What Law Governs Force Majeure in Your International Supply Chain Agreement?

By Thomas R. Schmuhl

If a U.S. company has a sales or supply agreement with a buyer or supplier outside of the United States which has been disrupted or otherwise impacted by circumstances relating to the COVID-19 situation now garnering world-wide attention, determining whether or not force majeure applies may not be governed by traditional domestic U.S. law.

Since January 1, 1988, such international commercial agreements have been governed by the United Nations Convention on the International Sale of Goods, commonly known as the CISG. The CISG is an international convention with the full force of federal law that preempts state contract law that would otherwise govern such commercial agreements, including both the Uniform Commercial Code and common law.  Under the CISG, a sale taking place between a seller in one country which has acceded to the CISG and a buyer in another country which has acceded to the CISG, will be governed by the CISG just as a sale between a buyer in New York and a seller in Illinois will be governed by the Uniform Commercial Code. Simply put, the governing law of the international contract between the buyer and the seller is the CISG when the parties are in different countries which have each acceded to the CISG.  Many of the countries most impacted by the COVID-19 situation (e.g. the United States, China, Japan, South Korea, Italy, Canada) have acceded to the CISG.

In the present context of COVID-19, this means that whether the impact of the virus constitutes force majeure will be determined by the CISG unless, pursuant to Article 6 of the CISG, the parties to the contract have explicitly and clearly excluded the application of the CISG from the contract in whole or in part.  Article 79 of the CISG sets forth the standards for determining if a force majeure condition has arisen.  Those standards bear a resemblance (but are not identical) to the standards found in many commercial laws around the world such as Section 615 of Article 2 of the Uniform Commercial Code.

One quick and obvious lesson to be drawn from this brief discussion is that is that the best protection available to buyers and sellers in an international context is a carefully drafted force majeure clause that will minimize the uncertainty that can arise from having to analyze real events like an epidemic in the context of the principles propounded in a state or nation’s commercial code or the international CISG.