3. Agenda
1. When is performance excused?
2. What procedures must be followed to excuse
performance?
3. Preventing problems: tips for drafting
effective force majeure clauses.
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4. Agenda
1. When is performance excused?
a. Force majeure clause.
b. Commercial impracticability.
c. Other potentially applicable UCC provisions.
d. CISG Article 79
2. What procedures must be followed to excuse
performance?
3. Preventing problems: tips for drafting effective
force majeure clauses.
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6. Example Force Majeure Clauses
Force Majeure. Neither party shall be liable for any failure to make or accept one or
more deliveries arising out of compliance with any law, ordinance, regulation, ruling,
order or other governmental action or arising out of acts of God, fire, flood, war,
sabotage, accidents, labor disputes, shortages or failure to supply materials or
equipment, interruption of or delay in transportation, or any other similar circumstance
beyond the control of the party.
Force Majeure. Seller shall not be responsible for cancellation or delay in delivery or
performance resulting from causes beyond its reasonable control, including, but not
limited to: acts of God; strikes or other labor disturbances; equipment failure; delays in
transportation; inability to obtain fuel, material, or parts; war; acts of terrorism; riot;
epidemics; floods; fires; unusually severe weather conditions; accidents; or other
contingencies the non-occurrence of which was a basic assumption on which the
purchase order was made.
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7. Another Example
FORCE MAJEURE. In the event either party, through no fault of its own, is unable
to perform due to an event that is beyond the non-performing party’s reasonable
control, such nonperformance shall be excused, provided that if any such event
continues for more than fifteen (15) days, Purchaser may, at its option, cancel this
order and all its obligations hereunder. Each party shall promptly notify the other of
any inability to perform and the cause.
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8. Interpretation Rules
Even if not expressly stated, courts generally require that the event
claimed as the basis for excused performance:
was beyond the control of the party claiming excuse; and
actually hindered performance.
Clauses excusing performance are usually narrowly construed:
Under the doctrine of ejusdem generis, courts may find events
dissimilar to listed examples will not excuse performance, even when
the clause includes broad catch-all language.
Events or possibilities of which the parties were aware at time of contract
are less likely to be found to excuse performance.
There is some conflict in the law about notice requirements if the clause
does not include an express notice provision.
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10. Common Law Origins
Taylor v. Caldwell, 122 ER 309 (1863).
Facts: Taylor & Lewis rented a music hall from Caldwell & Bishop for
purpose of holding a series of four concerts. Before the concerts took place,
the hall was then destroyed by fire. Taylor & Lewis sued for breach.
Held: Caldwell excused from its obligation because performance was
impossible after destruction of music hall.
Krell v. Henry, 2 KB 740 (1903).
Facts: Paul Krell rented a flat on Pall Mall for the days of June 26 and 27 for
the purpose of watching the coronation procession of Edward VII. The
coronation was later postponed because of the King’s illness. Flat owner CS
Henry sued for payment.
Held: Krell excused from performance given purpose of lease – watching the
coronation procession – was frustrated.
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11. UCC Commercial Impracticability
UCC § 2-615. Excuse By Failure Of Presupposed
Conditions.
Except so far as seller may have assumed a greater obligation and subject to
the preceding section on substituted performance:
(a) Delay in delivery or non-delivery in whole or in part by a seller that
complies with paragraphs (b) and (c) 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 non-occurrence 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.
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12. Basic Requirements
1. Seller must not have assumed the risk of some
unknown contingency.
2. Nonoccurrence of the contingency must have been a
basic assumption underlying the contract.
3. Occurrence of the contingency must have actually
made performance commercially impracticable.
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13. Assumption Of Greater Obligation
UCC § 2-615: “Except so far as Seller may have
assumed a greater obligation . . .”
Do not need an express agreement to assume a greater
obligation or risk.
Greater obligation can be implied in a number of ways:
Course of performance, course of dealing, usage of trade;
Awareness of risk at time of contracting. UCC § 2-615 cmt. 8.
Failure to expressly shift risk in the agreement, especially when that is
the normal practice in the industry.
Generally, force majeure clauses are not read as
supplanting UCC § 2-615, but could do so in some cases.
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14. Forseeability Of Contingency
UCC § 2-615: “. . . occurrence of a contingency the non-
occurrence of which was a basic assumption on which the
contract was made . . .”
Courts called on to address event the parties did not consider.
Courts generally look to whether the event is so unusual or
unforeseen and whether the consequences so severe that enforcement
of the contract would be commercially unreasonable or unjust.
Guiding principle examines commercial practicalities and the types of
risks which parties are expected to have assumed in the contract.
Courts often look to whether seller would be severely impacted and
whether buyer would receive an unjustifiable windfall.
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15. Performance Made Impracticable
UCC § 2-615: “. . . Performance as agreed has been
made impracticable . . .”
Lesser standard than common law impossibility.
However, must still show that performance despite event
would cause severe and unreasonable loss.
Must be causal connection between event and the
impracticability of performance.
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16. Government Regulation
UCC § 2-615: “. . . or by compliance in good faith
with any applicable foreign or domestic
governmental regulation or order. . .”
Text does not expressly require that the regulation or
order was unanticipated.
However, generally the regulation must be a supervening
event not existing at time of contract.
e.g. parties aware at time of contract that they would need to
comply with existing license or permit requirement.
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17. Applicability To Buyers
Express language of UCC § 2-615 only refers to sellers.
Buyer’s obligation generally to pay for goods.
Contracts often do not speak to buyer’s purpose.
Requirements contracts will automatically adjust buyer’s obligation.
However, courts generally agree buyers can rely on UCC § 2-615 and
common law doctrines like frustration of purpose:
Official Comment 9 illustrates application to buyer and some courts have
applied the section to Buyer’s claim of commercial impracticability.
Buyer can rely on common law doctrine of frustration of purpose (Krell v.
Henry).
However, relief generally unavailable absent understanding that purchase was
for a specific buyer need.
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18. Common Excuses
Official comment 2 to UCC § 2-615 notes that
section deliberately refrains from listing
contingencies.
Some often-claimed excuses are:
• Destruction of goods. • Natural disasters.
• Destruction of production • Strikes and labor issues.
facilities. • Crop failures.
• Supply problems. • Government regulation.
• Weather. • War, terrorist act, revolution, riot,
• Transportation issues. civil commotion.
• Fire and explosion. • Embargo.
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19. Increased Cost Of Performance
“Increased Cost alone does not excuse performance unless
the rise in cost is due to some unforeseen contingency which
alters the essential nature of performance.” UCC § 2-614
Comment 4.
“But a severe shortage of raw materials or of supplies due to
a contingency such as war, embargo, local crop failure,
unforeseen shutdown of major sources of supply or the like,
which either causes a marked increase in cost or altogether
prevents the seller from securing supplies necessary to his
performance, is within the section.” UCC § 2-614 Comment
4.
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20. Increased Cost Of Performance
Increased cost of performance is rarely a valid excuse.
Risk of change in market prices generally thought to be a business risk
assumed by the parties.
Courts rejected claims that increased crude oil prices in 1970s rendered
performance of fuel supply contracts impracticable. See, e.g., Eastern Air
Lines, Inc. v. Gulf Oil Corp., 415 F.Supp. 429 (S.D. Fla. 1975).
Courts rejected claims that increased costs to ship goods around the Cape
of Good Hope after various closures of the Suez Canal made performance
impracticable. See, e.g, Transatlantic Financing Corp. v. United States,
363 F.3d 312 (D.C. Cir. 1966).
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21. Increased Cost Of Performance.
Aluminum Co. of America v. Essex Group, Inc., 499 F.Supp.
53 (W.D.Pa. 1980).
ALCOA was granted relief from long-term supply arrangement with
potential 20 year term where actual material price increases
dramatically outstripped the contract’s escalation clause which was
based on the Wholesale Price Index of Industrial Commodities.
The Court found commercial impracticability based on the failure of
the contract’s price adjustment mechanism to keep pace with actual
cost inflation and rewrote the contract provisions with alternate price
terms.
The decision has been roundly criticized, particularly because it
rewrote the parties’ agreed upon price adjustment mechanism.
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22. Failure Of Source Of Supply
Mere fact that a party expected to perform their obligation in
a particular way that becomes unavailable is not a defense.
Where a specific source of supply was not contemplated
performance not likely to be excused even if costs are
increased.
Performance may be excused where the parties mutually
contemplated a particular source of supply and its failure was
unexpected.
Courts have generally excused farmers from performance
after a crop failure where there was no basis to expect that
farmer would purchase a replacement crop on the market.
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24. Destruction Of Identified Goods
UCC § 2-613. Casualty to Identified Goods.
Where the contract requires for its performance goods identified when the
contract is made, and the goods suffer casualty without fault of either party
before the risk of loss passes to the buyer, or in a proper case under a "no
arrival, no sale" term (Section 2-234) then
(a) if the loss is total the contract is avoided; and
(b) if the loss is partial or the goods have so deteriorated as no longer to
conform to the contract the buyer may nevertheless demand inspection
and at his option either treat the contract as avoided or accept the goods
with due allowance from the contract price for the deterioration or the
deficiency in quantity but without further right against the seller.
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25. Substituted Performance
UCC § 2-614. Substituted Performance.
(1) Where without fault of either party the agreed berthing, loading, or
unloading facilities fail or an agreed type of carrier becomes unavailable
or the agreed manner of delivery otherwise becomes commercially
impracticable but a commercially reasonable substitute is available, such
substitute performance must be tendered and accepted.
(2) If the agreed means or manner of payment fails because of domestic or
foreign governmental regulation, the seller may withhold or stop delivery
unless the buyer provides a means or manner of payment which is
commercially a substantial equivalent. If delivery has already been taken,
payment by the means or in the manner provided by the regulation
discharges the buyer's obligation unless the regulation is discriminatory,
oppressive or predatory.
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27. International Agreements
CISG Article 79:
“A party is not liable for a failure to perform any of his
obligations if he proves that the failure was due to an
impediment beyond his control and that he could not
reasonably be expected to have taken the impediment into
account at the time of the conclusion of the contract or to
have avoided or overcome it or its consequences.”
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28. Agenda
1. When is performance excused?
2. What procedures must be followed to
excuse performance?
3. Preventing problems: tips for effective
drafting force majeure clauses.
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29. Procedural Requirements
UCC § 2-615. Excuse By Failure Of Presupposed
Conditions.
Except so far as seller may have assumed a greater obligation and subject to
the preceding section on substituted performance:
(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.
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30. Allocation
Where ability to perform is only partially impaired,
seller has obligation to make “fair and reasonable”
allocation. UCC § 2-615(b).
No rigid allocation rules, seller has some flexibility:
Pro rata approaches generally accepted.
Seller may allocate production to itself.
Seller may fill non-contract orders from regular
customers, but not new customers.
Seller may consider varying needs of its customers.
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31. Notice Requirements
Seller must provide buyer with “seasonable” notice
of the impracticability and any allocation. UCC § 2-
615(c).
Seasonable means within the period required by the
contract, or if none within a reasonable time.
Reasonableness depends on the nature, purpose, and
circumstances of the action. UCC § 1-205.
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32. Buyer’s Rights And Obligations
UCC § 2-616. Procedure On Notice Claiming Excuse.
(1) Where the buyer receives notification of a material or indefinite delay or an
allocation justified under the preceding section he may by written notification to
the seller as to any delivery concerned, and where the prospective deficiency
substantially impairs the value of the whole contract under the provisions of this
Article relating to breach of installment contracts (Section 2-612), then also as to
the whole,
(a) terminate and thereby discharge any unexecuted portion of the contract; or
(b) modify the contract by agreeing to take his available quota in substitution.
(2) If after receipt of such notification from the seller the buyer fails so to modify the
contract within a reasonable time not exceeding 30 days the contract lapses with
respect to any deliveries affected.
(3) The provisions of this Section may not be negated by agreement except in so far
as the seller has assumed a greater obligation under the preceding section.
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33. Agenda
1. When is performance excused?
2. What procedures must be followed to excuse
performance?
3. Preventing problems: tips for drafting
effective force majeure clauses.
33
34. Drafting Tips
Identify specific concerns in force majeure clause with
particularity:
Will failure of a specific source of supply excuse performance.
Will damage or destruction to production equipment excuse
performance.
Will changed economic circumstances provide an excuse.
If buyer intends goods for specific purpose, will disruption of that
purpose or event excuse performance.
Will events impacting third parties, such as others upstream and
downstream in the supply chain, excuse performance.
Expressly address events of which parties are aware at the time of
contract.
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35. Drafting Tips
Where “laundry list” approach is used:
Carefully define listed events.
Consider whether list is exclusive or non-exclusive .
Consider drafting clause to address effects and not causes.
Consider using sweep-up language specifying both “including but not
limited to” and “whether or not similar” to events listed in laundry
list.
Expressly exclude events that do not constitute a force
majeure.
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36. Drafting Tips
Consider whether the force majeure clause should:
Expressly specify that events are outside of control of a
party constitute a force majeure.
Specify whether events resulting from negligence of a
party are included.
Impose a duty to take reasonable steps to avoid the force
majeure event or its effects.
Supplant UCC § 2-615 and common law doctrines of
impossibility, impracticability, and frustration of purpose.
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37. Drafting Tips
Address procedures when claiming force majeure:
Form and timing of notice required to invoke clause and
consequences of non-compliance with notice requirement.
Allocation requirements and most favored nations provision.
Specify effect of force majeure on parties’ duties:
Temporary suspension of duty.
Substitute performance by seller.
Buyer ability to procure goods elsewhere during the force majeure.
End of force majeure event.
Obligation to make-up missed shipments after conclusion of event.
Ability to cancel or terminate the agreement.
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