Will COVID-19 Excuse Non-Performance of Texas Contracts?
March 23, 2020 by
As private companies adopt work-from-home policies, restrictions on travel, and restrictions on in-person meetings, and our local, state, and federal government impose quarantines, shelter-in-place orders, and restrictions on social gatherings in an effort to battle the spread of COVID-19, many companies are finding it difficult, if not impossible, to comply with existing contracts.
In Texas, freedom to contract is highly favored and ingrained in our jurisprudence and public policy.1 Absent compelling reasons, courts must respect and enforce the specific terms of a contract the parties have freely and voluntarily entered.2 The law provides very limited circumstances or justifications to excuse a failure to perform. As a general rule under Texas law, unless the parties to a contract expressly provide otherwise, performance is not excused even when prevented by an act of God or by an inevitable accident beyond the parties’ control, such as fires, floods, earthquakes, tornadoes, hurricanes, declarations of war, strikes, riots, and yes—even pandemics.3 To address this, parties to commercial contracts routinely include a “force majeure” clause: a provision that provides a defense to a party’s failure to perform in the event certain catastrophic circumstances occur which are beyond the performing party’s control. The typical force majeure clause will enumerate the list of applicable catastrophic circumstances and then provide the performing party with relief by suspending (i.e., delaying) or even excusing (i.e., forgiving) performance under the contract.
Like other contractual provisions, Texas courts construe force majeure clauses strictly. 4 The judicial rationale is aligned with the basic principle of freedom to contract and the notion that courts are not at liberty to re-write (or write in) provisions of a contract.5 Therefore, even when a contract has a force majeure clause, a pandemic virus like COVID-19 is not automatically included unless the clause is written to contemplate that scenario.
What this means for business owners today is first and foremost—contract obligations are not excused or delayed on their own by virtue of COVID-19. In other words, the commercial landlord still has a legal right to expect timely rent payments, the distributor still has a legal right to expect timely product shipments, and the manufacturer still has a legal right to expect timely payment, notwithstanding current events. To provide relief, contract must contain a “force majeure” clause that addresses the specific catastrophic scenario at hand preventing the party from performing. While “COVID-19” does not need to be identified in the contract, the language must be specific enough to persuade a court to interpret COVID-19 (and the circumstances around this outbreak) as an included event justifying non-performance. If your contract contains a force majeure clause, then look for keywords such as “epidemic,” “pandemic,” or “government acts” such as declarations of emergency, quarantine, or other orders that might describe our current events. Each force majeure provision must be examined to determine not only whether it is applicable to the current COVID-19 pandemic, but also whether performance under the contract is merely suspended or excused altogether—so that you can evaluate the overall impact to your business and its obligations under the contract.
Our corporate law attorneys at Brown Fox are vastly experienced in drafting and interpreting these provisions, and we can provide you with the appropriate guidance in navigating these issues. Learn more about Brown Fox’s Corporate Law practice here. Learn more about Adam Fox here and Neal Parekh here.