The rise of COVID-19 (“Coronavirus”) has thrust us into unprecedented times in just about every aspect of life. Following recommendations by the CDC, the White House, and most medical experts, more people are staying home, and businesses are closing.
The oil and gas industry is an historically important, yet fragile, part of the nation’s economy. It is virtually impossible to go a single day without using a product or energy source that is not, in some form, provided by the oil and gas industry. From plastics to gasoline, the oil and gas industry is a part of everyday life. Despite this prevalence, the state of the industry is erratic and highly dependent on the nation’s economic and geopolitical position. The economic effect of the Coronavirus is a major obstacle in an already tough oil and gas market.
Low oil prices are not a new phenomenon. The industry has weathered various economic recessions and depressions since its discovery. However, with the rise of the Coronavirus, the industry is facing a completely unique set of circumstances. This leaves us with many practical, yet unanswered legal questions.
The most pressing concern for various industries pertains to a rarely used, often forgotten clause: the force majeure clause. Force majeure clauses exist in virtually every type of contract. This clause provides that, with the occurrence of certain events or circumstances that are beyond either party’s reasonable control, i.e. an “Act of God,” performance of the contract by either or both of the parties will be excused. Modern standard-form oil and gas leases and assignments usually contain this type of clause.
Despite prevalence in modern contracts, force majeure provisions are rarely used, as they are reserved for only the most unthinkable circumstances. As we find ourselves in the inconceivable – a modern pandemic – it’s time to consider the protections the force majeure clause provides in the context of the primary term of an oil and gas lease. As state oil and gas commissions are closing, deadlines are being altered and extended. As a result, plans for drilling and production have been thrown for a loop.
Force majeure clauses are contractual, so applicability is largely based on the unique facts of each circumstance. A force majeure provision is useful for risk analysis, but the ultimate effect of this clause depends on either the agreement of the parties or the decision of a court of law. Because force majeure clauses arise out of contracts, they only matter when parties to a contract have found themselves in a lawsuit for the performance of the subject contract. The use of the force majeure clause in a civil suit would arise as an affirmative defense. For example, if a lessee finds itself in a quiet title action for the release or cancellation of an oil and gas lease due to the expiration of the primary term, the lessee might bring up the force majeure provision to show that outside circumstances caused a delay, thus necessitating the extension of the primary term. The responsibility for proving a force majeure event lies solely on the party asserting this defense.
State and federal courts are largely responsible for determining what constitutes a force majeure event. Often, these cases set out what does not constitute a force majeure event. The Oklahoma Supreme Court has determined that lack of demand and low pricing does not qualify as a force majeure event. Golsen v. Ong Western, Inc., 756 P.2d 1209, 1213 (Okla. 1988). Colorado has also adopted this view, holding that market forces do not constitute a force majeure event. Kaiser-Francis Oil Co. v. Producer's Gas Co., 870 F.2d 563 (10th Cir. 1989). Additionally, Wyoming courts have adopted the position that market forces do not qualify as a force majeure event, unless they have been specifically included in the force majeure clause. W. Tex. Utils. Co. v. Exxon Coal USA, 807 P.2d 932 (Wyo. 1991).
Similarly, Texas courts consider foreseeability in their force majeure analysis: “An economic downturn in the market for a product is not such an unforeseeable occurrence that would justify the application of the force majeure provision, and a contractual obligation cannot be avoided simply because performance has become more economically burdensome than a party anticipated.” TEC Olmos, LLC v. Conocophillips Co., 555 S.W.3d 176, 183, 2018 Tex. App. LEXIS 3909, *11, 2018 WL 2437449 (quoting Valero, 743 S.W.2d at 663-64). Texas also supports the position that foreseeable events, such as an economic downturn, should be specifically bargained for to qualify as a force majeure event. TEC Olmos, LLC v. Conocophillips Co., 555 S.W.3d 176, 186, 2018 Tex. App. LEXIS 3909, *21, 2018 WL 2437449.
The apparent consensus on force majeure is that market forces do not qualify unless they were specifically bargained for within the force majeure clause.
Although dependent on the facts at hand, multiple court decisions have provided insight as to what constitutes a force majeure event. Colorado has determined that a state’s failure to comply with regulations constitutes a force majeure event. Gillespie v. Simpson, 41 Colo. App. 577, 588 P.2d 890 (1978). North Dakota has determined that a force majeure clause can extend the term of an oil and gas lease when operations are delayed by the government, so long as nothing in the clause limits its application to the secondary term of the lease. Pennington v. Cont'l Res., Inc., 2019 ND 228, 932 N.W.2d 897. Wyoming defines a force majeure event as “any accident, due directly and exclusively to natural causes, without human intervention, which by no means of foresight, pains, or care, reasonably to have been expected, could have been prevented.” Sky Aviation Corp. v. Colt, 475 P.2d 301, 304 (Wyo. 1970). Texas prioritizes foreseeability in its force majeure analysis. See TEC Olmos, LLC v. Conocophillips Co., 555 S.W.3d 176 (Tex. App. 2018). These cases suggest that determination of a force majeure event is largely based on the facts at hand, foreseeability, and extent of governmental interference.
This thousand-foot view of state case law provides a few guidelines that should be considered as we weather the storm of the Coronavirus. Here are some things you should consider when addressing a force majeure issue:
According to the White House, we are likely to be dealing with the effects of Coronavirus until late Summer 2020. Maintenance of public health may lead to further government interference in day-to-day life. The application of a force majeure provision will depend largely on the provision itself, the facts of your case, and the specific nature of the government interference.
If you find yourself faced with a potential force majeure issue, you should seek the advice of the attorneys at Ball Morse Lowe for legal counsel in determining the proper steps to protect your contractual interest. Call our offices today at 405-701-5355.