Vanessa Miller Publishes Article on Force Majeure Provisions
This article was originally published in mdm Distribution Intelligence on September 10, 2024, and is republished here with permission.
Everything You Wanted to Know about Force Majeure Provisions
In the manufacturing and distribution industries, when it rains it pours. Shutting down a manufacturing line or warehouse can cost millions of dollars a day, cripple production and leave a party in breach of contract.
Sometimes, however, the issue can be traced to an unforeseeable event that could eviscerate the party’s ability to perform under its contracts. If that is the case, the affected party has a plausible argument that its performance has been “temporarily excused,” thereby avoiding breach and in turn, millions of dollars in alleged damages.
Force Majeure
Force majeure refers to unforeseeable circumstances that prevent a party from fulfilling a contract. Common force majeure provisions may cover several categories of events that could affect the supply chain. The provision may cover risks that are reasonably beyond the control of the party claiming force majeure. Specific covered events include:
- natural disasters or “acts of God” such as lightning, tornadoes, hurricanes, tsunamis, floods and earthquakes;
- manmade disasters such as plant fires or floods;
- war and civil issues such as riots, civil unrest and acts of terrorism;
- disease, epidemic or pandemic;
- labor disputes or strikes;
- government embargos or other governmental actions affecting the supply chain; and
- even power outages or transportation issues.
Force majeure provisions are entirely creatures of contract and supersede related common law doctrines of excuse. Force majeure — which comes from French, meaning “superior force”— refers to circumstances outside a party’s control that prevent it from performing under its contract.
Some recent events that have resulted in suppliers invoking their right to suspend performance under the force majeure provision in a supply contract include the West Coast labor dispute, the severe winter storms in 2014 and 2015, Hurricane Katrina, the COVID-19 pandemic, blockages of the Suez and Panama canals and the 2021 Winter Storm Uri that froze Texas.
It is important to note that even if a listed event occurs, the party seeking to invoke the force majeure provision should be able to show that there are no alternative means, increased costs notwithstanding, for fulfilling the contract. The event has to be one that prevents performance — although this standard falls short of the doctrine of impossibility. For example, if the supplier is able to timely deliver parts using expedited air freight, even though this form of transportation is more expensive, the supplier may not be able to rely on force majeure to suspend performance under the supply contract.
A well-drafted force majeure provision should include two key elements:
- First, the provision should define the events that constitute a force majeure.
- Second, the provision should set forth the supplier’s rights and obligations if a force majeure event occurs that impacts the supplier’s ability to timely supply parts, including notice and time to resume performance.
Force majeure provisions should, where possible, be tailored to the specific supply relationship. Historically parties to manufacturing contracts routinely cut and paste standard force majeure provisions into every single supply agreement without giving much thought to whether they were on the sell- or the buy-side, the products at issue, the regions involved in the supply chain and/or risk allocation between the parties. The times have undoubtedly changed.
In general, the supplier will want the definition of force majeure to be as broad as possible, covering any potential risks that are reasonably outside of the supplier’s control. In contrast, the customer will want the force majeure provision to be narrowly tailored and to provide the customer the right to terminate the contract in the event that the supplier is unable to resume performance within a certain amount of time.
Once the supplier has properly declared force majeure, it will be excused from performing (e.g. manufacturing or delivering parts) and can not breach the contract for the duration of the event.
Commercial Impracticability Under the Uniform Commercial Code
To the extent a contract for the sale of goods does not contain a force majeure clause, Article 2 of the Uniform Commercial Code (UCC) codifies the concept of commercial impracticability. To date, nearly every state has adopted Article 2 of the UCC, meaning the less stringent standard of “commercial impracticability” has replaced the common law requirement of objective impossibility of performance.
What follows below is a very confusing provision of the UCC that simply means this: something bad happened that the parties did not think would happen when they entered into the contract, and now it will be nearly impossible to perform under the contract.
Now here is the actual language from Section 2-615 (Excuse by Failure of Presupposed Conditions) of the UCC that sets forth the scope of the defense of commercial impracticability:
(a) Delay in delivery or nondelivery in whole or in part by a seller. . . is not a breach of his duty under a contract for sale if performance as agreed has been made impracticable by the occurrence of a contingency the nonoccurrence of which was a basic assumption on which the contract was made or by compliance in good faith with any applicable foreign or domestic governmental regulation or order whether or not it later proves to be invalid.
(b) Where the causes mentioned in paragraph (a) affect only a part of the seller’s capacity to perform, he must allocate production and deliveries among his customers but may at his option include regular customers not then under contract as well as his own requirements for further manufacture. He may so allocate in any manner which is fair and reasonable.
(c) The seller must notify the buyer seasonably that there will be delay or non-delivery and, when allocation is required under paragraph (b), of the estimated quota thus made available for the buyer.
Courts generally apply a three-part test to determine whether the definition of “commercial impracticability” under UCC 2-615 is available to a nonperforming seller: (1) The seller must not have assumed the risk of some unknown contingency, (2) the nonoccurrence of the contingency must have been a basic assumption underlying the contract, and (3) the occurrence of that contingency must have made performance commercially impracticable.
As for whether performance has become “commercially impracticable,” the issue is akin to the contractual force majeure context and turns largely on the cost or ability to perform. Before a court will excuse performance as commercially impracticable, the affected party must typically establish that continued performance would result in grave injustice because the cost has become excessive and unreasonable. The circumstances under which a court will allow a nonperforming party to escape culpability are limited to truly extraordinary and wholly unexpected circumstances. Increases in the price of raw materials, even if unanticipated, will not suffice.
In conclusion, contractual force majeure provisions and the UCC’s doctrine of commercial impracticability are important tools for managing risks in supply relationships. Parties should understand their rights and obligations in the face of risks beyond the parties’ control.
