Is COVID-19 a Force Majeure Event That Excuses Performance on Renewable Construction Projects?

The post Is COVID-19 a Force Majeure Event That Excuses Performance on Renewable Construction Projects? appeared first on POWER Magazine.

Like other segments of the economy, the renewable energy industry is dealing with the impacts of the COVID-19 pandemic. Several states still have restricted business activities and are only now considering lifting those restrictions. Many equipment suppliers, contractors, and project owners have sent or received force majeure notices under their respective contracts and disputes may arise over whether a COVID-related delay in performance is excused.

The force majeure clause in the contract is the logical starting point and may be dispositive. As one Texas court explained, when the parties have themselves defined the contours of force majeure in their agreement, those contours dictate the application, effect, and scope of force majeure."[i] But there are several aspects of a force majeure clause that should be considered to determine whether COVID-19 constitutes a force majeure event. We look at each of those aspects below.

Definition of Force Majeure Event

First, how does the clause define a force majeure event"? Force majeure clauses are related to the common law doctrines of impossibility of performance and commercial impracticability. Those doctrines provide that a party's performance is excused when an unforeseen event makes that performance impossible or extremely impractical. Some force majeure clauses still use that doctrine today and define a force majeure event" as something that makes performance impossible or illegal. Under those clauses, COVID-19 may not be a force majeure event unless the project is in a state or locality that has ordered all non-essential businesses to cease operations, and construction is included in the definition of non-essential."

The executive order issued by the governor of Pennsylvania is one example. It requires all businesses that are not life-sustaining" to cease physical operations, and the order's accompanying chart lists construction as a non-life-sustaining business. Other states, including Texas and Maryland, defined essential businesses" more broadly and cited to an Advisory Memorandum from the Department of Homeland Security's Cybersecurity and Infrastructure Agency (CISA) that outlines Essential Critical Infrastructure Workforce" industries. Under the CISA guidance, renewable energy infrastructure, including those supporting construction," was deemed essential and could continue work despite COVID-19.

List of Specific Force Majeure Events

Second, does the force majeure clause include a list of specific events that covers COVID-19? Force majeure clauses typically are construed narrowly so that performance will only be excused if the event that caused the party's nonperformance is specifically identified."[ii] Most clauses contain a broad list of force majeure events such as: acts of God, war, hurricanes, fires, earthquakes, terrorism, etc. But it is less common for a clause to expressly include events like epidemic, pandemic, or quarantine, which are more clearly COVID-19 related. If a clause includes one of those terms, that may support an argument that COVID-19 and related social distancing orders were intended to be potential force majeure events.

Even if your clause does not include an event that encompasses COVID-19, it may include a catch-all provision such as any other cause which is beyond the reasonable control of the Party whose performance is affected." Yet, while such clauses seem broad, the applicable state law may limit their scope. Some state courts apply a doctrine known as ejusdem generis, which requires that when a general catch-all phrase comes after a list of specific events, the general phrase must be limited to the same type of specified events.[iii]

Foreseeability and Control

Third, does the force majeure clause expressly require that a force majeure event be unforeseeable or beyond the reasonable control of the party claiming force majeure? Although these foreseeability and control elements are conceptually distinct, they are often analyzed together, and some courts have held that one gives rise to the other.[iv]

If the force majeure clause does not contain foreseeability or control language, there may be ambiguity around what the party claiming force majeure must show for their performance to be excused. Is the party excused simply because a listed event occurred? Or must they also show that they could not foresee, or take precautions to avoid, the event?

The way that state courts resolve this ambiguity varies. Some states' laws-like California-may require that the foreseeability and control elements be read into a force majeure clause, even if the clause is silent on that point.[v] Other states' laws-including Texas, Oklahoma, and Wyoming-suggest that a force majeure event need not be unforeseeable if the clause does not expressly include foreseeability as a factor.[vi]

This can be particularly important for construction contracts that were negotiated and executed after COVID-19 cases started appearing. The impacts of the outbreak are now foreseeable, which could be problematic for an affected party if the force majeure clause requires that an event be unforeseeable. To mitigate this, parties might consider including language specifying that COVID-19 can be deemed a force majeure event without regard to foreseeability.

Mitigation

A fourth issue to consider is whether the force majeure clause requires mitigation when a force majeure event occurs. For example, does the clause require that a party affected by force majeure exercise reasonable efforts to mitigate or limit the delay or damages caused by the event? If it does not, the existence of the force majeure event alone may be enough to excuse performance, even if there are other reasonable steps that can be taken to move a project along.

In Sun Operating Partnership, for example, a Texas appellate court considered whether force majeure applied to an oil and gas lease when gas production from several wells was interrupted due to major repairs and renovations. The trial court instructed the jury that the interruption in production could not be deemed a force majeure unless the well operators had exercised due diligence and taken all reasonable steps to avoid, remove, and overcome the effects" of the interruption. The Court of Appeals of Texas overturned the ruling because the force majeure clause itself said nothing about requiring due diligence or reasonable steps to avoid or overcome a force majeure event. The clause provided only that when certain specified acts occurred, any resulting delay or interruption" was not be counted against the affected party.

The mitigation element is significant in the context of COVID-19 because each state is responding to the pandemic differently. Although ceasing all work on a project is one way to comply with social distancing guidelines, it may not be consistent with the obligation to mitigate. If a state's order allows work to continue while implementing recommended guidelines (e.g., face masks, gloves, and six feet of distance), a complete standstill may not be justified under a contract's force majeure clause.

Also, even when mitigation is required, there may be ambiguity regarding what specific mitigation efforts are required. In one noteworthy example arising out of Hurricane Katrina, a Texas court found that, absent clear indications in the contract, mitigation efforts may be limited to the specific type of performance called for in the contract. The case-Virginia Power Energy Marketing, Inc. v. Apache Corp.[vii]-involved a contract to supply natural gas at two specific pipeline locations. After Hurricane Katrina damaged the pipelines in those locations, the supplier (Apache) claimed force majeure and curtailed its production under the contract. The buyer (Virginia Power) asked that the gas be delivered to an alternate delivery point, but Apache refused. As a result, Virginia Power was forced to buy additional natural gas on the open market at a higher price than it would have paid under its contract. Afterwards, Virginia Power learned that Apache was the seller in many of Virginia Power's open market purchases.

The parties ultimately ended up in a lawsuit over the application of the force majeure clause. Among other things, the clause required that a party make reasonable efforts to avoid the adverse impacts of a Force Majeure and to resolve the event or occurrence once it has occurred in order to resume performance." Virginia Power argued that the reasonable efforts required that Apache deliver its gas under the contract at alternate delivery locations, instead of selling it on the open market at higher prices. The court disagreed because the contract required delivery of the gas at two specific locations only. In the court's view, it could not conclude that the parties intended that the reasonable efforts' clause would trump their express agreement concerning delivery locations." The court also suggested that the outcome might have been different if the clause had specified that gas could be delivered at alternate locations in response to a force majeure event.

Burden of Proof

A final element to remember is the burden of proof. Clauses typically require that the burden of proof lies with the party claiming to be affected by a force majeure event. If that is the case, the party claiming force majeure based on COVID-19 may need to provide additional information showing how the pandemic impacts its performance. This may be easier for some elements of the work than others. Supply chain disruptions, for example, are well-documented and may result in a delay of parts being delivered to a project site. But the same logic does not necessarily extend to project personnel, who may be able to continue performance subject to a state's social distancing guidelines. In those circumstances, the affected party may need to explain why the guidelines cannot be implemented. If they cannot and a standstill is required, the affected party may need to provide regular updates on when work might resume and what, if any, return-to-work protocols may be required. Many states have already issued return-to-work guidance that may be helpful in gauging when and how work can resume safely.

Steven A. Neeley is a Washington, D.C.-based partner with the law firm Husch Blackwell LLP. He focuses his litigation and arbitration practice on government contracts, renewable energy, and construction projects. He can be reached at steve.neeley@huschblackwell.com.

[i] Sun Operating P'shp v. Holt, 984 S.W.2d 277, 286 (Tex. App. Ct. 1998).

[ii] Kyocera Corp. v. Hemlock Semiconductor, LLC, 886 N.W.2d 445, 451 (Ct. App. Mich. 2015).

[iii] In TEC Olmos, LLC v. ConocoPhillips Co., for example, the court considered whether an economic downturn in the oil and gas market constituted a force majeure event under the catch-all provision of the force majeure clause in a lease agreement for test-drilling. The court held that it did not because the specified events in the clause (fires, floods, storms, and acts of God) were natural or man-made disasters for which the parties could not reasonably allocated risks because such events occurred infrequently. Market changes, in contrast, occur regularly and can be addressed with a contractual allocation of risk.

[iv] United States v. Hampton Roads Sanitation Dept., 75 ERC 1842 (E.D. Va. 2012) (finding that force majeure clause implicitly included unforeseeability as an element because best efforts language in clause includes using best efforts to anticipate any potential force majeure event and best efforts to address the effects of any such event" as it is occurring and afterwards to minimize any resulting delay) (emphasis in original).

[v] Watson Laboratories, Inc. v. Rhone-Poulenc Roer, Inc., 178 F. Supp. 2d 1099, 1010 (C.D. Cal. 2001) (finding under California law that elements of the common law force majeure defense," such as the requirement that a force majeure event be beyond the party's reasonable control, are often read into the force majeure provision of a contract").

[vi] See, e.g., Perlman v. Pioneer Ltd. Partnership, 918 F.2d 1244 (5th 1990)(Because the clause labelled force majeure' in the Lease does not mandate that the force majeure event be unforeseeable or beyond the control of Perlman before performance is excused, the district court erred when it supplied those terms as a rule of law."); Sabine Corp. v. ONG Western, Inc., 725 F. Supp. 1157, 1170 (W.D. Okl. 1989) (Plaintiff's argument that an event of force majeure must be unforeseeable must be rejected. Nowhere does the force majeure clause specify that an event of cause must be a unforeseeable [sic] to be a force majeure event."); Kodiak 1981 Drilling Partnership v. Delhi Gas Pipeline Corp., 736 S.W.2d 715, 720-21 (Ct. App. Tex. 1987) (finding that other courts' holdings requiring that a specified force majeure event also be unforeseeable have not been approved by any Texas court, state or federal").

[vii] 297 S.W.3d 397 (Ct. App. Tex. 2009).

The post Is COVID-19 a Force Majeure Event That Excuses Performance on Renewable Construction Projects? appeared first on POWER Magazine.