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September 21, 2020
Article by Brattle Consultants Provides Economic Framework for Force Majeure Energy Contract Disputes

Brattle consultants have coauthored a new article that discusses the instrumental role economic analyses can serve in evaluating force majeure or other contract defense disputes in energy-industry transactions. These analyses, the authors argue, can enhance the robustness of negotiation and litigation positions relating to the validity of a claimed event that affects contractual performance.

The COVID-19 pandemic and ensuing economic crises are only the latest disruptions in a rapidly evolving energy marketplace. These tough conditions have already put an economic strain on many transactions in the energy industry – including fuel and power purchase agreements, projects to install new infrastructure, and acquisitions of existing assets. Traditionally, the legal industry has focused on specific legal requisites, such as the need for the language in a force majeure clause to explicitly address the circumstances used as the basis for relief.

The article outlines the types of economic analyses that can often assist in determining the nature and impacts of such claims, as well as to prove or disprove causation, and identify mitigation options once the legal requirements for declaring force majeure are met. These economic tests include:

  • Evaluating causation between the COVID-19 pandemic or other events and associated nonperformance.
  • Quantifying what impacts the claimed events had on the financial losses and credit ratings of the party seeking relief from obligations, and on the economic damages imposed on the counterparty from nonperformance.
  • Proving that the contract party seeking relief from obligations did (or did not) use available mitigation options to reduce the adverse impacts of the claimed events.

The authors also provide a helpful economic framework to evaluate any assertion or defense of force majeure claims. This framework is relevant and applicable to many different contract disputes that may arise due to the pandemic and any future not-yet-known disruptions.

The article, “The Role of Economics in Evaluating Contractual Performance Defenses: Emerging Disputes on COVID-Related Force Majeure Claims,” is coauthored by Brattle Principals Metin Celebi and Shaun Ledgerwood, Academic Advisor Peter Fox-Penner, and Senior Associate Jake Zahniser-Word.