In the aftermath of hurricanes Laura and Delta, Southwest Louisiana is faced with a widespread reconstruction project the size of which it has not seen in quite a while.  While never afraid to roll up the sleeves and get to work, this time the demand for contractors exceeds the local supply.  Welcoming help from each other is nothing new for our two great states in times of trouble and once again, many Texas based construction companies have begun or are considering getting involved with Southwest Louisiana’s “renovation.”

The purpose of this piece is to remind all involved that construction law in Louisiana has an important distinction from construction law in Texas.  In Texas, a general contractor is not required to have a license to enter a contract for construction or to perform construction activities.  With very few exceptions, the opposite is true in Louisiana.

The Louisiana contractors licensing law is found at La. R.S. § 37:2150-2192.  In general, it requires all contractors performing commercial projects to be licensed by the Louisiana State Licensing Board for Contractors.  The statute contains different licensure requirements for different types of construction primarily based on value of the project or the relative difficulty involved.  For example, a commercial license is required for all commercial projects of $50,000 or more.  A residential license is required for all projects exceeding $75,000.

Within these two broad categories, there are certain subgroups that have varying dollar amount thresholds.  For example, if your commercial project involves any hazardous materials, a license is required if the project value exceeds $1.00, which is to say, you must be licensed.  The same one-dollar threshold is true for mold remediation, which is in particularly high demand following back-to-back hurricanes.

For our friends who are looking for contractors, we encourage you to go to www.lacontractor.org which provides a list of all licensed contractors.  Understandably everyone wants to get back on their feet as fast as possible, but it only takes a second to confirm that the business you may be dealing with is in fact licensed in Louisiana.

To our friends in Texas looking to lend a hand to its neighbors to the east, we likewise encourage you to visit www.lacontractor.org to review the requirements, schedule a test, and get licensed before contracting for or performing any construction work in Louisiana.

It is our understanding that the Louisiana State Licensing Board for Contractors has been inundated with applications from Texas based construction firms seeking licensure for some component of the South Louisiana rebuild.  We understand that due to COVID-19 restrictions, the normal testing locations cannot accommodate the demand for tests and that alternative sites have been offered at various places throughout the state.

For more information on the Kean Miller Construction Law Team, click here.

Title to minerals and royalties in Texas has long been riddled with problems arising from subject-to, reservations-from, and exceptions-to provisions.  Over the years these problems have naturally found their way into the Texas courts, highlighting the critical importance of drafting language to avoid ambiguity and clarify intent.  Emphasis is placed on intent, as unambiguous deeds often are found at the center of litigation. In practice, Texas has always recognized the fundamental public policy of allowing parties the broad freedom to enter into contracts, including mineral conveyances, on terms agreed to by the parties, and Courts will usually enforce the terms as written.  It is also understood amongst oil and gas lawyers that the trend in Texas case law appears to be a gradual transition from a simple mechanical application of the basic rules of deed construction, with an increased focus on the parties’ intent. However, that trend towards increasing recognition of the intent of the parties may be contrived or overstated, as illustrated by the recent Texas Supreme Court case of Wenske v. Ealy, 521 S.W.3d 791, 797 (Tex. 2017) This caseillustrates the importance of clearly stating the intent of the contracting parties to remove doubt and avoid a rigid application of the default rules of deed construction.

Wenske v. Ealy

In the Wenske case, the issue at hand was whether a deed transferred the entire burden of an outstanding non-participating royalty interest to the grantee, or whether the non-participating royalty interest was intended to burden both the grantee and grantor’s reserved interest proportionately.

A quick summary of the facts – in 1988, the Wenskes purchased a tract of land by deed in which the grantors reserved a collective one-fourth (1/4) non-participating royalty interest covering all oil, gas, and other minerals for a term of twenty-five (25) years.  Subsequently, in 2003, the Wenskes conveyed the tract to the Ealys by warranty deed, “subject to” a reservation of an “undivided 3/8ths of all oil, gas, and other minerals in and under and that may be produced from the tract” and included the following clause:

Exceptions to Conveyance and Warranty:

Undivided one-fourth (1/4) interest in all of the oil, gas and other minerals in and under the herein described property, reserved by [the grantors in the 1988 deed] for a term of twenty-five (25) years … together with all rights, express or implied, in and to the property herein described arising out of or connected with said interest and reservation …

In 2011, the Wenskes and Ealys executed oil and gas leases covering the property and in 2013, a dispute arose concerning how the 1/4th non-participating royalty interest would burden their interests.  The Wenskes argued that their reserved 3/8ths mineral interest was not burdened by the 1/4 non-participating royalty interest, while the Ealys argued that each mineral owner bore their proportionate share of the burden. Neither party argued that the 2003 warranty deed was ambiguous.

At the appeals level, in deciding in favor of the Ealys, the Court reasoned that since the 2003 warranty deed was silent as to how the burden of the 1/4th non-participating royalty interest should be allocated, the “default rule” prevails – being that ordinarily a non-participating royalty interest is carved proportionately out of any applicable mineral interest from which it was created.  The Texas Supreme Court, although agreeing with the Appeals Court’s ultimate result, rejected the reasoning, emphasizing that the “Parties’ intent, when ascertainable, prevails over arbitrary rules.”

The Texas Supreme Court focused on the fact that the grant in the 2003 warranty deed was made subject to both the reservation of the 3/8ths mineral interest, as well as the exception to conveyance, which neither party disputed.  Simply put, the 2003 warranty deed conveyed the minerals to the Ealys, reserved 3/8ths of the minerals to the Wenskes, and put the Ealys on notice that the entirety of the mineral estate was subject to the 1/4th non-participating royalty interest (thus avoiding a warranty claim from the Ealys).  The Court reasoned that the deed did not contain language that would contradict the long-standing oil and gas principal that ownership of minerals carries with it the right to receive a corresponding interest in the royalties, and that a “severed fraction of a royalty interest”, like the 1/4th non-participating royalty interest at issue, generally burdens the entire mineral interest from which it was carved out.  As a result, the Court held that under a careful and detailed examination of the 2003 warranty deed, while recognizing the words in the deed their plain meaning and harmonizing all of its parts, it could not be construed to read that the parties intended only the Ealy’s interest be subject to the 1/4th non-participating royalty interest.  In other words, the Court reasoned that the language used in the 2003 warranty deed could not be read as intending to alter the default rule, therefore, the default rule was applied and Wenske and Ealy were both proportionately burdened by their share of the non-participating royalty interest.

The Court purported to reject the idea of simply using a default rule, in this case, the rule being that a non-participating royalty interest generally proportionately burdens the entire mineral interest from which it was carved.  However, despite the Court’s stated goal of emphasizing the parties’ intent over a strict application of the default rule of contractual interpretation, the Court appears to have created uncertainty, as its holding is essentially based on a default rule. In hindsight, if Wenske intended to transfer the entire burden of the non-participating royalty interest to Ealy, the deed should have expressly stated that intent, bypassing any application of the default rule explained above.

Conclusion

The Wenske case illustrates that, although the intent of the parties has been increasingly important in recent years, intent is still often looked at through the lens of long-standing oil and gas rules and principles.  Therefore, when drafting contract language addressing Texas oil and gas rights – lease provisions, deed provisions, reservations, exceptions, etc. – the drafter should be mindful that intent is not always readily ascertained or applied.  Consequently, it remains critical to recognize that if a party wishes to stray from the default rules of construction, those intentions need to be clearly expressed in the document.

 

Cory Page is an associate in The Woodlands office of Kean Miller, LLP.  His practices focus on upstream oil and gas matters. Cory may be reached at 832.509.2445 or Cory.Page@keanmiller.com.

Many clients ask, “How do I keep my house from going into probate when I die?”  A Transfer on Death Deed (“TODD”) is one way to do this.

What is a TODD?  In 2015, Texas enacted Chapter 114 of the Texas Estates Code, which created and authorized the TODD.  Its main purpose is to allow a property owner, whose main asset is their home, to transfer their interest in the property to a designated beneficiary/beneficiaries, outside of the probate process.  The original statute even provided a statutory form that could be used by property owners and attorneys.

What are the advantages?  First, the TODD allows the owner to transfer title by simply recording the TODD before the owner passes away.  Second, a TODD (like a will or trust) does not trigger any mortgage “due on sale” clause, and it does not affect any homestead or ad valorem exemptions.  Third, the TODD can be revoked at any time during the lifetime of the owner.  This means that the owner can still sell the property during his lifetime.

What are the disadvantages?  The TODD became effective in 2015; however, over the last five years the disadvantages are becoming more and more evident.

First, the statutory form, which was intended to make drafting a TODD easier, has been dropped from the 2019 statutory version, because the poorly written form created more confusion and problems than intended.

Second, the statute provides for a two year “claw back” period which allows unpaid creditors to “claw back” the deceased owner’s property into the probate estate and force a sale in order to pay the creditors.

Third, title companies may refuse to write insurance policies for the property during the two year “claw back” period.  This results in many beneficiaries being unable to sell or refinance the property during the first two years.

Fourth, the TODD overrides any contrary provision in the owner’s Will, even if the Will is signed after the TODD.  The only way to revoke a TODD is by either expressly revoking the TODD, or by revoking the prior TODD and naming a new beneficiary.  The revocation is not effective until the instrument is filed the in the county clerk’s office where the property is located

Fifth, the beneficiary takes the property, subject to all conveyances, encumbrances, assignments, contracts, mortgages, and liens.  In some instances, this can lead to a beneficiary not being able to pay off the lien obligations and forcing either a sale of the property, if possible, or a foreclosure.

Do I still need a Will?  There are several advantages to a TODD, but a property owner needs to be aware of the disadvantages when deciding whether to use one.  A TODD can be an easy way to transfer property to a beneficiary but it should be considered as one tool in the toolbox.  It is often necessary to support that planning with a well written Will to complete your planning.  Be sure to speak with your attorney to identify the best planning options for your circumstances.

The upcoming election and concern regarding potential changes have people asking questions about what they can do in 2020 to blunt the impact of a future change in the tax law.  One strategy for people with significant assets will be to give property away while the current tax laws are in place.

As many already know, the 2017 Tax Cuts and Jobs Act (“TCJA”) dramatically increased the gift and estate tax exclusion amount from $5 million per person to $10 million (adjusted annually for inflation) for gifts being made between December 31, 2017 and January 1, 2026.  On January 1, 2026, the exemption amount will return to $5 million dollars (also adjusted annually for inflation) unless Congress acts to pass a law that either (a) extends the date or (b) increases or decreases the exemption amount.

The scheduled reduction of the gift and estate tax exclusion amount back down to $5 million will have no practical effect for a US citizen that gives away less than $5 million in property because they will not have a taxable estate.  However, for people that believe they will give away more than $5 million, the $10 million exemption currently offered by the TCJA presents a planning opportunity.  Likewise, the $10 million exemption offers a planning opportunity to those concerned that Congress will pass a new law lowering the exemption below $5 million.

Last year, the IRS issued final regulations confirming that the larger $10 million exemption will apply to lifetime gifts made while the TCJA was in place even if the giver dies after it has expired.  For example, if a person has $13 million in assets and dies in 2027 having made no gifts during their life then (under current law without any adjustments for inflation) $8 million ($13m – $5m = $8m) will be subject to a 40% reduction for estate tax.  By contrast, if that same person makes a $10 million dollar gift in 2020, then only $3 million dollars of his/her estate would be subject to the estate tax.

In the example above, the giving strategy stands to save millions in tax liability.  However, there is no “one-size-fits-all” strategy for tax planning and there is a significant amount of planning that should go into how to properly structure and protect the gift.  Be sure to discuss your current plans and estate planning goals with a qualified attorney before implementing any tax planning strategies.

The Small Business Administration (“SBA”) issued an update to its “Frequently Asked Questions for Lenders and Borrowers for the Paycheck Protection Program,” adding question #46 and the response, which is recited below.  For PPP loans of less than $2 million, the borrower will be “deemed to have made the required certification concerning the necessity of the loan request in good faith.”  PPP loans greater than $2 million will be subject to SBA review for compliance. If the SBA concludes that “a borrower lacked an adequate basis for the required certification concerning the necessity of the loan request,” it will seek repayment. Importantly, if the loan is repaid in response to such notification, the SBA will not pursue administrative enforcement or referrals to other agencies in regard to the loan necessity certification.

  1. Question: How will SBA review borrowers’ required good-faith certification concerning the necessity of their loan request?

Answer: When submitting a PPP application, all borrowers must certify in good faith that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” SBA, in consultation with the Department of the Treasury, has determined that the following safe harbor will apply to SBA’s review of PPP loans with respect to this issue: Any borrower that, together with its affiliates,20 received PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith.

SBA has determined that this safe harbor is appropriate because borrowers with loans below this threshold are generally less likely to have had access to adequate sources of liquidity in the current economic environment than borrowers that obtained larger loans. This safe harbor will also promote economic certainty as PPP borrowers with more limited resources endeavor to retain and rehire employees. In addition, given the large volume of PPP loans, this approach will enable SBA to conserve its finite audit resources and focus its reviews on larger loans, where the compliance effort may yield higher returns.

Importantly, borrowers with loans greater than $2 million that do not satisfy this safe harbor may still have an adequate basis for making the required good-faith certification, based on their individual circumstances in light of the language of the certification and SBA guidance. SBA has previously stated that all PPP loans in excess of $2 million, and other PPP loans as appropriate, will be subject to review by SBA for compliance with program requirements set forth in the PPP Interim Final Rules and in the Borrower Application Form. If SBA determines in the course of its review that a borrower lacked an adequate basis for the required certification concerning the necessity of the loan request, SBA will seek repayment of the outstanding PPP loan balance and will inform the lender that the borrower is not eligible for loan forgiveness. If the borrower repays the loan after receiving notification from SBA, SBA will not pursue administrative enforcement or referrals to other agencies based on its determination with respect to the certification concerning necessity of the loan request. SBA’s determination concerning the certification regarding the necessity of the loan request will not affect SBA’s loan guarantee.

By: Jimmy Dupuis

In response to the COVID-19 disaster, Texas Governor Greg Abbott issued two orders allowing parties to notarize certain documents without a physical appearance before a notary public.  The orders suspend multiple statutes that require a face-to-face meeting, and they set out procedures that must be followed using video conference technology.

Estate Planning Documents

The first order was issued on April 8, 2020 and will remain in effect until terminated by the Office of the Governor or until the March 13, 2020 disaster declaration is lifted or expires.  It provides that parties may use video conference technology to notarize certain estate planning documents, including:

  • self- proving affidavits for wills;
  • durable powers of attorney;
  • medical powers of attorney;
  • directives to physicians; and
  • oaths of executors, administrators, and guardians.

The order suspends the following statutes to the extent necessary to allow for appearance before a notary public via video conference:

  • Estates Code § 251.104(b)
  • Estates Code § 251.1045(a)
  • Estates Code § 751.0021(a)(4)
  • Health & Safety Code § 166.154(b)
  • Health & Safety Code § 166.032(b-1)
  • Estates Code § 305.054
  • Estates Code § 1105.052

According to the order, documents executed while the order is in effect will be valid, including after the termination of the order, if the following procedures are employed:

  • A notary public shall verify the identity of a person signing a document at the time the signature is taken by using two-way video and audio conference technology.
  • A notary public may verify identity by personal knowledge of the signing person, or by analysis based on the signing person’s remote presentation of a government-issued identification credential, including a passport or driver’s license, that contains the signature and a photograph of the person.
  • The signing person shall transmit by fax or electronic means a legible copy of the signed document to the notary public, who may notarize the transmitted copy and then transmit the notarized copy back to the signing person by fax or electronic means, at which point the notarization is valid.

Note that this order does not address statutory requirements requiring wills to be witnessed by two people in the “conscious presence” of the testator.

Even though the order states that documents executed in compliance with the foregoing shall remain valid after the termination of the suspension of the applicable statutes, you should consult with your attorney about the advisability of re-executing any documents signed utilizing the procedures outlined above.

Real Estate Documents

This order was issued on April 27, 2020 and will remain in effect until the earlier of May 30, 2020 or the termination of the March 13, 2020 disaster declaration.  It suspends section 121.006(c)(1) of the Texas Civil Practice & Remedies Code to the extent necessary to allow for appearance before a notary public for the purpose of acknowledging real-estate instruments via video conference.

According to the order, documents executed while the order is in effect will be valid if the following procedures are followed:

  • A notary public shall use two-way audio-video communication technology that allows for direct and contemporaneous interaction between a person signing a document and the notary public by sight and sound.
  • A notary public shall verify the identity of a signatory at the time the signature is taken by using two-way audio-video communication technology. A notary public may verify identity by:
    • personal knowledge of the signatory;
    • analysis based on the signatory’s remote presentation of a government-issued identification credential, including a passport or driver’s license, that contains the signature and a photograph of the signatory, and is of sufficient quality to allow for identification; or
    • an introduction of the signatory by oath of a credible witness who personally knows the signatory, and who is personally known to the notary public.
  • During the two-way audio-video communication:
    • the notary public shall attest to being physically located in Texas;
    • the signatory shall attest to being physically located in Texas;
    • the signatory shall affirmatively state what documents are being signed; and
    • the signatory’s act of signing shall be close enough to the camera for the notary public to observe it clearly.
  • A recording of the two-way audio-video communication of the notarial act shall be kept by the notary public for two years from the date of the notarial act.
  • The signatory shall send the original signed documents by courier, U.S. Mail, or overnight carrier directly to the notary public for the notary public to sign and to affix the official stamp or seal.
  • The official date and time of the notarization shall be the date and time when the notary public witnessed the signatory signing the documents during the two-way audio-video communication.
  • The documents shall include, whether in a notarial certificate, a jurat, or an acknowledgement, language substantially similar to the following: “This notarization involved the use of two-way audio-video communication pursuant to the suspension granted by the Office of the Governor on April 27, 2020, under section 418.016 of the Texas Government Code.”

Note that this order states that it does not prevent a traditional notarization or an online notarization under chapter 406 of the Texas Government Code.  Although the first order, applicable to estate planning documents, does not contain similar language, the same would presumably apply.

By: Jennifer Jones Thomas

The Centers for Medicare and Medicaid Services (“CMS”) has issued additional blanket waivers retroactive to March 1, 2020 through the end of the emergency declaration to help healthcare providers contain the spread of COVID-19.  The updated waivers were released on April 29, 2020 and are an update from those issued on April 21, 2020.  The goal of the waivers is to make it easier for Medicare and Medicaid beneficiaries to get tested for COVID-19 and to provide flexibility to the healthcare system as America reopens.  Providers may begin to use these waivers immediately.  The changes announced by CMS include new rules to support and expand COVID-19 diagnostic testing for Medicare and Medicaid beneficiaries; increasing hospital capacity; removing barriers for hiring healthcare professionals; decreasing administrative burdens and further expanding telehealth and Medicare.

 COVID-19 Testing

With the new waivers, Medicare will no longer require an order from a treating physician or other practitioner for Medicare beneficiaries to get COVID-19 tests and laboratory tests required for a COVID-19 diagnosis.  COVID-19 tests will be covered when ordered by any healthcare professional who is authorized to do so under state law.  A written practitioner’s orders also are no longer required for Medicare to pay for the COVID-19 test.  For example, a pharmacist can work with a practitioner to provide an assessment and specimen collection with the physician or other practitioner billing Medicare for the services.  Pharmacists can perform COVID-19 tests if they are enrolled in Medicare as a laboratory if it is within the pharmacist’s scope of practice according to state law.  This waiver would allow beneficiaries to get tested at pharmacies and other types of healthcare entities in order to help expand COVID-19 testing capacity.  CMS will pay practitioners to assess beneficiaries and collect laboratory samples for COVID-19 testing and make a separate payment if that is the only service the patient receives.  CMS also announced that Medicare and Medicaid will cover certain serology antibody tests and laboratory processing of certain FDA-authorized tests that beneficiaries may self-collect at home.

Expansion of Hospitals

CMS will allow hospitals to provide services at other health care facilities and sites that are not part of the existing hospital to help address patient needs.  For example, CMS will allow freestanding inpatient rehabilitation facilities to accept patients from acute care hospitals even if the patients do not require rehabilitation care.  The purpose is to make use of available beds in freestanding inpatient rehabilitation facilities to help acute care hospitals make room for COVID-19 patients.  CMS will also pay for outpatient hospital services such as wound care, drug administration, and behavioral health services delivered in a temporary expansion location.  CMS will allow certain provider-based hospital outpatient departments that relocate to off campus sites to continue to be paid under the outpatient prospective payment system.  Additionally, long term acute care hospitals can accept any acute care hospital patients and be paid at the higher Medicare payment rate pursuant to the CARES Act.

Healthcare Professionals

Nurse practitioners, clinical nurse specialists and physicians’ assistants will be allowed to provide home health services pursuant to the CARES Act for beneficiaries who need in-home services.  These licensed practitioners can now order home health services, establish and periodically review a plan of care for home health patients; and certify and recertify that the patient is eligible for home health services.  Previously only a physician could certify a patient for home health services.  This change is effective for both Medicare and Medicaid beneficiaries.  CMS will allow physical and occupational therapists to delegate maintenance therapy services to therapy assistants in an outpatient setting.  As with hospitals, CMS is now waiving a requirement for ambulatory surgical centers to periodically reappraise medical staff privileges during the emergency thereby allowing physicians and other practitioners whose privileges are expiring to continue taking care of patients during the emergency.

Partial Hospitalization Services

CMS will allow the following partial hospitalization services to be delivered in temporary expansion locations including patients’ homes:  individual psychotherapy; patient education; and group psychotherapy.  Community mental health centers may offer partial hospitalization and other mental health services to clients in the safety of their own homes.  CMS will not enforce certain clinical criteria in local coverage determinations that limit access to therapeutic continuous glucose monitors for beneficiaries with diabetes.  Clinicians will have the flexibility to allow more of their diabetic patients to monitor their glucose and adjust insulin doses at home.

Telehealth

CMS is attempting to further expand telehealth for Medicare by waiving limitations on the type of clinical practitioners that can furnish telehealth services.  Previously only doctors, nurse practitioners and physician assistants could deliver telehealth services; however, now other practitioners such as physical therapists, occupational therapists and speech language pathologists can also provide telehealth services.  CMS will allow hospitals to bill for services furnished remotely by hospital-based practitioners to Medicare patients who are registered as hospital outpatients including counseling, educational services, and therapy services.  Hospitals can bill as the originating site for the telehealth services if services furnished by a hospital-based practitioner to Medicare patients when the patient is at home.

CMS is broadening the list of services that can be conducted by audio only telephone to include many behavioral health and patient education services.  CMS will be increasing payments for telephone visits to match payments for similar office and outpatient visits.  The payments will be retroactive to March 1, 2020.  CMS is changing the process to add new telehealth services on a “sub-regulatory basis” by considering prices from practitioners who are now using telehealth.  CMS is now paying for Medicare telehealth services provided by rural health clinics in federally qualified health clinics, allowing beneficiaries located in rural and other medically underserved areas more options to access care from their home without having to travel.

CMS is waiving the video requirement for certain telephone evaluations resulting in Medicare beneficiaries being able to use audio-only telephones to get these services.   The designated codes permissible for audio-only telephone evaluation can be found at https://www.cms.gov/Medicare/Medicare-general-information/telehealth/telehealth-codes.

On April 27, 2020, Governor Abbott issued Executive Order GA-18, implementing Phase I to reopen Texas, beginning May 1, 2020. In addition to confirming that “essential services” shall continue to operate as they have, GA-18 provides guidance on services that may reopen as of 12:01 a.m. on Friday.

“Reopened services” include:

  • Retail services that may be provided through pickup, delivery by mail, or delivery to the customer’s doorstep;
  • In-store retail services up to 25 percent occupancy rate;
  • Dine-in restaurant services up to 25 percent occupancy rate, except restaurants that derive 51% or more of their receipts from alcohol;
  • Movie theaters up to 25 percent occupancy rate;
  • Shopping malls up to 25 percent of mall’s occupancy rate but not food-court, play areas, or interactive displays;
  • Museums and libraries up to 25 percent occupancy rate but not interactive functions or Exhibits;
  • Services provided by an individual working alone in an office; and
  • Golf course operations; and
  • Local government operations.

Governor Abbott states that people and business providing or obtaining services authorized under GA-18 “should follow minimum standard health protocols recommended by DSHS,” found here, and confirms that residents may still engage in essential daily activities such as going to grocery the store or gas station, providing or obtaining other essential or reopened services, visiting parks, hunting or fishing, or engaging in physical activity like jogging, bicycling, or other outdoor sports. Notably, GA-18 encourages individuals to wear face coverings but “no jurisdiction can impose a civil or criminal penalty for failure to wear a face covering, superseding any mandates passed down from Texas cities, counties, and townships.”

What business are not included as a “reopened service”:

  • Bars,
  • Gyms,
  • Public swimming pools,
  • Interactive amusement venues such as bowling alleys and video arcades,
  • Massage establishments,
  • Tattoo studios,
  • Piercing studios, and
  • Cosmetology salons

These businesses are not included in the reopened services and shall remain closed for the present time. Likewise, “…people shall not visit nursing homes, state supported living centers, assisted living facilities, or long-term care facilities.”

GA-18 marks a limited step toward reopening businesses in Texas but still limits certain business segments and the volume of clientele that can be serviced, and violations are punishable by a fine of up to $1,000 or up to 180 days in jail. GA-18 does supersede local orders but only to the extent they “restrict essential services or reopened services allowed by this executive order, allows gatherings prohibited by this executive order, or expands the list of essential services or the list or scope of reopened services.” Accordingly, you should consult with your attorney if you have questions about how this order applies to your business or works in connection with any existing local orders.

On April 14, the Railroad Commission of Texas held a marathon virtual meeting to hear from nearly sixty of the state’s energy leaders including executives from some of the most prominent oil producers and midstream companies, industry analysts, consultants and academics. A reported 20,000 people tuned into the public meeting from across the globe to hear the discussion. The topic of the day – whether government-mandated production cuts should be implemented to help curb the free-fall in oil prices.

The COVID-19 pandemic coupled with Saudi Arabia flooding the market with oil in response to its price war with Russia, has resulted in an extraordinary drop in demand that some argue necessitates government intervention. However, the State has not stepped in to regulate oil production since the 1970s, and the argument for such a move in the fiercely independent realm of Texas oil and gas has been met with strong opposition from other industry leaders.

The market currently has a vast oversupply of oil while demand remains low causing prices to plunge to levels not seen in decades. Proponents of state-mandated production cuts argue that it would help bolster oil prices by cutting down on supply. One executive of a prominent producer active in the Permian Basin went so far as to push for a temporary oil production cut of up to one million barrels per day.

On the other hand, those in the industry opposed to such an idea say that the free market should be allowed to run its course. Others argue that production is already being reigned in organically due to the low oil prices, and that further government-imposed production cuts would have no effect on the global oil price. As one industry analyst argued, “The well-known cure for low oil prices is low oil prices.

Even if production cuts were implemented, it is unclear what the process would look like or how it would be enforced, and at the close of the hearing the matter remained unresolved. The commissioners have not yet stated when they will vote on the issue, but as prices continue to fall, instability in the oil and gas industry appears to be here for the foreseeable future.

Over the past few weeks and months, Texas, the United States, and the world have felt increasingly devastating impacts from COVID-19, commonly known as the coronavirus.  In addition to the dire health concerns, practical realities and government orders in numerous states (including “stay at home” orders) have had and will continue to have an  effect on parties’ ability to perform under their contracts at all, much less in a timely manner and in accordance with all contractual provisions.  This article reviews some basic tenants of Texas contract and commercial law that may affect a party’s obligations with respect to performance hindrances created by COVID-19—force majeure clauses and impossibility of performance.

Force Majeure Provisions: The Terms of the Contract Control

The terms of the contract should be the starting point for any analysis of the effect of COVID-19 on performance under a given contract.  The parties should determine whether the contract contains a force majeure provision, which excuses non-performance of contractual obligations if the inability to perform is caused by some intervening, unforeseeable circumstance outside of the parties’ control, such as an act of God or war.[1]

Most force majeure provisions contain a definition or list of specific events or types of events that trigger the force majeure provision, and often specifically include “epidemics” or “pandemics.”  Texas law defines an epidemic as “the occurrence in a community or region of a group of illnesses of similar nature, clearly in excess of normal expectancy, and derived from a common or a propagated source.”[2]  Texas law defines a pandemic as “a global disease epidemic or an epidemic that crosses international borders and affects an extremely large number of people.”[3]  On March 11, 2020, the World Health Organization (“WHO”) officially declared COVID-19 a pandemic,[4] and the Centers for Disease Control and Prevention (“CDC”) also refer to coronavirus a pandemic.[5]

COVID-19 does qualify as an epidemic and a pandemic, but this is simply the first step.  The specific terms of the force majeure provision must also be examined.  The scope and effect of a force majeure clause depends on the specific contract language, which may differ from traditional definitions of the term force majeure.[6]  Some force majeure provisions contain exceptions, for example, providing that the unavailability of equipment or labor or the failure of performance by subcontractors do not constitute force majeure events.  Texas courts generally enforce contractual provisions, including force majeure provisions, as written.  “When the parties have themselves defined the contours of force majeure in their agreement, those contours dictate the application, effect, and scope of force majeure.”[7]  Texas courts are not at liberty to rewrite the contract or interpret it in a manner that the parties never intended.[8]  Texas courts “presume parties intend what the words of their contract say,” and interpret contract language according to its “plain, ordinary, and generally accepted meaning” unless the instrument directs otherwise.[9]  In particular, sophisticated parties are generally permitted to anticipate and allocate business risks between them, and those terms will generally be seen to be commercially reasonable.[10]

Generally, force majeure provisions excuse performance but do not provide for affirmative relief.  In other words, a party will typically not be held liable for failing to perform under the terms of the contract but will also not be entitled to additional costs or damages incurred due to the force majeure event.  As always, the terms of the contract at issue will control exactly what relief the non-performing party is entitled to, if any.

IMPOSSIBLITY OF PERFORMANCE AND OTHER LEGAL RELIEF

If the contract does not contain a force majeure provisions or similar clause(s),[11] a party’s non-performance may still be excused if the performance is deemed “impossible.”  Under Texas law, a party’s performance may be excused when it is made impracticable or impossible by supervening circumstances.[12]  Courts often look to the foreseeability of the event causing the impossibility or impracticability, but this factor has more recently been deemphasized, and there are certain situations in which a court may still discharge a party of its obligations even when the event was foreseeable and, in fact, was foreseen.[13]  An impossibility may be caused by an impracticability that existed at the time the contract was created, but only if the non-performing party has no reason to know of the impracticability and that party assumed that the impracticability would not exist when it entered into the contract.[14]

Texas courts have specifically held that “the performance of a contract is excused by a supervening impossibility caused by the operation of a change in the law . . . .”[15]   This interpretation could become relevant if executive orders or other instructions from governmental entities prevent performance or make performance impracticable.  However, Texas law is clear that performance will not be excused simply because performance became more economically burdensome than anticipated.[16]  Additionally, if the impossibility was caused by the non-performing party’s voluntary act, performance will not be excused.[17]

In addition to the doctrine of impossibility, “if performance is contingent upon the continued existence of a state of things or set of circumstances, a condition is implied that the cessation of existence of such state of things excuses performance.”[18]  The non-performing party must show (1) an unexpected contingency has occurred, (2) the risk of that contingency was not allocated to either party by agreement, and (3) the occurrence of the contingency has made performance impossible.[19]

CONCLUSION

Texas law provides several avenues of relief for parties who find it impracticable or impossible to perform their contractual obligations during the COVID-19 pandemic, starting with the contract itself.  If a party believes that it may be entitled to relief under its contract or the law, it should contact and notify the other party(ies) as soon as possible and comply with any applicable contractual provisions regarding formal notice.  Communication and documentation will be key during this unprecedented time.  Each contract and factual scenario will present unique issues, and Kean Miller is prepared to help answer any questions and guide parties through any issues that they may face.

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[1] See Black’s Law Dictionary 761 (10th ed. 2014); Sun Oper., L.P. v. Holt, 984 S.W.2d 277, 282–83 (Tex. App.—Amarillo 1998, pet. denied); Valero Transmission Co. v. Mitchell Energy Corp., 743 S.W.2d 658, 663 (Tex. App.—Houston [1st Dist.] 1987, no writ).

[2] 25 Tex. Admin. Code § 97.1 (13).

[3] 25 Tex. Admin. Code § 97.1 (22).

[4] World Health Organization, WHO Director-General’s opening remarks at the media briefing on COVD-19 – 11 March 2020 (March 11, 2020).

[5] Centers for Disease Control and Prevention, Coronavirus Disease 2019 (COVID-19): Situation Summary (updated April 7, 2020) https://www.cdc.gov/coronavirus/2019-ncov/cases-updates/summary.html (last visited April 7, 2020).

[6] Virginia Power Energy Mktg., Inc. v. Apache Corp., 297 S.W.3d 397, 402 (Tex. App.—Houston [14th Dist.] 2009, pet. denied).

[7] Sun Oper., 984 S.W.2d at 283. See also TEC Olmos, LLC v. ConocoPhillips Co., 555 S.W.3d 176, 181 (Tex. App.—Houston [1st Dist.] 2018, rev. denied); Zurich Am. Ins. Co. v. Hunt Petrol. (AEC), Inc., 157 S.W.3d 462, 466 (Tex. App.—Houston [14th Dist.] 2004, no pet.).

[8] Sun Oper., 984 S.W.2d at 283.

[9] URI, Inc. v. Kleberg Cty., 543 S.W.3d 755, 764 (Tex. 2018).

[10] See PPG Indus., Inc. v. Shell Oil Co., 919 F.2d 17, 19 (5th Cir. 1990).

[11] The doctrine of impossibility will not apply where the risk was allocated by agreement. See In re Doe, 917 S.W.2d 139, 142 (Tex. App.—Amarillo 1996, writ denied).

[12] Centex Corp. v. Dalton, 840 S.W.2d 952, 954–55 (Tex. 1992).

[13] Id.

[14] Solar Soccer Club v. Prince of Peace Church of Carrollton, 234 S.W.3d 814, 824 (Tex. App.—Dallas 2007, pet. denied); Janak v. FDIC, 586 S.W.2d 902, 906–07 (Tex. App.—Houston [1st Dist.] 1979, no writ).

[15] Centex Corp., 840 S.W.2d at 954.

[16] Huffines v. Swor Sand & Gravel, 750 S.W.2d 38, 40 (Tex. App.—Forth Worth 1988, no pet.).

[17] Stafford v. Southern Vanity Magazine, Inc., 231 S.W.3d 530, 537 (Tex. App.—Dallas 2007, pet. denied) (defendant had transferred stock to a third party, so could not use defense of impossibility to prevent judgment directing it to transfer stock to plaintiff as agreed).

[18] In re Doe, 917 S.W.2d at 142.

[19] Id.