2/18/21 - Insights
A Perfect Storm: How Will Contracts Be Impacted by Conditions in Texas?
Arctic cold and historic snowfall this February have caused substantial disruption nationwide, in particular in the state of Texas. Widespread, record low temperatures, combined with unprecedented demand on the power supply, have temporarily shuttered businesses across the state. Further exacerbating this “perfect storm,” much of the state’s wind-powered electric generation capacity has been stalled as a result of extreme low temperatures. And it’s not just alternative energy that has been impacted by the severe weather conditions: a number of the country’s major oil refineries have been shut down, and numerous west Texas oil wells have been temporarily shut in.
The probable, if not unavoidable, consequence of these events is a disruption of business and contractual performance. Because many contracts include specific notice provisions and time-sensitive performance deadlines, parties are well advised to promptly evaluate their agreements.
Force majeure generally. Force majeure clauses are frequently—but not always—included in contracts and typically excuse non-performance under the contract. These provisions vary in specificity and can cover acts of war, government orders, and natural disaster, which the recent weather conditions may trigger. However, economic hardship alone or difficulty of performance generally do not qualify as force majeure events. Likewise, some agreements expressly exclude payment obligations as a type of performance subject to force majeure declarations.
When force majeure issues arise:
- Promptly notify your legal department or outside counsel. If you believe a contractual obligation should be excused as a result of the recent weather events, or if you have received notice from another party that they are considering not performing under the contract, contact counsel immediately to discuss the issue.
- Look to the contract. Review the relevant agreement to identify any potentially applicable provisions, such as force majeure, material adverse change, impossibility, impracticability, notice provisions, time limits, and representations and warranties. The specific terms of the agreement—and particularly the force majeure clause—likely control the analysis.
- Create a timeline/data sheet. Make detailed notes regarding when performance was or is due under the relevant contracts, whether any partial performance has occurred or any partial payment was made—and when those payments or that performance occurred—and identify what deliverables or future commitments may be impacted if a contractual obligation is not performed.
- Collect and preserve relevant documents. If possible, gather all relevant documents, contracts, and communications and provide to your legal team. As with any issue that has the potential for litigation, preserve any potentially relevant documents and information.
- Provide notice. Working with counsel, provide prompt, written notice of all identified issues to the other party. Giving notice will protect and preserve your rights, and formal notice may be required under your agreement. When giving notice, provide basic facts, but avoid giving any explanations (particularly regarding causation) that might prevent you from modifying your position as you obtain additional information. If providing notice of force majeure, be sure to conform to any contractual requirements (timing, form of notice, and any required detail). Avoid making any firm commitments or promises that might compromise your rights and express the potential for flexibility where possible. Likewise, avoid framing issues with contract performance in terms of pure economic frustration.
- Take notes. Especially if you are receiving notice from another party, take careful notes of all information provided during the communication or promptly thereafter. Of particular import, make note of any statements by your counter-party that concern: (i) what the other party believes caused its inability to comply with the contract, (ii) when the problem first arose, and (iii) what clause in the contract they rely on to excuse their non-performance. Record the date and time of the communication as well as the identity of all parties present and provide to your lawyers.
- Set deadlines for future action and keep the pressure on. In communicating with the other party, identify specific dates by which they must respond and follow up with phone calls, letters, or emails if they fail to do so in a timely manner. If you are the party seeking relief from a contractual obligation, respond swiftly to the other side’s communications while avoiding making any promises or statements that could be used against you in the future.