The Force Majeure Clause in the Time of COVID-19
SUMMARY
As the nation, along with much of the world, enters another week of social distancing, working from home, and lockdowns due to the ongoing COVID-19 pandemic, we consider the effect the pandemic may have on oil and gas leases in Texas. The question we address here is whether nonperformance under an oil and gas lease may be excused by the force majeure clause included therein.
According to Texas law, force majeure clauses are included in oil and gas leases to excuse nonperformance due to events or circumstances beyond the control of the lessee or by an event which was unforeseeable at the time the lease was executed. i
BACKGROUND
Force majeure clauses vary among leases and contracts. In some cases, a contract may enumerate events covered by the force majeure clause, such as fire, flood, storm, or insurrection. When dealing with such a clause, Texas courts have stated that they are bound by the contents of the contract and "are not at liberty to rewrite the contract or interpret it in a manner which the parties never intended." ii In such an instance, if a pandemic is so enumerated, the current Covid-19 pandemic will constitute a force majeure and excuse performance under the contract.
However, if a pandemic is not included in the agreement, nonperformance of the contract likely will not be excused under Texas law.
IMPLICATIONS
In other contracts, the force majeure clause may not enumerate a list of force majeure events. For example, the following provision was found in a Producers 88 lease:
Should Lessee be prevented from complying with any express or implied covenant of this lease, from conducting drilling or reworking operations thereon or from producing any oil, gas or other minerals therefrom by reason of scarcity of or inability to obtain or to use equipment or material, or by operation of force majeure, and Federal or state law or any order, rule or regulation of governmental authority, then while so prevented, Lessee's obligation to comply with such covenant shall be suspended, and Lessee shall not be liable in damages for failure to comply therewith; and this lease shall be extended while and so long as Lessee is prevented by any such cause from conducting drilling or reworking operations on or from producing oil or gas from the lease premises; and the time while Lessee is so prevented shall not be counted against Lessee, anything in this lease to the contrary notwithstanding. iii
Texas appellate courts have held that although lease terms are controlling when interpreting a force majeure clause, the common law is used to fill in any gaps. iv At common law, force majeure is an event which is not foreseeable to the parties nor controlled by the parties. v As such, the issue of foreseeability becomes paramount in this analysis. Courts have typically held that foreseeability does not require a specific event, just a real possibility that such an occurrence could affect performance. In a sales context, a court determined that a train derailment was foreseeable despite not being a specified force majeure event in the contract. vi Likewise, Texas courts have held that a decrease in price or change in the market for oil or gas is foreseeable to the parties entering into a contract, and therefore is not a force majeure event. vii In the current situation, a court may determine that a pandemic is a foreseeable event. In addition to the current Covid-19 virus, in the past twenty years various parts of the world have been affected by SARS (2002-2004), the H1N1 virus or swine flu (2009), and Ebola (2013-2016 and 2017). The Producers 88 clause set out above specifically excuses performance for any "Federal or state law or any order, rule or regulation of governmental authority." Through the course of this pandemic, Governor Abbott has issued various executive orders instructing people to minimize in-person contact "except where necessary to provide or obtain essential services" through at least April 30, 2020. viii Governor Abbott's Executive Order defers to the guidelines provided by the U.S. Department of Homeland Security to define "essential services." According to said guidelines, both onshore and offshore drilling operations are essential infrastructure activities, and therefore may continue. ix The Order also instructs that "every person in Texas shall, except where necessary to provide or obtain essential services…minimize in-person contact." x Although this order instructs Texans to stay home for the duration of the pandemic, it specifically excepts those needed to provide essential services, which includes drilling operations. As such, the orders of the state government will not impede performance of an oil and gas lease or contract. Unfortunately, despite the Covid-19 pandemic affecting every corner of the globe, absent the specific inclusion of a pandemic in the oil and gas lease or agreement, it is unlikely that a force majeure clause will excuse nonperformance under Texas law.
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i Hydrocarbon Management, Inc. v. Tracker Exploration, Inc., 861 S.W.2d 427, 435-36 (Tex.App.—Amarillo 1993, no writ).
ii Sun Operating Ltd. Partnership v. Holt, 984 S.W.2d 277, 283 (Tex.App.—Amarillo, 1998) (citing Id. at 436 and Texas City Ref., Inc. v. Conoco, Inc., 767 S.W.2d 183, 186 (Tex.App.—Houston [14th Dist.] 1989, writ denied).
iii Source: Producers 88 (4/76) Revised Paid Up With 640 Acres Pooling Provision.
iv Hydrocarbon Management, Inc., 861 S.W.2d at 436.
v Black's Law Dictionary, Third Pocket Edition, 2006 defines force majeure as "an event that can be neither anticipated nor controlled."
vi Bende and Sons, Inc. v. Crown Recreation, Inc., Kiffe Products Div., 548 F.Supp. 1018 (E.D.N.Y. 1982).
vii TEC Olmos, LLC v. ConocoPhillips Company, 555 S.W.3d 176, 182-83 (Tex.App.—Houston [1st Dist.] 2018) (citing Valero Transmission Co. v. Mitchell Energy Co., 743 S.W.2d 658, 660 (Tex.App.—Houston [1st Dist.] 1987, no writ.).
viii Tex. Exec. Order No. GA-14 (March 31, 2020), https://gov.texas.gov/uploads/files/press/EO-GA-14_Statewide_Essential_Service_and_Activity_COVID-19_IMAGE_03-31-2020.pdf.
ix Krebs, Christopher C., Director, Cybersecurity and Infrastructure Security Agency, U.S. Department of Homeland Security, Guidance on the Essential Critical Infrastructure Workforce, March 28, 2020 (https://www.cisa.gov/publication/guidance-essential-critical-infrastructure-workforce).
x Tex. Exec. Order No. GA-14.