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Force Majeure COVID-19

Authors: Robert Scales, Tyler J. Cox 

Contributing Editor: Melinda D. Frazier

While there’s little doubt the early part of 2020 has left the world reeling with the spread of the global pandemic, COVID-19, the question remains: Does COVID-19 qualify as a force majeure event as commonly defined in oil and gas leases? Businesses across the globe are scrambling to adjust to a disruption in operations in the face of the outbreak of COVID-19, and oil and gas companies are no exception. Many businesses engaged in oil and gas operations are under unique time pressure constraints in the context of numerous contractual obligations, most notably being oil and gas leases, which contain provisions requiring commencement or continuance of drilling operations within certain timeframes to maintain the validity of these leases. One possible mechanism that oil and gas operators may rely upon to maintain these leases in the face of a global pandemic is the force majeure clause.

A force majeure clause is a contractual provision which allows a party, who would be otherwise obligated to fulfill a certain contractual obligation, to temporarily suspend the performance of said obligation.[1] Historically grounded in common law, force majeure protects parties against circumstances beyond the control of the non-performing party that correspondingly make performance commercially impractical, illegal, or impossible.[2] Like many other contractual doctrines, force majeure clauses have migrated over time to sophisticated, negotiated contractual provisions. In oil and gas leasing and development, one application of a force majeure clause is to relieve an oil and gas lessee from the termination of the lease due to circumstances beyond its control that would make performance untenable or impossible.[3]

As with all other contractual provisions, courts have historically looked to the language of the contract to ascertain the intention of the parties thereto. Of course, the scope and effect of any force majeure clause depends upon its wording, but courts have construed these clauses in light of their general purpose.[4] When a party to a contract wishes to determine the applicability and scope of a force majeure clause, the first step is to determine if the event qualifies as force majeure as set forth under the specific terms of the contract in question.

In the following example, the language of the force majeure clause is very general, and therefore it is uncertain whether the impact of COVID-19 on the lessee’s operations would in and of itself, suffice. The clause provides:

Should Lessee be prevented from complying with any express or implied covenant of this Lease, or from conducting drilling or reworking operations hereunder, or from producing oil or gas hereunder by reason of scarcity or inability to obtain or use equipment or material, or by operation of force majeure, or by any Federal or state law or any order, rule or regulation of governmental authority, then while so prevented, Lessee’s duty shall be suspended after written notice to Lessor by certified mail, and Lessee shall not be liable 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 or from producing oil or gas hereunder, and the time while Lessee is so prevented shall not be counted against Lessee, anything in this Lease to the contrary notwithstanding.[5]

In the aforementioned clause, the force majeure event is not specifically listed, therefore this may place the party asserting force majeure in a position to show that such event was unforeseeable.[6] Although several courts have noted in dicta that disease outbreaks may qualify as a general force majeure event, it seems unlikely that the virus, in its current iteration, would cause such a disruption to make operations impracticable in broadly drafted clauses.[7]

In contrast, some parties have expanded upon the drafting of force majeure clauses in an effort to provide clear guidelines as to what constitutes a qualifying force majeure event. For example, in a contract for services with the State of Wyoming, a force majeure clause included “epidemics and quarantines” as a qualifying force majeure event. Thus, although there is relatively little case law pertaining to force majeure clauses as they pertain to situations similar to COVID-19, language of this nature may well suffice.[8]

While the court will abide by standards of contract interpretation regarding language that explicitly defines force majeure events, many courts have relied on common law to fill gaps in general, catch-all clauses, which would include the undefined reference to force majeure in the example above.[9] These gap fillers typically include four considerations:[10]

  1. Foreseeability – the intervening event must be unforeseeable and therefore could not have been prevented or mitigated.[11]
  2. Beyond the Control of the Parties - the intervening event must be beyond the reasonable control of the party that is seeking protection under the force majeure clause.[12]
  3. Impracticability – the intervening event has made performance impracticable because “the cost of performance has in fact become so excessive and unreasonable that the failure to excuse performance would result in grave injustice”.[13]
  4. Causality – the intervening event must be the proximate cause of the party’s inability to perform.[14]

On the other hand, subsequent government actions, including city and state shelter-in-place orders may trigger the use of the force majeure clause. For example, the State of Idaho issued an order directing “all individuals living in the State of Idaho to self-isolate at their place of residence,” with exemptions for “Essential Services.[15] The definition of Essential Services includes “Essential infrastructure, including…gas…oil refining,” among others.[16] The ambiguity of essential infrastructure creates a reasonable possibility that workers involved in oil and gas drilling operations are not exempt from the self-isolate requirement. Conversely, the State of California adopted a stay-at-home order, excepting jobs “needed to maintain continuity of operations of essential critical infrastructure sectors.”[17] These exemptions included petroleum workers involved in numerous oil and gas operations including “[p]etroleum drilling, extraction, production, processing, refining.”[18] Here it is clear that oil and gas drilling and related activities are explicitly exempt from California’s stay-at-home order. Ultimately, whether a stay-at-home order triggers a general force majeure provision turns on the exact language and allowed exceptions of each order.

After consideration, should a company determine that a stay-at-home order temporarily suspends the necessity of drilling operations under a lease, there are several practical steps that may be helpful should disputes around the force majeure clause arise. First, keep exhaustive records relating to the state of operations prior to suspending operations, the actions taken in preparation of suspension, the date suspension of operations occurred, the date operations resumed, and the actions and time necessary to fully reengage operations, etc. Second, pay close attention to the notice requirement that is included in the above force majeure clause. The suspension of obligations under this clause would take effect only after written notice is given to Lessor. All force majeure clauses contain different notice requirements and must be strictly complied with in order to invoke said provision. Finally, the force majeure clause is only intended to act as a temporary relief from an obligation under the contract. This relief from performance will only last for the length of time that the clause is triggered, and therefore the suspended obligations will return the moment that the force majeure triggering event is deemed to have concluded.

In conclusion, the triggering of the force majeure provision in your contract is a question of fact, and as this situation remains fluid at this point, the answer to your force majeure question could change from day to day. Under this ever-evolving landscape, we recommend continuous tracking of orders and regulations as to your relevant jurisdictions, as well as regular consultations regarding the possible applicability of each of your force majeure clauses, prior to the attempted invocation of a force majeure provision.

 

[1] Patrick H. Martin and Bruce M. Kramer, Williams & Meyers, Oil and Gas Law, § 683 (LexisNexis Matthew Bender 2019).

[2] Id.

[3] 38 R. Eclavea, Am.Jur.2d, Gas and Oil § 83 (Westlaw May 2015).

[4] Northern Natural Gas Co. v. Approximately 9117 Acres In Pratt, No. 10-1232, U.S. Dist. LEXIS 64006 (D. Kan. May 7, 2012).

[5] Producer’s 88- New Mexico- Paid Up/Pooling Lease Form.

[6] TEC Olmos, LLC v. ConocoPhillips Co., 555 S.W.3d 176 (Tex. App.-Houston, 2018).

[7] SNB Farms, Inc. v. Swift & Co., Nos. C01-2077, C01-2078, C01-2080, 2003 U.S. Dist. LEXIS 2063, (N.D. Iowa Feb. 7, 2003) (It is undisputed for the purposes of summary judgment that the outbreak of [Porcine Reproductive and Respiratory Syndrome] constituted a force majeure event); Rexing Quality Eggs v. Rembrandt Enters., 360 F. Supp. 3d 817, 841 (S.D. Ind. 2018) (noting that avian flu may constitute an unforeseeable event subject to a force majeure clause).

[8] See State of Wyoming Contract for IT Consultant Services, https://wyoleg.gov/WYGovTransparency/Contracts/Adventos.pdf., (last accessed March 25, 2020).

[9] Sun Operating Ltd. P'ship v. Holt, 984 S.W.2d 277, 283 (Tex. App.—Amarillo 1998, pet. denied).

[10] Courts have consistently rejected the application of these gap-fillers to provisions or events explicitly contemplated within the contract. See Zurich Am. Ins. Co. v. Hunt Petrol.(AEC), Inc., 157 S.W.3d 462, 466 (Tex. App.—Houston [14th Dist.] 2004, no pet.), ("Regardless of its historical underpinnings, the scope and application of a force majeure clause depend on the terms of the contract."); Eastern. Air Lines v. McDonnell Douglas Corp., 532 F.2d 957 (5th Cir. 1976) ("[w]hen a risk has been contemplated and voluntarily assumed . . . foreseeability is not an issue and the parties will be held to the bargain they made.")

[11] See Gulf Oil Corp. v. Fed. Energy Regulatory Comm’n, 706 F.2d 444, 454 (3rd Cir. 1983).

[12] Atkinson Gas Co. v. Albrecht, 878 S.W.2d 236, 241 (Tex. App. 1994).

[13] This standard varies by jurisdiction across the United States, with some jurisdictions requiring a more stringent standard of “objective impossibility”. See Gulf Oil Corp. v. Fed. Energy Regulatory Com., 434 U.S. 1062, 98 S. Ct. 1235 (1978). See also Kel Kim Corp. v. Central Mkts., Inc., 70 N.Y.2d 900, 902 (1987).

[14] Toyomenka Pac. Petroleum, Inc. v. Hess Oil V.I. Corp., 771 F. Supp. 63, 67 (S.D.N.Y. 1991), (The court found that limited capacity in port due to a hurricane granted relief under a force majeure provision several weeks after the hurricane had passed.)

[15] Order to Self-Isolate for the State of Idaho, March 20, 2020, https://coronavirus.idaho.gov/wp-content/uploads/sites/127/2020/03/statewide-stay-home-order_032520.pdf (last accessed March 20, 2020).

[16] Id.

[17] Executive Order N-33-20, March 4, 2020, https://www.gov.ca.gov/wp-content/uploads/2020/03/EO-N-33-20-COVID-19-HEALTH-ORDER-03.19.2020-002.pdf, (last accessed March 26, 2020).

[18] Essential Critical Infrastructure Workers, March 22, 2020, https://covid19.ca.gov/img/EssentialCriticalInfrastructureWorkers.pdf, (last accessed March 26, 2020).

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