COVID-19 Crisis Highlights the Importance of Force Majeure Clauses in Energy Contracts
Force majeure and similar contractual excuse clauses have taken on an outsized importance in the wake of the COVID-19 pandemic, both in terms of the applicability of such clauses in current energy sector contracts, such as supply contracts and construction contracts, and in the scope of such clauses in as-yet-unexecuted contracts. Many energy sector participants are struggling with understanding what protection, if any, these clauses may provide them or their contract counterparties seeking to invoke them under current circumstances. Indeed, given that completion deadlines for many renewable energy projects are driven by cliff dates in connection with claiming the production tax credit or the investment tax credit, delays caused by the COVID-19 pandemic, and whether such delays may be excused under a contractual force majeure clause, have become critically important to energy sector participants.
The analysis of whether a force majeure clause may be appropriately invoked is driven primarily by three realities. First, text matters. The recent focus on force majeure clauses has revealed a wide array of approaches in contractual language. The types of events listed run the gamut, from very narrow definitions of force majeure events such as traditional "Act of God"-type occurrences, to much broader definitions that excuse, modify, or delay performance based on a laundry list of potential excuses. Thus, there is no one-size-fits-all analysis applicable to force majeure applicability—each clause and contract must be analyzed and applied to the specific facts and circumstances at hand. Second, causation is critical. Under certain force majeure clauses, events that simply hinder a party's ability to perform may be sufficient to invoke such clauses. Under other clauses, however, the claimed force majeure event must directly render performance impossible. Thus, a textual and fact-intensive inquiry is required in order to determine the applicability of a particular force majeure clause. And third, relief is not always sufficient. Indeed, even when force majeure or delay clauses are validly implicated, rights, remedies, notification, and mitigation requirements vary widely across contracts and jurisdictions and may not provide the relief sought by the invoking party.
Although disputes relating to many of these clauses in the COVID-19 context are in their infancy, the above factors, among many others, are vital considerations for contracts currently in negotiation. As a result, when drafting force majeure clauses, parties should carefully consider the following:
- Contractual Language Is Key: Even if a list of force majeure events is accompanied by a "catch-all" provision, the listing should specifically include intended events or it may not cover occurrences such as a pandemic or related government closures or travel advisories. In addition, parties should seriously consider whether to identify express exclusions to the force majeure provision in order to preclude a contractual counterparty from invoking certain events to excuse future performance of contractual obligations.
- Identification of Triggering Events: Because the express language of the force majeure clause controls interpretation and applicability, parties should pay careful attention to what level of impact on performance should trigger a force majeure provision (i.e., merely relational or directly causal).
- Be Wary of the Foreseeability Trap: Although contract language reigns supreme, some courts may read an unforeseeability requirement into a force majeure provision even if it is not expressly required by the language. As a result, in drafting force majeure provisions, parties should think carefully about whether the events they intend the clause to cover are arguably foreseeable, particularly when viewed through the lens of the COVID-19 pandemic. Energy sector participants can minimize this risk by expressly noting in their contractual force majeure provision that certain events can give rise to a force majeure claim whether or not such events are foreseeable. Conversely, parties seeking an unforeseeability requirement can explicitly state that such events must be unforeseeable in order to give rise to a force majeure claim.
While there is much uncertainty as to the ultimate effects of the COVID-19 pandemic on the renewable energy industry, one thing is certain—parties will be paying much closer attention to the text and intent of force majeure provisions in energy sector contracts.
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