5 Things to Know About Force Majeure Under Texas Law
A lot has changed in the United States in the last few weeks, with dramatic changes for the entire country, including the oil and gas business. Both Oil and gas operators and their contractual counterparties likely did not anticipate COVID-19 or sub-$30 WTI when signing contracts and leases that are now in effect. And if the recent economic chaos and depressed oil process continue for long, oil and gas operators may be sending and receiving force majeure notices in the weeks and months to come. Here are some key points to remember about force majeure under Texas law:
Contract language trumps common law concepts of force majeure. Operators need to focus on the exact language of any force majeure provision at issue rather than general concepts about force majeure. “[W]hen the parties have themselves defined the contours of force majeure in their agreement, those contours dictate the application, effect, and scope of force majeure.” Sun Operating Ltd. P'ship v. Holt, 984 S.W.2d 277, 283 (Tex. App.—Amarillo 1998, pet. denied). “[Contract] terms are controlling regarding force majeure, and common law rules merely fill in gaps left by the [contract].” Hydrocarbon Mgmt., Inc. v. Tracker Expl., Inc., 861 S.W.2d 427, 436 (Tex. App.—Amarillo 1993, no writ). So pay close attention to the actual contract language at issue.
Specific force majeure events are treated different than a “catch-all” provision. Most force majeure clauses include specific examples of force majeure (e.g., war, riots) and a general catch-all description such as “an event that no party could have avoided through proper planning or foresight.” These are treated differently under Texas law. Generally, claims of force majeure under catch-all provisions can be made only for events that are unforeseeable. TEC Olmos, LLC v. ConocoPhillips Co., 555 S.W.3d 176, 182–83 (Tex. App.—Houston [1st Dist.] 2018, pet. denied). Claims of force majeure for specified events, however, are not limited to unforeseeable events under Texas law. Id.; Kodiak 1981 Drilling P'ship v. Delhi Gas Pipeline Corp., 736 S.W.2d 715, 721 (Tex. App.—San Antonio 1987, writ ref’d n.r.e.). But see Valero Transmission Co. v. Mitchell Energy Corp., 743 S.W.2d 658, 663 (Tex. App.—Houston [1st Dist.] 1987, no writ) (stating in dicta that “[a] force majeure clause does not relieve a contracting party of the obligation to perform, unless the disabling event was unforeseeable at the time the parties made the contract”). So even if a company could have reasonably predicted the panic that would come with COVID-19 (which seems unlikely), if “pandemic” or something similar is listed as a specified force majeure event, it may still qualify as a force majeure event.
Operators may want to make a record showing they tried to overcome the force majeure event. The occurrence of a force majeure event is usually not the end of the story. Most clauses require the party making such a declaration to try to overcome the event using “reasonable efforts” (or similar language). Operators may want to make a record as part of their declaration, writing out the reasons that performance is impossible, what efforts have been made to perform despite the force majeure, and/or what ideas have been considered to overcome the situation and why they were rejected. A formal letter is not required. Instead, it could be a basic email noting why a decision was made. What is important is that there is a written record of the reasoning and efforts to avoid invoking force majeure.
“Reasonable efforts” must, indeed, be reasonable. While a party may be obligated to use “reasonable efforts” to overcome a force majeure event, there are limits to this reasonableness. Generally, a party cannot require its counterparty to alter the specific terms of its contracts or perform any obligations it does not already have under its agreements. At least one Texas appellate court has interpreted a similar clause and held that where the contract specified that a party would deliver gas to a specific delivery point and a force majeure event prevented delivery at that specific point, the “reasonable efforts” clause did not require delivery to be made at an alternative location. Va. Power Energy Mktg., Inc. v. Apache Corp., 297 S.W.3d 397, 403 (Tex. App.—Houston [14th Dist.] 2009, pet. denied) (holding that “reasonable efforts” language would not trump the specific agreement that the gas be delivered at a specific location). The requirement to use reasonable efforts to avoid the consequences of a force majeure event obligates parties to try and find a reasonable alternative to performing the terms of the contract (in this example, making a reasonable effort to deliver the gas to the delivery point), but it does not require parties to take on new obligations (here, delivering the gas to a different delivery point).
Pay attention to notice requirements. Often a contract will require that a declaration of force majeure take place within a set time period following the force majeure event. Operators should read their force majeure clauses closely to be sure and comply with these requirements. If the force majeure provision does not include a specific deadline, “the law will imply a reasonable time . . . based on the facts and circumstances of the case.” Allegiance Hillview, L.P. v. Range Tex. Prod., LLC, 347 S.W.3d 855, 869 (Tex. App.—Fort Worth 2011, no pet.). In order to avoid an issue at trial, parties should declare force majeure as soon as possible after the event so they don’t run the risk of their counterparties claiming that they unreasonably delayed.