International Sales Contracts - COVID-19 Pandemic and Force MajeureClient Alert
Q: What is force majeure in the context of a contract?
A: Generally speaking, a force majeure clause is a contract provision that relieves a party from performing its contractual obligations when certain circumstances beyond its control arise, making performance inadvisable, commercially impracticable, illegal, or impossible.
Q: If a party enters into an international commercial contract and the COVID-19 pandemic has prevented or delayed performance by such party, is such party excused from performing?
A: It depends. Does the contract for sale of goods stipulate that the United Nations Convention on Contracts for the International Sale of Goods (“CISG”) is the determinative governing law, or, by default the CISG governs?
The CISG generally applies if the parties to a contract are from different signatory countries (unless the parties expressly waive its applicability), or when private international law provisions default to the CISG. The United States is a signatory country to the CISG. Specifically, CISG Article 79 provides that “[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.” The treatment of impediment under the CISG is different from the treatment under common law (see below). Generally, four conditions must be satisfied in order for a party to assert the force majeure protection under the CISG. First, the impediment must be beyond the party’s control. Secondly, the impediment is unforeseeable at the time the contract was signed (thus, a party probably would not prevail in court if it enters into a contract today and claims that it cannot perform under the contract due to the COVID-19 pandemic). Thirdly, the impediment and its consequences could not be reasonably avoided or overcome. Lastly, the non-performance of the party is the result of the impediment.
Q: What if the contract does not contain an express force majeure clause or the CISG does not apply to the contract?
A: Consider other options under U.S. law to excuse non-performance.
Under Article 2 of the Uniform Commercial Code (“UCC”) (Section 2-615), a seller may be excused from delay or non-delivery of the goods if performance “has been made impracticable” by either (i) the occurrence of an event “the nonoccurrence of which was a basic assumption on which the contract was made” or (ii) good faith compliance with foreign or domestic government regulation. Can the COVID-19 pandemic and/or compliance with the governmental health orders be used to excuse performance under the UCC? Perhaps, but analysis should be done on a case by case basis.
The common law doctrines of “frustration” and “impossibility” may be invoked, but they have higher thresholds to overcome. Additionally, states in the U.S. apply different treatments of these concepts.
Some jurisdictions focus on whether the impossibility of performance was foreseeable at the time the contract was entered. Additionally, the contract must be consummated based on the assumption that the event (which rendered performance impossible) would not occur. Some states expand the impossibility defense to include the doctrine of impracticability (see the UCC discussion above).
The doctrine of “frustration of purpose” generally provides where the breaching party finds that the purposes for which it bargained have been frustrated to the extent that the breaching party is not receiving the benefit of the bargain for which it contracted; i.e., the frustration destroyed the purpose of the contract. Some jurisdictions also require that an event resulting in such frustration of purpose is unforeseeable and beyond the parties’ control.