Please note that views presented in blog articles are those of the author, not those of the Wisconsin Department of Justice, the section, or the State Bar of Wisconsin.
As the world was besieged by COVID-19 in the first half of 2020, large swathes of the economy shut down. International travel practically ceased, events were canceled, and factories temporarily shut down to stop the spread of disease. Many people began working from home, cutting out their daily commute.
Katherine Plachta, a U.W. Law School rising 2L, is a summer extern with the Wisconsin Department of Justice Environmental Protection Unit.
One of the few positive news stories coming out of those early days of the pandemic was the drop in fossil fuel emissions from this stalling of mobility. Globally, carbon dioxide emissions fell by 6.4% in 2020, while in the United States they sank by 12.9%.
But the consequences for those in the oil and gas industries were not so rosy.
With a reduction in emissions due to people quarantining from COVID-19, the market forces driving preexisting energy contracts changed. The demand for oil plummeted, falling below $0 on April 20, 2020. The lack of demand for fuel caused many existing oil and gas contracts to become impracticable.1
Contracting parties began to invoke force majeure clauses to alter their obligations under the contract.
About Force Majeure Clauses
Force majeure clauses “enumerate circumstances whose occurrence excuse a party’s performance of its obligations under the contract.”2 They allow parties to excuse or alter obligations when certain circumstances arise that are beyond the parties’ control and make contractual performance impracticable or unreasonable.
For example, force majeure would free a party of its contractual obligations after an earthquakes, hurricane, war, or Act of God, as those events are typically covered in force majeure clauses.3
Courts interpret force majeure clauses in the context of the whole contract. Contract interpretation is a matter of state law, so results will vary by state.4 However, many jurisdictions tend to interpret force majeure clauses narrowly so that coverage is limited to events enumerated in the contract.
COVID-19: A Force Majeure?
There is a contentious debate around whether COVID-19 is a proper exercise of force majeure.
The first hurdle for parties seeking to invoke a force majeure clause is to determine whether the COVID-19 pandemic is an event enumerated in the contract’s force majeure clause.5 If the force majeure clause contains reference to a pandemic or epidemic, the party claiming force majeure is likely to succeed on their claim.
Second, the parties must show the causal connection between COVID-19 and their inability to perform their contractual obligation.6 If the party can show a strong connection between the COVID-19 pandemic and their inability to perform the contract, there is a greater chance they will succeed in invoking the force majeure clause. However, if the connection is tenuous, the party is unlikely to succeed.
The invocation of force majeure clauses is already underway in the energy sector in response to the COVID-19 pandemic. The China National Offshore Oil Corporation gave force majeure notices on cargoes in early 2020.7 Some courts found that COVID-19 qualifies as a “natural disaster” within the meaning of certain force majeure clauses.8
Economic Turndown Not Enough
An economic downturn alone is unlikely to be enough to invoke a force majeure clause.
Previously, courts held that a change in purchaser demand, without more, is not covered under force majeure clauses.9 The courts found there must be an unforeseeable and uncontrollable event that is directly connected to the change in demand to trigger the clause.
Another court, falling in line with the narrow interpretation of force majeure clauses, found that “[e]conomic factors are an inherent part of all sophisticated business transactions and, as such, while not predictable, are never completely unforeseeable.”10
Precedent in Government Orders
There is precedent in jurisdictions for finding that government orders fall within force majeure clauses. However, the order must “clearly direct or prohibit an act which proximately causes nonperformance or breach of a contract.”11
Thus, government orders responding to the COVID-19 pandemic may be the ultimate force majeure event relied on by contracting parties, rather than the pandemic itself.
Conclusion: Litigation is Just Starting
Much of the litigation surrounding the invocation of force majeure clauses for nonperformance of energy contracts has yet to occur.
Ultimately, the debate around COVID-19 as a force majeure event will be an extremely fact-specific inquiry decided on a case-by-case basis.
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Endnotes
1 Ahmer A. Qureshi, Comment, Coronavirus & Contracts: How the Coronavirus May Trigger Force Majeure, 46 Am. J. L. & Med. 133-136 (2020).
2 Cosmos Nike Nwedu, The Rise of Force Majeure Amid the Coronavirus Pandemic, 61 Nat. Res. J. 1-18 (2021).
3 Nwedu supra note 2.
4 Qureshi supra note 1.
5 Qureshi supra note 1.
6 Nwedu supra note 2.
7 Nwedu supra note 2.
8 See JN Contemporary Art LLC v. Phillips Auctioneers LLC, No. 20cv4370 (DLC), 2020 U.S. Dist. LEXIS 237085 (S.D.N.Y. Dec. 16, 2020); Easom v. US Well Servs., No. H-20-2995, 2021 U.S. Dist. LEXIS 28778 (S.D. Tex. Feb. 10, 2021).
9 Rexing Quality Eggs v. Rembrandt Enters., Inc. 360 F. Supp. 3d 817, 840 (S.D. Ind. 2018).
10 Route 6 Outparcels, LLC v. Ruby Tuesday, Inc., 931 N.Y.S.2d 436 (N.Y. App. Div. 2011); see also CAI Rail, Inc. v. Badger Mining Corp., 2021 U.S. Dist. LEXIS 32564 (S.D.N.Y. Feb. 22, 2021).
11 N. Ill. Gas Co. v. Energy Coop., 461 N.E.2d 1049, 122 Ill. App. 3d 940, 78 Ill. Dec. 215 (1984).
