeure. Unlike impossibility, impracticability and frustration of purpose, this allows the parties to allocate risk for events outside of their control as they see fit. Contracting parties negotiate and specify the events that will qualify as force majeure. Force majeure clauses

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often include a catch-all phrase, such as "any other causes beyond the parties' control;" although the efficacy of such language can be limited.⁸ While broad language or a catch-all phrase might excuse nonperformance, relying on such provisions creates considerably more uncertainty in the argument. These considerations highlight the need to avoid inclusion of boilerplate terms not tailored to the parties' agreement and the relevant commercial transaction.

III. Force Majeure and Related Principles in Practice

The defenses to non-performance of force majeure, impossibility and impracticability all have similar requirements. Often used interchangeably, impossibility and impracticability are functionally the same, and the term impossibility is often used to refer to both. In general, a party claiming force majeure, impossibility or frustration of purpose must show an event occurred that:

(a) was beyond the control of the party claiming the affirmative defense;

(b) neither party would have foresaw or contemplated at the time of entering the contract;

(c) makes performance impossible or impracticable (due to, for example, extreme difficulty, expense, injury, or loss) and

(d) cannot be remedied by due diligence (either within a given timeframe or at all). ⁹

If the event causes only a delay in performance, a court will allow the delay without punishing the breaching party, but the party must still perform. The defense of frustration of purpose requires a party to show total, or near total, destruction of the essential purpose of the transaction.¹⁰

A. "Beyond Control"

Where a party seeks to excuse its performance based on a force majeure clause, it bears the burden of showing that the event was outside of the party's control and the event's occurrence was not the result of the party's fault or negligence.¹¹

"Even when an event is an extreme and unforeseeable occurrence of the magnitude to trigger a force majeure clause, such as a terrorist attack, a litigant must still carry its burden to prove that the terrorist attack qualified as a force majeure event as defined by the contract in

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question."¹² Additionally, the party claiming force majeure must show that its failure to perform was proximately caused by the force majeure and that the party acted with diligence and good faith in attempting to perform, but performance remains impossible or unreasonably expensive.¹³

In a recent Texas case, TEC Olmos entered into a farmout contract with ConocoPhillips to drill land leased by ConocoPhillips.¹⁴ The contract included a deadline, a liquidated damages provision in the...