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.
The provision is a legal term known as force majeure. Taken from French civil law, force majeure is “a contract provision that excuses a party’s performance of its obligations under a contract when certain circumstances beyond their control arise, making performance inadvisable, commercially impracticable, illegal, or impossible,” according to a recent coronavirus and force majeure story in The National Law Review.
Force majeure has been invoked in the past by companies seeking to explain contractual failures stemming from the Sept. 11 terrorist attacks, Hurricane Sandy, SARS, and Ebola. But the international response to the coronavirus—quarantines, shutdowns, and travel bans—has upended business as usual around the world in an unprecedented way, said attorney Gregory Bombard, a partner at the law firm Duane Morris.
Companies seeking to escape liability for failing to deliver the terms of a contract are scrambling for the legal cover to do so, he said. “They want to know: Who bears the risk if we can’t deliver?”
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Unforeseeable circumstances – such as the outbreak of coronavirus – that prevent a party from fulfilling its contractual duties may fall under the force majeure clause of that contract.
Force majeure clauses are specific to each contract and operate as a risk allocation mechanism to govern situations that are beyond the parties’ control, such as the outbreak of war or natural disasters. Whether the COVID-19 outbreak constitutes a force majeure event depends on the exact wording and scope of the provision in the contract. For example, if the force majeure clause:
- expressly specifies epidemics, diseases or public health emergencies, then COVID-19 likely qualifies as a force majeure event;
- covers “acts of government,” then travel bans may be covered.
The party seeking to invoke force majeure usually must show a causal connection between the event – the outbreak of COVID-19 – that made it effectively impossible to perform its contractual duties. The clause may operate to excuse or suspend performance of a particular contractual duty.
Some companies are providing force majeure notices to their contract partners. The China Council for the Promotion of International Trade announced that it will offer force majeure certificates to help companies deal with overseas contractual requirements. The effectiveness of these certificates and notices will depend on the exact language of the contract’s force majeure clause.
If your contracts do not contain a force majeure clause, then the narrower doctrine of frustration of the contract purpose may apply. To qualify under this doctrine, the event must (1) be not reasonably foreseeable and (2) radically change the contract terms from what the parties agreed to.
Of course, there is no court guidance yet on how the COVID-19 outbreak may affect commercial contracts. The facts are still evolving. But as businesses prepare for the impact of the virus in the United States, they can look to the cases that arose out of past unexpected events like the September 11 terrorist attacks, previous changes in Chinese government policy or unprecedented weather events as a guide to how to deal with key contracts.
View the full Alert on the Duane Morris LLP website.