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Contracts and COVID-19

Contracts

This article discusses contract liability if events beyond your control cause a breach of contract.

Performance of pre-pandemic contracts may have been difficult or impossible due to COVID-19. Here, learn about the contract law concept of "force majeure" and whether it can get you out of a contract. 

What is a "force majeure" or "act of God" clause?

Many contracts include a "force majeure" or "act of God" clause. A force majeure clause is a part of a contract that says if something unexpected happens, one or both parties may be excused from doing what the contract says they should do.

Texas law does not provide one universally accepted example of a force majeure clause. Still, specific events can trigger force majeure, like fire, storms, acts of God, or orders by governmental authorities. 

The courts will try to understand what the parties meant in the contract to decide if a force majeure clause applies. The clause may mention pandemics or have more general language that would include a pandemic. Other questions a court might ask include:

  • Was it impossible to perform under the contract because of a government order (like a shelter-in-place order)?
  • Was it impossible to perform under the contract because of other circumstances created by or related to the pandemic?
  • Was the pandemic foreseeable when the parties made the contract?

Our contract doesn't address the COVID-19 situation. What can I do?

Before COVID-19, it would have been unlikely that a force majeure clause in a contract used a global pandemic as an excuse for performance.

If something related to COVID-19 does not fit into one of the specific types of force majeure outlined in the contract, you might rely on "catch-all language" in the clause to excuse performance.

Texas courts have held that a party must show that:

  1. The incident in question falls into the catch-all language of the force majeure clause, and
  2. The event in question was not foreseeable by the parties when they agreed to the contract.

Do force majeure clauses impact commercial real estate contracts?

Most commercial contracts, including most leases, have a force majeure clause. That is, if something unexpected happens that makes it hard or impossible for the landlord or tenant to do what they promised in the lease, they don't have to do it.

In most cases, the tenant must pay rent even if there is a force majeure. Some leases have language that says the tenant can't use an "act of God" or force majeure as an excuse for not paying rent. If the lease doesn't have this language, the tenant might be able to use the force majeure clause to avoid paying rent.

In general, a force majeure excuses both the landlord and tenant from other things they promised to do in the lease, but only for as long as the unexpected event makes it hard or impossible to do those things. Talk to a lawyer if you have a lease and are unsure how it works in a situation like this. See if there are programs from the government or other organizations that can help with rent or other costs.

What are my other options if I don't have a force majeure clause in my contract?

If you don't have a force majeure clause in your contract, you can't use a force majeure defense. But you can use other defenses based on Texas law.  

One example is the defense of "impossibility of performance." This means that if something happens that makes it impossible or difficult to do what the contract says, you might not have to do it. For example, if a law or court order changes and makes it impossible to do what the contract says, you might not have to do it. But if something happened because of COVID-19, it is unclear if that can be used as a defense.  

A court will have to decide if it was something that the parties thought might happen when they made the contract. If you want to use this defense, you will have to show that you didn't cause the problem and that it wasn't something you thought might happen when you made the contract. 

What if I had a contract for the sale of goods?

If the contract in question deals with the sale of goods, another way to use force majeure language can be found in Article 2 of the Uniform Commercial Code, codified in Texas under Chapter 2 of the Texas Business and Commerce Code.

For such contracts, a party could argue that any alleged failure to perform is excused by Section 2.615 of the Texas Business and Commerce Code. It says that a delay in delivery or non-delivery by a seller is not a breach of the contract 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.” If this occurs, the seller must notify the buyer that there will be a delay or non-delivery.

Also, suppose the seller can partially deliver some of the goods promised under the contract and has contractual obligations to deliver the product to other parties. In that case, an excuse for non-performance under Section 2.615 is allowed only if the available products are shared among the sellers’ customers in a fair and reasonable manner.

Should I get an attorney?

Work with a lawyer when evaluating your contractual rights and obligations. This is true whether you want to enforce a force majeure clause or use a defense such as impossibility. 

The remedies and defenses discussed in this article will depend on fact-intensive questions and turn on Texas contract law and analysis. No single remedy or defense fits every contract. Talking with a lawyer about your contract can help limit your risk and more accurately evaluate your rights during a changing situation like the COVID-19 pandemic. The pandemic is a unique situation, and courts have responded to it in varying ways.

Read How to Select a Lawyer and learn about limited-scope representation (a way to make hiring a lawyer more affordable because you only pay for certain legal services).

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