Renewed Importance of Interpreting and Drafting Force Majeure Clauses in Mining and Energy Contracts in Light of COVID-19

Dickinson Wright
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Dickinson Wright

Economic fluctuations bring about a number of difficult decisions for businesses operating in mining and energy industries in the form of staffing levels, production capacity increases or reductions, areas of expansion or contraction, supply chain challenges and overall business strategies.  With the current rollercoaster that commodity prices are on, in light of the demand ebbs and flows associated with the COVID-19 crisis, one common question in the industry is what are the options for a business that can no longer meet its contractual obligations?  There are varying analyses and answers must be determined on a case-by-case basis; however, a prudent starting point is to review these contracts for potential force majeure clauses.

Force majeure clauses are frequently found within mining and energy contracts and generally relieve the parties from liability or performance obligations when an event or circumstance that was unforeseen or not anticipated at the time of contract formation occurs.  While common, these provisions are triggered very rarely and as a result are often misunderstood or under-evaluated.  While there are slight variations from state to state and court to court, a court interpreting a force majeure clause will generally attempt to answer the following questions based upon the facts of a specific triggering event:  (1) Does the triggering event fall within the language of the force majeure clause?; (2) Has the party seeking relief from its obligation demonstrated that its ability to perform was materially impacted by the triggering event?; (3) Was the triggering event beyond the control of either party?; and (4) Was the triggering event unforeseeable at the time the parties entered into the contract?  Again, while it may vary slightly between jurisdictions, courts also trend toward reading force majeure clauses narrowly.  Another factor to consider is courts generally hold that mere economic hardship is not considered to have a material impact on ability to perform in the realm of force majeure clauses.  When analyzing contracts for your business, the preceding factors must be considered on a per contract basis to ascertain options in moving forward.

Analysis on mining and energy contracts where a given product needs to be provided or certain payments made may be more uniform with contracts made for other industries.  However, mining and energy contracts for a set term in which a company must begin extracting minerals or provide for a set period in which extraction may be paused without extinguishing the contract are more complex.  Will businesses be able to toll the obligation to begin extraction or the time frame to pause extraction for the length of the COVID-19 crisis?  Is the duration of the COVID-19 crisis defined by any governmental prescribed stay-at-home orders and industry shutdowns or by some potential economic factor?  These are questions that need to be considered when reviewing the force majeure clause and that are likely to be litigated throughout the country as we move forward.  One thing that is clear, events such as COVID-19 will be considered a foreseen possibility in the future and contracts drafted from this point forward will need to contain detailed force majeure clauses to eliminate questions as to applicability in situations such as pandemics.

Force majeure is just one possible answer for mining and energy businesses that are unable to fulfill existing contractual obligations.  If an agreement does not contain a force majeure clause or it is inapplicable to the specific circumstances presented, other options could be theories of frustration of purpose or impossibility or impracticality of performance. However, like force majeure provisions, the potential remedies available need to be evaluated on a case-by-case basis.  As we all move forward in the post COVID-19 landscape, mining and energy contracts will need to include carefully drafted clauses anticipating possible future events to provide operational and financial options for your business.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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