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Wednesday,
May 17, 2006
 In recent months, many businesses and individuals have sought to determine their rights and obligations in the hurricane-altered business environment of the Gulf Coast. Countless seminars and papers have been presented on the myriad legal issues that have dominated the landscape since the storms. The wave of pending litigation is ever growing. However, with hurricane season upon us yet again, it is prudent to keep in mind the issues that should be considered in preparation for future storms, as well as in preparation for potential lawsuits. This newsletter is not intended to provide a comprehensive discussion of the non-litigation/pre-litigation issues facing the Gulf Coast business community, but rather to touch on the highlights of three of the most significant issues. In this first installment of a three-part series, we will discuss certain common issues in the area of force majeure. Over the next several weeks, look for Part II discussing selected insurance issues, and finally Part III covering certain aspects of oil spill cleanup cost recovery under the Oil Pollution Act of 1990, including the act of God affirmative defense to liability under that statute.
Force Majeure – What Happens When a Storm Makes Performance Under a Contract Prohibitively Burdensome or Impossible?
Force majeure, both as a legal concept and as a contractual provision, operates as a potential safe harbor in which to shelter when an unforeseen event makes the performance of an obligation significantly more difficult to the point of being impossible. The term “force majeure” is virtually interchangeable with “fortuitous event,” “cas fortuit,” “irresistible force,” and “act of God,” all of which are essentially defined as “a providential occurrence or extraordinary manifestation of forces of nature which would not have been foreseen and the effect thereof avoided by the exercise of reasonable prudence, diligence and care.” Rector v. Hartford Accident & Indem. Co., 120 So.2d 511 (La. App. 1 Cir. 1960). A force majeure event will “excuse the discharge of a duty and relieve a defendant from liability for injury.” Id. Though foreseeability is a major component of any force majeure analysis, Louisiana courts have tended to recognize hurricanes as fortuitous events, despite the (increasing) number of major storms occurring in the Gulf of Mexico each year. Technological advances have greatly increased the accuracy of forecasting the path of a storm, but the state courts seem to be willing to acknowledge the inherently unpredictable nature of hurricanes, a characteristic that was well illustrated by both Katrina and Rita’s last minute, unexpected changes in direction prior to landfall.
If a contract contains provisions regarding force majeure, that clause will serve as an instruction on how the parties intended to resolve the situation when the contract was drafted. If that provision lists specific events that allow a declaration of force majeure, that list is generally exclusive, despite any broad language in the provision such as “whether of the kind enumerated herein or otherwise.” On the other hand, if there is no force majeure clause, other portions of the contract may illustrate whether the occurrence of the particular event was contemplated by the parties and if so, how the parties intended to comply with that provision. A contract may contain several different clauses that control the parties’ behavior in the event performance under the contract is hindered, in addition to a force majeure clause. In that case, the force majeure provision may not automatically control the disposition of a dispute if other provisions address the parties’ obligations when performance is impaired. A continuous operations clause, for example, may provide an alternative, controlling mechanism by which the parties’ rights may be determined, exclusive of any force majeure clause.
In both Louisiana and Texas, the line between “impracticability” and “impossibility” of performance is not entirely clearly defined. While the Louisiana Civil Code permits dissolution of a contract as a result of “impossibility” of performance, some case law suggests that “impracticability” may be the standard, at least insofar as performance becomes so economically burdensome as to be relatively impossible. Nevertheless, courts have frequently held parties liable for non-performance, even under conditions that made performance economically unfeasible. Texas, however, recognizes the defense of impracticability in much narrower circumstances. The state courts have limited their understanding of “impracticability” to the few scenarios recognized in sections 262 through 264 of the Restatement (Second) of Contracts, each of which, in practical terms, amounts to absolute impossibility of performance. Ancillary, albeit essential, elements of the contract do not appear to qualify as “basic assumptions” upon which the viability of the contract hinges for the purposes of a commercial impossibility claim. This analysis dovetails with force majeure jurisprudence, which generally requires performance to have been rendered impossible by the supervening event—not merely more difficult or burdensome—before performance will be excused.
In the absence of a force majeure clause, both Louisiana and Texas law contain statutory gap fillers to provide guidance with regard to the parties’ rights and obligations in the event performance becomes impaired. Under Louisiana law, in situations where there is neither a general force majeure clause nor a provision regarding a specific event, or where there is no contract at all, Civil Code Articles 1873 through 1878 supply the pertinent provisions regarding the application of force majeure principles. The Code emphasizes proportionate reduction of the parties’ obligations and grants a reviewing court the discretion to tailor its decision “according to the circumstances.” In Texas, in the context of a dispute involving a contract for the sale of goods, Uniform Commercial Code sections 2.614 through 2.616 may be substituted for absent contractual provisions. The UCC requires a tender and acceptance of commercially reasonable substituted performance when the agreed manner of delivery becomes commercially impracticable, and, additionally, a fair and reasonable allocation of seller’s production amongst its buyers if only a part of its duty is affected by the event. Notably, the event causing non-performance must be an event not within the contemplation of the parties at the time of contracting. Further, increased cost alone does not excuse performance except in the most extreme and unforeseen circumstances.
The various issues arising under force majeure are likely to be litigated extensively over the next several years. While this may help crystallize the law in the future, it is imperative that businesses and individuals be aware of their rights with respect to this important provision.
For more information, please contact Michael Golemi at magolemi@liskow.com or Anna Knull at atknull@liskow.com or go to www.liskow.com.
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