During the last months, the entire world is experiencing shortages of supplies and raw materials, long delays in deliveries, and, most important, the increase of prices. These consequences are impacting the international trade in every aspect, especially in the sales of good contracts.
Many of our clients are looking for advises on how to mitigate these problems and if there is a possibility for them and their counterparts to terminate or amend the contract terms. The ability of the common law system to evolve and adopt quickly to new situations helps to react to new crisis in a way impossible to the civil law system.
The following is an analysis of three doctrines under the New York law that may guide
during these times, in particular: (i) Force Majeure; (ii) Impossibility to Perform; and (iii) Excuse by Failure of Presupposed Conditions under §2-615 of the Uniform Commercial Code (“UCC”). We focus our attention on New York law because of its role as guide for new developments.
Force Majeure
“Force Majeure” is defined as a provision in a contract that frees both parties from obligation if an extraordinary event directly prevents one or both parties from performing. New York courts have consistently held that a party will be exonerated from performance under a force majeure clause only if that clause expressly includes the event in question and that event effectively prevents the party from fulfilling its obligations under the contract. It is important to note that the burden of demonstrating force majeure lies with the party seeking exemption from its performance, and the non-performing party must demonstrate its efforts to fulfill its contractual obligations, despite the occurrence of the event constituting force majeure.
[1] However, “mere impracticability or unexpected difficulty are not sufficient to justify the non-performance”[2].
In the event of force majeure clauses with a general language (i.e., “or any other event beyond the parties’ control making it impossible to perform their obligations under the contract”), New York courts held that the principle of interpretation applicable is that a general clause should not be attributed expansive meaning and the occurrence of an unlisted event must be of the same nature as the particular matters specifically listed. Furthermore, when the event alleged to have caused the non-performance is not specifically listed, some New York judges have indicated that the party seeking to invoke the force majeure clause by relying on a generic provision will also have to prove that the event was unpredictable. For example, a New York judge dismissed a defaulting party’s attempt to rely on a generic provision when that party argued that a rise in the price of manufacturing supplies was a force majeure event, arguing that such an increase could have been reasonably expected[3].
For these reasons, it seems that the force majeure is available in the event of shortage of supplies or raw materials. Conversely, a Force Majeure clause may not be enforced in the event of an increase of the prices or delays with the delivery.
Impossibility to Perform
The doctrine of impossibility to perform could excuse a party’s contract performance when an unforeseen and unanticipated event makes performance objectively impossible[4]. However, the performance is not excuse “if the difficulties that … make performance impossible reasonably could have been foreseen by the promisor when the parties entered into contract”[5].
New York law is very stringent because it requires that performance be objectively impossible[6]. It remains unclear if the current crisis meets the requirements of New York law for excuse. The longer the crisis and the closer such events are tied to contractual failure, the more likely such claims will succeed.
Excuse by Failure of Presupposed Conditions under §2-615 of the UCC
§2-615 of the UCC, title “Excuse by failure of Presupposed Conditions”, excuses the impracticability of the seller to deliver all or some of the goods.
The defense requires the breaching seller to show the following:
1. “a contingency;
2. the impracticability of performance as a consequence of the occurrence of that contingency; and
3. that the nonoccurrence of the contingency was a basic assumption of the contract.”[7]
This section could be invoked when a seller experiences “a marked increase in the cost of supplies or where the seller cannot obtain supplies due to a “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 ….“[8].
To correctly invoke this section, 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”[9].
Conclusion
If correctly invoked, the aforementioned doctrines could help to mitigate the problems created by the recent crisis. In fact, Force Majeure, Impossibility to Perform, and §2-615 of the UCC may excuse parties to not perform all or part of the performance. However, negotiations between contract parties to reach an internal solution are always the best reaction.
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We at Valla & Associates will continue closely to monitor developments on the subject and will continue to advise our clients on this matter. Feel free to contact us if you need any assistance or advice.
Requests for information or insights on the issue discussed in this article may be addressed to Vincenzo.dangelo@vallalaw.com. This article is for information purposes only and does not constitute legal advice. The information contained herein may be outdated or incomplete and shall in no way be taken as an indication of future results. The transmission of this article is not intended to create, nor does its receipt constitute, an attorney-client relationship between preparer and reader. You should not act on the information contained in this article without first seeking the advice of an attorney.
