COVID-19: Energy contracts and force majeure
Although oil and gas companies were not required to suspend operations under Oklahoma Gov. Kevin Stitt’s Executive Memorandum of March 25, 2020, the spread of COVID-19 has presented previously unforeseen challenges to the energy industry’s ability to continue to operate normally. These challenges have only been exacerbated by steep declines in oil prices throughout the United States as COVID-19 has spread, further stretching resources and making an already difficult situation that much worse.
In light of these challenges, oil and gas companies grappling with the reality that it may be difficult or impossible to meet their contractual obligations should review their contracts to determine whether they include force majeure clauses, and if so, whether it is appropriate to invoke the force majeure protections provided by those clauses.
Force majeure, generally
In general, a force majeure clause specifies unforeseen and uncontrollable events that would make it impossible for a party to meet its contractual obligations. If a covered event occurs, the force majeure clause may excuse a party from performing under the contract.
Force majeure clauses commonly include specific examples of covered events, such as natural disasters, weather-related events, terrorist attacks, or acts of war. These clauses can be drafted broadly or narrowly depending on the intent of the parties to the contract. They can specifically enumerate covered events, or alternatively, they can speak in more general terms about the types of events that would be covered.
Factors in determining force majeure applicability
Courts will generally look at the following factors to determine whether performance may be excused pursuant to a force majeure triggering event: 1) whether the language of the force majeure clause covers the triggering event; 2) whether the party seeking to be excused from having to perform can demonstrate that the triggering event materially inhibited its ability to perform under the contract; and 3) whether the triggering event is beyond the parties’ control.
Language in the Clause
In analyzing whether COVID-19 can be used as the basis to excuse a company from performing its contractual obligations, the company should first look to the language of the force majeure clause.
Courts often read force majeure clauses strictly, so if the clause specifically indicates that a pandemic would be a triggering event that could excuse performance, a party would have a strong argument that COVID-19 is covered. However, force majeure clauses often do not specifically identify pandemics as covered events. If that is the case, a company should review the language of the clause to determine whether COVID-19 may fall under the definition of another specific triggering event. For example, some clauses include language defining the enactment of laws, regulations, or governmental orders as force majeure events. In the oil and gas context, governmental actions, including orders to halt production, have been deemed to be force majeure events. Thus, if oil and gas production is halted due to a government order, or if a company is prevented from otherwise performing due to COVID-19 travel restrictions or shelter-in-place orders, it may be able to rely on that language to excuse performance.
If the force majeure clause is more general in nature, a party should review the language to see if it could be considered to cover events like pandemics. For example, some clauses refer to “acts of God.” Whether COVID-19 is deemed to be an act of God will likely depend on the jurisdiction.
In reviewing general force majeure clauses, courts will also analyze whether the event was unforeseeable when the parties entered into the contract. If the event was foreseeable, the court may determine that the parties intended to address and allocate the risk of the occurrence of the event through the contract’s other terms.
A company seeking to have its performance excused should be mindful of the fact that it may need to demonstrate that COVID-19 made its performance under the contract impossible, as opposed to simply more burdensome or expensive.
The Oklahoma Supreme Court has held in the context of a gas purchase agreement that increased costs or changes to the market do not excuse performance, unless they were caused by an unforeseen circumstance that alters the essential nature of performance under the contract. Based on this holding, it may be difficult for an oil and gas producer to argue that declines in oil prices make performance under the contract impossible. However, there may be other relevant considerations, such as supply chain or workforce availability issues brought on by COVID-19 that would be relevant to the “impossibility” analysis. Essentially, this will be a fact-dependent analysis, and it would be beneficial to have strong and sound legal assistance.
For a triggering event to excuse performance, it must not have been caused by the party seeking to be excused. Further, the contract may impose a duty to mitigate any negative impact of the triggering event. This analysis will also be dependent on the facts and circumstances, but the bottom line is businesses should be aware of their contractual duties before stopping performance due to a force majeure event.
Invoking force majeure protection
Before halting performance, a company should review the language of the contract, as there may be requirements for when and how to notify the other parties of a force majeure event. Such notices should be drafted only after taking all factors into account and determining whether other actions may be necessary to protect the company’s rights under the contract. For example, a company may consider trying to reach a mutually agreeable modification of the contract until the triggering event is over.
If a company determines that it cannot rely on the force majeure clause, it may have other remedies at law on the basis that performance under the contract is impossible or impractical.