By Paul B. Westbrook and Shawna R. Rinehart
Force Majeure Clause:
A force majeure clause is a lease provision designed to protect a lessee against termination of the lease resulting from governmental actions, acts of God, and other circumstances beyond the lessee’s control. Force majeure clauses can vary substantially in length and detail. The two inquiries fundamental to a force majeure clause are what events or circumstances constitute force majeure and the effect of a force majeure on the lease. As with other savings provisions, the actual words used in a force majeure clause are essential to answering both of these inquiries. The courts have recognized that often the parties go to great lengths to define the contours of force majeure in their agreement. In those instances, the courts adhere to the application, effect, and scope of the force majeure provision, as written in the agreement, and will not interpret it in a manner that the parties did not intend.
A significant issue in determining whether a force majeure provision applies is the extent to which the cause for delay could have been avoided or controlled by the lessee. For example, mere governmental action may be insufficient to qualify as a force majeure where the action is merely part of the usual regulatory framework for development and operations under a lease or occurs in response to a regulatory violation or failure by the lessee. As stated by the court in Atkinson Gas Co. v. Albrecht, 878 S.W.2d 236, 241 (Tex. App.—Corpus Christi 1994, writ denied), “the purpose of a force majeure clause is to excuse non-performance of lease obligations only when caused by circumstances beyond the reasonable control of the lessee or by an event which is unforeseeable at the time the parties entered into the contract. . . . Thus, the force majeure clause of an oil and gas lease of the present nature is not triggered when the Texas Railroad Commission orders a well shut-in due to the lessee’s failure to comply with its regulations, at least when compliance with the regulation is within the reasonable control of the lessee.” In contrast, where a lessee demonstrates diligent compliance with the relevant regulatory framework but a delay occurs nevertheless, a force majeure is more likely to be found.
As noted above, the precise language of the force majeure clause will dictate the effect of a force majeure event. Accordingly, many force majeure clauses are too narrowly drawn. Often, the list of force majeure events is adequate, but the occurrence of the events just excuses the lessee from complying with express or implied covenants. As a result, the lessee would be protected from a suit for damages, but the language in the force majeure clause may not prevent the lease from terminating. Another problem may exist if the force majeure clause specifically lists some, but not all, physical activities necessary to maintain the lease. In this instance, the lessee may be protected if the force majeure clause also includes general language that is broad enough to include the activity that was interrupted by force majeure. However, the lessee should be mindful as to how certain terms may be defined in the lease when utilizing the terms in the force majeure provision and elsewhere in the lease (ex: “operations”).
One recent Texas case addressed the issue of whether a drop in commodity prices, and the resulting inability to obtain financing, constituted a force majeure under a farmout agreement, the interpretation of which would likely be the same as a lease. See TEC Olmos, LLC v. ConocoPhillips Co., 555 S.W.3d 176 (Tex. App.—Houston [1st Dist.] 2018). In that case, the court followed a specific framework for deciding the issue. First, the court asked whether the alleged force majeure event was a specifically enumerated event in the force majeure clause, deciding in that case that it was not. Next, the court asked whether the event was covered by the catch-all language at the end of the force majeure clause. As part of that analysis, the court held that a force majeure event must have been unforeseeable to be covered by the catch-all language and held that a drop in commodity prices is never unforeseeable. Based on this case, it will be critical for a lessee to either identify a specifically enumerated force majeure event on which its argument is based, or argue that some event or condition (other than merely a drop in commodity prices) was unforeseeable and triggered the catch-all language in the force majeure clause.
Because every lease is unique, there is no blanket answer to how the current COVID-19 pandemic and the global economic crisis will be treated for force majeure purposes. Certainly if a force majeure clause contains specific “pandemic” or “quarantine” triggers, the lessee should be in good position to claim force majeure. If not, then there will be room for argument and uncertainty as to whether current events qualify as “acts of God,” government orders, could be considered unforeseeable for purposes of catch-all language, or otherwise fall within a specific force majeure clause.
Conclusion:
While lessees have attempted to tailor the force majeure provision in their leases to be broad and cover as many force majeure events as possible, the exact language in many provisions may have the opposite of effect and end up being more limiting than intended.