I. Introduction

This memorandum is intended as a starting point for research on force majeure issues.  This memo does not address all of the issues that might arise in connection with Force Majeure.  For civil law authority on impossibility of performance, see Saul Litvinoff, Louisiana Civil Law Treatise: Law of Obligations, § 16.1 – 16.97 (2d ed. 2001); Saul Litvinoff, Force Majeure, Failure of Cause and Théorie de L’imprévision: Louisiana Law and Beyond, 46 La. L. Rev. 1 (1985).

Here are a few things to consider when confronting force majeure issues:

• In many commercial transactions, force majeure issues have been addressed in the contract, so it is important to obtain and review the contract.
• Many contractual provisions and some statutory provisions require a party that is claiming force majeure to notify the other parties to the contract of the event of force majeure.  Some provisions require "prompt" "timely" or "seasonable" notice.  Therefore, it is important to determine promptly whether there is a notice requirement in your client's situation.  Don't just assume that because everyone knows about Katrina that notice provisions can be disregarded.
• Some force majeure provisions or situations may totally relieve a party of an obligation to perform a contractual obligation.  Other situations may merely suspend or delay the time for performance.  It is important to determine which is applicable in a particular situation.
• In addition to contractual provisions, there may be codal or statutory provisions that apply.  For instance, Civil Code articles 1873 through 1878 cover impossibility of performance under Louisiana law.  U.C.C. articles 2-613 through 2-616 will be applicable for contracts of sales in many jurisdictions.[1]
• In some situations, the contractual provisions may have modified the default provisions provided by law.  It is even possible that under some circumstances, a party may have assumed the risk of an unforeseen force majeure event.
• Louisiana law, and perhaps the law of some other jurisdictions, discusses the concept of the foreseeability of the force majeure event.  See, e.g., La. Civ. Code art. 1875.  This may present major issues for litigation.  One the one hand, it was certainly foreseeable that New Orleans could have been hit by a Category 4 or 5 hurricane with the resulting flooding.  Indeed, such an event had been predicted in various studies.  On the other hand, the possibility of such a catastrophic event was statistically remote.  (The Commander of the Corps of Engineers suggested in a television interview the other day that it was less than a 0.5% chance.) As the Revision Comments to La. Civ. Code art. 1875 explain "Louisiana Courts have shown more concern for the reasonableness of the parties' foresight in a particular situation than for the objective foreseeability of a particular event. . . Thus, under this Article, that fact that an event is foreseeable does not preclude a conclusion that the parties could not have reasonably foreseen it, since they may not have thought it sufficiently important a risk to have made it the subject of a clause in the contract."
• Consider choice of law issues.  If a contract of sale is involved, the UCC concept of commercial impracticability may set a lower standard than the concept of impossibility of performance under Louisiana law.  On the other hand, if no contract of sale is involved, some common law jurisdictions may not excuse performance even where it is impossible.
• There are, of course, many other issues that you will need to consider, but which do not come within the parameters of force majeure, such as risk of loss issues.

II. Impossibility of Performance Under Louisiana Law

A.  Civil Code Articles

La Civ. Code art. 1873 

Obligor not liable when failure caused by fortuitous event.

An obligor is not liable for his failure to perform when it is caused by a fortuitous event that makes performance impossible.  An obligor is, however, liable for his failure to perform when he has assumed the risk of such a fortuitous event. An obligor is liable also when the fortuitous event occurred after he has been put in default.  An obligor is likewise liable when the fortuitous event that caused his failure to perform has been preceded by his fault, without which the failure would not have occurred.

La Civ. Code art. 1874 

Fortuitous event that would have destroyed object in hands of oblige.

An obligor who had been put in default when a fortuitous event made his performance impossible is not liable for his failure to perform if the fortuitous event would have likewise destroyed the object of the performance in the hands of the obligee had performance been timely rendered.  That obligor is, however, liable for the damage caused by his delay.

La. Civ.  Code art. 1875

Fortuitous event

A fortuitous event is one that, at the time the contract was made, could not have been reasonable foreseen.

Comment:  Louisiana courts have stated that the question of whether a fortuitous event made an obligation truly impossible or just more burdensome depends on the particular facts and circumstances of each case. 

La. Civ. Code art. 1876

Contract dissolved when performance becomes impossible

When the entire performance owed by one party has become impossible because of a fortuitous event, the contract is dissolved.  The other party may then recover any performance he has already rendered.

La. Civ. Code art. 1877

Fortuitous event that has made performance impossible in part

When a fortuitous event has made a party's performance impossible in part, the court may reduce the other party's counter-performance proportionally, or, according to the circumstances, may declare the contract dissolved.

La. Civ. Code art. 1877

Fortuitous event after obligor performed in part

If a contract is dissolved because of a fortuitous event that occurred after an obligor has performed in part, the obligee is bound but only to the extent that he was enriched by the obligor's partial performance.

B. Discussion

In Louisiana the doctrine of force majeure, absent agreement to the contrary, excuses parties from liability when they fail to perform due to a fortuitous event that makes performance impossible.  See La. Civ. Code art. 1873 et seq.; see also La. Civ. Code. arts 2533, 2697, 2743, 2899, 2939, 2507, 2716, 2719, 2723, 2946, 2970, 583, 1250 (governing the impact of a fortuitous event on particular contracts such as sales and leases).  So, in determining whether the doctrine applies, it is necessary to determine (1) whether performance is impossible and (2) whether the impossibility was caused by a fortuitous event.

1. Impossibility of Performance

In order for an obligor to claim force majeure, his performance must be actually impossible and not merely more onerous.  “If performance is still possible in spite of the obstacle, the obligor must fulfill his obligation at any cost, whatever the sacrifice.”  Saul Litvinoff, Louisiana Civil Law Treatise: Law of Obligations, § 16.17 (2d ed. 2001).  “His diligence, in other words, must be absolute and perfect, regardless of the magnitude of the increase in physical or financial effort that unforeseen events or changes in circumstances may require of him in order to perform, and also regardless of the collapse of his expectations when such events or changes, without making impossible the performance he promised, deprive him from obtaining the reasonable advantage in contemplation of which he bound himself to perform.”  Saul Litvinoff, Force Majeure, Failure of Cause and Théorie de L’imprévision: Louisiana Law and Beyond, 46 La. L. Rev. 1 (1985).[2]   For example, if a manufacturer is obligated to deliver a product, but is incapable of manufacturing it due to a fortuitous event, he must obtain the product from another and deliver it to the obligee.  Litvinoff, Law of Obligations § 16.17 (citing Dallas Cooperage & Woodenware Co. v. Creston Hoop Co., 109 So. 816, 818 (1926).  Indeed, much of the jurisprudence reflects the fact that the traditional application of the doctrine of force majeure in Louisiana is quite harsh.  However, possible arguments for a more flexible approach to the disruptions in performance of contracts caused by fortuitous events might be made.  See Litvinoff, 46 La. L. Rev. 1.

2. Fortuitous Event

The Civil Code defines a fortuitous event as “one that, at the time the contract was made, could not have been reasonably foreseen.”  La. Civ. Code art. 1875.  “When the event that makes the performance impossible could have been foreseen the obligor has no valid excuse for his failure to perform and is therefore liable for damages.”  Litvinoff, Law of Obligations § 16.14.  This does not require, however, that the fortuitous event be absolutely unforeseeable.  Rather, the event should be relatively unforeseeable, or such that it would have escaped the foresight of a reasonable man.  Id.  In the context of force majeure an event might not be regarded as foreseeable simply because it is possible.  Id.  Rather, it is necessary to ascertain whether, at the time the contract was entered, the parties had some special reason to anticipate that the event could occur.  Id.  In other words, when an event is vaguely possible but most would consider it improbable, the event is likely unforeseeable.  Id.  The leading Louisiana case involving the connection between fortuitous event, irresistible force, impossibility of performance, and failure of cause, Viterbo v. Friedlander, 120 U.S. 707 (1887), was decided by the United States Supreme Court.  Litvinoff, 46 La. L. Rev. at 24.  In determining “whether the overflowing of the [ Mississippi River] was truly a fortuitous event, since, because of its recurrence, flooding could have been foreseen,” the court held that it was a fortuitous or unforeseen event as well as an irresistible one.  Id. 

C. Leases

1. La. Civ. Code art. 2714        If the leased thing is lost or totally destroyed, without the fault of either party, or if it is expropriated, the lease terminates and neither party owes damages to the other.

Comment: The comments to this article state that lease termination by operation of law is not inescapable.  The jurisprudence holds that the parties may prevent such termination by inserting appropriate clauses in their lease contract. 

2. La. Civ. Code art. 2715    If, without the fault of the lessee, the thing is partially destroyed, lost or expropriated, or its use is otherwise substantially impaired, the lessee may, according to the circumstances of both parties, obtain a diminution of the rent or dissolution of the lease, whichever is more appropriate under the circumstances.  If the lessor was at fault, the lessee may also demand damages.  If the impairment of the use of the lease thing was caused by circumstances external to the leased thing, the lessee is entitled to dissolution of the lease, but is not entitled to diminution of the rent.

Comment: One court determined that certain leased premises were “partially destroyed” when Hurricane Betsy caused considerable damage to a building, including almost complete demolition of one of the walls, breakage of all glass windows, and destruction of one-third of the roof, and estimated cost of repairs amounted to slightly more than half of the estimated value of the building.  The court found that the premises were only partially destroyed and the lessee had the right to cancel the lease. 

Additional case law suggests that to be considered totally destroyed, the thing must be so damaged as to require reconstruction, as distinguished from mere repairs, seriously affecting the lessee’s possession.  Several cases also note that a factor in determining the level of destruction is if the thing is considered permanently unfit for use as intended under the lease contract.

Another example of “partial destruction of the leased premises” occurred when a court found that nearly total destruction to one third of the roof of the premises occupied by lessee and substantial damage to the floor, interior or ceiling, walls and electrical and air conditioning systems, and total eviction for some months because of the time required for restoration, resulted in “partial destruction of the leased premises.”

Additionally, the clause “according to the circumstances of both parties” suggests that each case will be determined according to individual facts and there could be circumstances where a court could side with a lessor.   Additionally, if the impairments are caused by circumstances external to the leased thing, dissolution of the lease may be the lessor’s only remedy.  It is possible that Hurricane Katrina could fall under this clause and eliminate the opportunity for the lessee to receive a rent abatement and leave the lessee with only the remedy of dissolution.  However, the common sense answer seems to be that if the premises are uninhabitable as a result of the Hurricane, then the lessee’s obligation to pay rent abates and if the premises is uninhabitable for a prolonged period of time, either party should have the option to terminate the lease.  Under such circumstances, neither party should be able to recover damages.

3. La. Civ. Code art. 2682     The lessor is bound:  (1) to deliver the thing to the lessee; (2) to maintain the thing in a condition suitable for the purpose of which it was leased; and (3) to protect the lessee’s peaceable possession for the duration of the lease.

Comment: In a recent case, the court decided that a lessee’s right to peaceable possession is a matter of public policy that cannot be waived and if the lessor fails to provide the lessee with peaceable possession, the lessee’s obligation to pay rent ceases.  The court also noted that no “hell or high-water” clause can be used to resurrect the lessee’s obligation.  The court described a “hell or high-water clause” as one where the lessee unconditionally agrees to make lease payments to the lessor notwithstanding any foreseeable or unforeseeable circumstances.  The court stated that such clauses are generally enforceable but not in cases where the lessor has failed to provide lessee with peaceable possession as peaceable possession is a matter of public policy. 

4. La. Civ. Code art. 2688    The lessee is bound to notify the lessor without delay when the thing has been damaged or requires repair, or when possession has been disturbed by a third person. 

Comment:  Consider whether this notice requirement is still necessary if the circumstances are such that the landlord has an independent basis for knowing that the  premises are uninhabitable.

5. La. Civ. Code art. 2691    During the lease, the lessor is bound to make all repairs that become necessary to maintain the thing in a condition suitable for the purpose for which it was leased, except those for which the lessee is responsible. 

6. La. Civ. Code art. 2693    If during the lease, the thing requires a repair that cannot be postponed until the end of the lease, the lessor has the right to make that repair even if this causes the lessee to suffer inconvenience or loss of use of the thing.  In such a case, the lessee may obtain a reduction or abatement of the rent, or a dissolution of the lease, depending on all of the circumstances, including each party’s fault or responsibility for the repair, the length of the repair period, and the extent of the loss of use.

Comment: See where the comments recognize a flexible formula for determining which option to impose.  The comments also avoid the previously used one month benchmark for repairs in recognition of short-term leases.

7. La. Civ. Code art. 2694    If the lessor fails to perform his obligation to make necessary repairs within a reasonable time after demand by the lessee, the lessee may cause them to be made.  The lessee may demand the immediate reimbursement of the amount expended for the repair or apply that amount to the payment of rent, but only to the extent that the repair was necessary and the expended amount was reasonable. 

Comment: An older, but often cited Louisiana Supreme Court case, Bernstein v. Bauman, 127 So. 874 ( La. 1930), notes that a lease survives an unforeseen event merely requiring repairs as opposed to reconstruction. The Court reasoned that repairs would not cause the tenant to vacate the premises.

III. Force Majeure Under Texas Law

Once an obligation has been incurred, a party bound to perform may run into obstacles that make performance impossible.  Except where the Uniform Commercial Code may be applicable, common law jurisdictions generally require a force majeure clause if the parties wish to limit the risk that a future event will prevent performance and subject them to liability for non-performance.  If there is no such clause, the obligation to perform is absolute and cannot be excused under the force majeure doctrine.  See e.g., GT & MC, Inc. v. Texas City Refining, Inc., 822 S.W.2d 252, 259 (Tex. App. Houston 1991).

The doctrine of force majeure has existed in contract law for many years. Sun Operating Limited Partnership v. Holt, 984 S.W.2d 277, 282 (Tex. App.--Amarillo 1998).  It has historically embodied the notion that parties could be excused from performing their contractual duties when performance was prevented by forces beyond their control, such as acts of God. Id.  In more recent times, the doctrine has fallen to the wayside, and it is now little more than a descriptive phrase without much substance. Id. at 283.  Today, in Texas and nationwide, force majeure refers not to a common law doctrine used to interpret contract performance but to a provision parties typically include in their contract to provide for circumstances such as acts of God that might hinder performance.   Parties include force majeure clauses in their contracts in order to limit the risk that a future event will prevent performance and subject them to liability for non-performance.  Christopher J. Costantini, Allocating Risk in Take-Or-Pay Contracts: Are Force Majeure and Commercial Impracticability the Same Defense?, 42 Sw.L.J. 1047, 1060 (1989).

1. When there is no force majeure provision in the contract, no force majeure excuse should be allowed.

When bringing or facing a claim of excused non-performance under the doctrine of force majeure, the first step is to identify the force majeure clause in the contract at hand. If there is no such clause in the contract, unless a contract of sale is involved, then the obligation to perform is absolute and cannot be excused under this doctrine. GT & MC, Inc. v. Texas City Refining, Inc., 822 S.W.2d 252, 259 (Tex. App. Houston 1991).  In other words, when the parties do not bargain for such excusing conditions, common law will not insert them into the agreement. “Where the obligation to perform is absolute, impossibility of performance occurring after the contract was made is not an excuse for nonperformance if the impossibility might have reasonably been anticipated and guarded against in the contract.” Metrocon Construction Co., Inc. v. Gregory Construction Co., 663 S.W.2d 460, 462 (Tex. App. Dallas 1983), quoting Kolterman v. Underream Piling Co., 563 S.W.2d 950, 957 (Tex. Civ. App. San Antonio 1977).  For example, where high winds made a sub-contractor’s performance more difficult, the sub-contractor was not excused under force majeure because although an act of God had prevented performance, it was not bargained for as an excuse under the contract.  Metrocon, 663 S.W.2d at 463.  The contract between the parties contained a provision regarding Metrocon’s liability to Gregory for delays occasioned by acts of God; therefore it is clear that acts of God were in contemplation of the parties. Id.  If Gregory had wished to provide that its performance would be excused in the event of a loss due to an act of God, it could have included such in the contract; instead, it chose to assume an absolute obligation to perform and cannot later claim the excuse. Id.

 2. When there is a force majeure provision in the contract, whether the non-performance is excused should be analyzed using principles of contract interpretation under contract analysis.

When there is a force majeure provision in the contract, the scope and application of the doctrine is dependent entirely upon the terms of the contract in which it appears and the meaning the parties gave to it via their agreement. Holt, 984 S.W.2d at 289. The doctrine of force majeure should not supersede the specific terms bargained for in the contract. Perlman v. Pioneer Limited Partnership, 918 F.2d 1244, 1248 (5th Cir. 1990).   In construing the words of a contract, they must be accorded with their plain, ordinary, and generally accepted meaning unless the document provides otherwise. Holt, 984 S.W.2d. at 289. When the terms of a contract are unambiguous, the courts must give effect to the intentions of the parties expressed by the language they employ. If the language is reasonably susceptible of a construction that avoids forfeiture, it should be read that way. Id. at 287.  If needed, the common law doctrine of force majeure is available to fill in gaps left open by a contract; however in recent times this is rarely done. Hydrocarbon Management, Inc. v. Tracker Exploration, 861 S.W.2d 427, 436 (Tex.App.--Amarillo 1993).  Professor Corbin suggests that courts should approach interpretation of force majeure provisions by looking to: 1) the terms of the contract; 2) the custom of businesses in like cases; and 3) prevailing opinion of public welfare as evidenced by judicial decisions. See Corbin, Corbin on Contracts, §1324 (1962).  Texas courts, although typically considering some or all of these factors, have not expressly adopted such an approach.

There are several limitations that are typically placed on the force majeure excuse, including: 1) event must be out of the reasonable control of the party claiming the excuse; 2) the event must not be reasonably foreseeable, otherwise the parties would have provided for the event in the provision. 42 Sw.L.J. at 1064.  It is important to recognize, however, that neither of these limitations should be placed on the excuse unless the parties included this stipulation in the force majeure provision of their contract.  Holt, 984 S.W.2d at 287.  For example, the Fifth Circuit affirmed a Texas district court’s holding that the party’s non-performance was not excused under the doctrine of force majeure but rejected its reasoning. Perlman, 918 F.2d at 1248.  There, Perlman sought to have an oil and gas lease declared unenforceable under force majeure, claiming his performance was hindered by regulations passed by Wyoming and Montana. Id.  The district court, applying Texas law, had held that his performance was not excused because the event complained of was within his control and was entirely foreseeable. Id.  The Fifth Circuit, however, found it to be an error for the district court to interject these terms into the contract that were not contemplated by the parties. Id.  However the court went on to find force majeure inapplicable because the states had not passed the regulations, rather Perlman was acting on speculation that they would; therefore his performance was not prevented by any event or occurrence. Id. at 1249.  See also PPG Industries, Inc. v. Shell Oil Co., 919 F.2d 17 (5th Cir. 1990).

In several cases, orders passed by governmental bodies have prevented performance by the party claiming excuse.  Such an occurrence is typically provided for in a force majeure provision of a contract.   Interestingly, many of these cases have been decided based on another limitation that the parties are presumed to have contracted with knowledge of the law. Trucker Exploration, 861 S.W.2d at 436.  For example, where the Texas Railroad Commission’s (“RRC”) shut-down of a well prevented a party from performing on a contract, even though such an occurrence was provided for in a force majeure clause, the party was prevented from claiming excuse. Id.  Because the party was presumed to know that their overproduction would give the RRC the authority to order a shut-down, they had brought on the occurrence and therefore they were not allowed to claim the excuse. Id.; see also Atkinson Gas Co. v. Albrecht, 878 S.W.2d 236 (Tex. App. Corpus Christi 1994).

There are cases, of course, where the doctrine of force majeure did enable a party to be excused for their non-performance.  These are cases where the event or occurrence in question was specifically provided for in the force majeure provision of the contract.  For example, where bad weather caused a delay in the delivery of barrels of crude oil, the buyer was in breach for refusing to accept the delivery because the seller was excused for the delay under force majeure. Texas City Refining, Inc. v. Conoco, Inc., 767 S.W.2d 183, 185 (Tex. App. Houston 1989).  There, the force majeure provision in the contract specifically excused delay due to actions of the elements including floods and hurricanes. Id. 

3. Force majeure must not be confused with commercial impracticability.

Sometimes force majeure is confused with the doctrine of commercial impracticability by parties and even by courts. 42 Sw.L.J. at 1048. Whereas force majeure is not explicitly provided for statutorily, commercial impracticability is an excuse under Texas Business and Commerce Code §2.615 (excuse by failure of presupposed conditions), which mirrors the Uniform Commercial Code’s § 2-615.  Tex. Bus. & Com. § 2.615 (2001).  Commercial impracticability contains four elements: 1) the occurrence of an event must render performance impracticable; 2) the nonoccurrence of the event must have been a basic assumption of the contract; 3) the event must not have occurred due to the fault of the party claiming the excuse; and 4) the party claiming excuse must not have agreed to assume a greater obligation. 42 Sw.L.J. at 1053.  A force majeure clause allocates to one party the risks arising from the occurrence of a specific contemplated event while commercial impracticability allocates the risks arising from events the parties neither contemplated nor allocated.  Id.  Further, a party seeking excuse under force majeure must show that the event prevented his performance, whereas under § 2.615, a party must only show the event has rendered their performance commercially impracticable. Id.  Lastly, when a court is considering whether to grant an excuse under force majeure, it must refer to the rules of construction for contracts, while under commercial impracticability, a court finds guidance outside of the contract under the rules set forth in § 2.615. Id.  These doctrines are separate entities under the law and must be treated accordingly.

IV. Commercial Impracticability[3]

Parties and courts often confuse the doctrine of commercial impracticability with force majeure.  As discussed, supra, excused nonperformance based on force majeure generally requires the excuse be expressly provided for in the contract.  Excused nonperformance based on commercial impracticability, on the other hand, is provided for in the Uniform Commercial Code.[4]  Section 2-615 of the UCC excuses a seller’s failure to perform if performance is commercially impracticable.  Section 2-615 provides, in its entirety, as follows.

§ 2-615 provides Excuse by Failure of Presupposed Conditions.

Except so far as a 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 who 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.

(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.

A court faced with deciding whether the defense of impracticability is valid will generally require the following:  1) the occurrence of an event must render performance impracticable; 2) the nonoccurrence of the event must have been a basic assumption of the contract; 3) the event must not have occurred due to the fault of the party claiming the excuse; and 4) the party claiming excuse must not have agreed to assume a greater obligation.

1. When has performance been made impracticable?

The modern doctrine of commercial impracticability is traceable to the common law concepts of frustration of purpose and impossibility of performance.  The doctrine “finds its most recognized cases in the so-called ‘Suez Cases’, arising out of the various closings of the Sues Canal and the consequent increases in shipping costs around the Cape of Good Hope.”[5]  Those cases offered little hope to those asserting commercial impracticability as a defense.  The Transatlantic court gave specific consideration to UCC 2-615, Comment 4, which provides that

Increased cost alone does not excuse performance unless the rise in cost is due to some unforeseen contingency which alters the essential nature of the performance.  Neither is a rise or a collapse in the market in itself a justification, for that is exactly the type of business risk which business contracts made at fixed prices are intended to cover.  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 contemplation of this section.[6]

Despite the fact that war and embargo are specifically described contingencies in 2-615, Comment 4, courts have frequently denied the defense of commercial impracticability on the grounds that such events were foreseeable.[7]  Indeed, in Publicker Ind. V. Union Carbide Corp, 17 U.C.C. Rep. Serv. 989 (E.D. Pa. 1975), the market price of raw materials which Union Carbide needed to produce ethanol doubled.  Union Carbide sought to avoid its obligations under the commercial impracticability theory by arguing that it was unforeseeable that OPEC would double prices for natural gas after an embargo.  The court disagreed and found that a price increase by OPEC of 25% two years earlier provided fair warning that further price increases of any size were possible.  See also Transatlantic, supra, n 5.  These results have led commentators to say that the commercial impracticability defense is difficult, if not impossible, to establish.[8]   

 However, impracticability has been held to exist in situations where performance is physically impossible.  For example, in Goddard v. Ishikawajima-Harima Heavy Industries Co., 287 N.Y.S.2d 901 (N.Y.A.D. 1 Dept 1968), a boat manufacturer’s performance on a contract to furnish specific types and sizes of boats pursuant to written orders was found impracticable due to the destruction of its factory by fire.     

2. Foreseeability

To provide a basis for excused nonperformance, the contingency must not have been foreseeable.  If the occurrence of the disruptive event was not reasonably foreseeable, then the promisor cannot be deemed to have assumed the risk associated with the event.  Waldinger Corp. v. CRS Group Engineers, Inc., 775 F.2d 781, 786 (7th Cir. 1985).  On the other hand, if the event was foreseeable, the promisor is expected to protect himself contractually.  UCC 2-615, Comment 1 provides:

This section excuses a seller from delivery of goods contracted for, where his performance has become commercially impracticable because of supervening circumstances not within the contemplation of the parties at the time of contracting.

(emphasis added).  Arguably, the hurricanes were unforeseeable events as they were not likely contemplated by the parties at the time of contracting.  However, despite the implication that the test should be whether the event was unforeseen by the parties at the time of contracting, courts have frequently required that the event be unforeseeable or outside of the realm of logical possibility.  For example, in Bende & Sons, Inc. v. Crown Recreation, Inc., 548 F. Supp. 1018, 1022 (E.D.N.Y. 1982), the court held a train derailment was not unforeseeable stating that “[a]lthough it did not appear [the parties]…ever contemplated a train derailment…common sense dictates that they could easily have foreseen such an occurrence.”  See also Eastern Airline, Inc. v. Gulf Oil Corp., 415 F. Supp. 429 (S.D. Fla. 1975).[9]  So, it may be very difficult to argue that the hurricanes were not foreseeable. 

Excuse for impracticability has been called a game with a predictable outcome—the buyer wins.  Speidel, Excusable Nonperformance in Sales Contracts: Some Thoughts About Risk Mangagement, 32 S.C.L. Rev. 241, 248 (1980).

The courts consistently have found that the occurrence of the contingency was assumed or that the occurrence failed to make performance “as agreed” impracticable….  The results … are compatible with some traditional views about the nature and purpose of contract law, namely, than an “objective” theory of contracts which tightly controls both the creation of contract liability and the grounds for excuse through standards of reasonableness is desirable.  When this is combined with the natural tendency to leave the loss on the maker of an unconditional promise, the results are not surprising.   

Id.  It has also been said that “the commercial impracticability is recognized, but rarely allowed as an excuse.”  McGinnis v. Cayton, 312 S.E.2d 765, 775 (W. Va. 1984).

V. Force Majeure Under New York Law of Sales

New York has adopted Article 2 of the UCC as the main body of law regulating transactions for the sale of goods.  The concept of an event of Force Majeure excusing performance of a seller is embodied in Section 2-615 which provides, in its entirety, as follows:

§ 2-615. Excuse by Failure of Presupposed Conditions.

Except so far as a 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 who 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.

(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.

As you will note, Section 2-615(b) provides that when only a part of the seller’s capacity to perform is affected, the seller must allocate production and deliveries among his customers and such allocation may be in any manner which is “fair and reasonable.”  Official Comment 11 to Section 2-615 provides as follows:

An excused seller must fulfill his contract to the extent which the supervening contingency permits, and if the situation is such that his customers are generally affected he must take account of all in supplying one.  Subsections (a) and (b), therefore, explicitly permit in any proration a fair and reasonable attention to the needs of regular customers who are probably relying on spot orders for supplies.  Customers at different stages of the manufacturing process may be fairly treated by including the seller’s manufacturing requirements.  However, good faith requires, when prices have advanced, that the seller exercise real care in making his allocations, and in case of doubt his contract customers should be favored and supplies prorated evenly among them regardless of price.  Save for the extra care thus required by changes in the market, this section seeks to leave every reasonable business leeway to the seller.  (Emphasis added).

In Cliffstar Corp. v. Riverbend Products, Inc., 750 F.Supp. 81 (W.D.N.Y. 1990), a processor and seller of tomato paste was unable to deliver in full under its purchase contracts due to poor weather and harvest conditions.  As a result, the seller was able to provide only 79% of the total tomato paste that it was bound to deliver under contract.  The seller based its allocation of the available tomato paste on such factors as customer loyalty, past performance, needs, customer relationship and projections of potential future sales.  The plaintiff in the instant case was allocated approximately 31% of its original order while other customers received 85% and, in certain instances, 100% of their orders.  The court ruled that such an allocation was not unfair and unreasonable as a matter of law, but that such question is one of fact to be decided by the jury.  The court, quoting J.White and R. Summers, Uniform Commercial Code 3-9 (1998), goes on to state:

One should note that a direction to allocate pro rata is far from an explicit and rigid set of allocation rules.  Seller may choose to prorate based upon historic deliveries, historic contract amounts, current needs, current contract amounts, and possibly other contract grounds.  By choosing one or another scheme to establish his proration, the seller may be able to favor one set of customers over another to a considerable extent.  Moreover if we allow further deviations in the pro rata scheme based upon appropriate priority rules either because of the social utility of certain uses or because of the more serious injuries that some buyers would suffer if they did not receive more than a pro rata share, we leave the seller with a great deal of flexibility.  We believe that the seller should have considerable flexibility and that courts will not often improve things by putting their own oar in.  The seller’s selfish long-term interest in maintaining a cadre of customers will usually sufficiently induce him to treat his customers as he should.[10] 

Although New York law offers no definitive guidance as to what factors are determinative as to what constitutes a “fair and reasonable” allocation under Section 2-615, it is clear that under New York law a significant degree of deference is given to the business judgment of a seller. 

When does a Force Majeure event terminate?

Although it makes sense that a Force Majeure event ceases to exist once the party declaring Force Majeure is able to perform in full under the contract, we have found no case law, under New York law or otherwise, regarding the point at which a Force Majeure event terminates.  We have found a couple law review articles which very briefly and vaguely touch on the issue, but nothing definitive or in detail.[11]  The termination date of a force majeure event will have to be resolved on a case-by-case basis.

Seller’s Rights at Law: UCC § 2-615

All states other than Louisiana have adopted Article 2 of the UCC as the main body of law regulating transactions for the sale of goods.  The concept of commercial impracticability[12] excusing performance of a seller is embodied in Section 2-615.  Courts, in determining whether a seller should be excused from performance under Section 2-615, typically apply a two-pronged analysis: (1) was there an unforeseeable contingency and (2) in light of the unforeseen contingency, was performance impracticable.

A. Unforeseeable Contingency

The first prong of the impracticability analysis asks whether the contingency was reasonably foreseeable at the time the contract was made.  Although foreseeability is not a requirement explicit in the wording of Section 2-615, Official Comment 1 to Section 2-615 states that “this section excuses a seller from the timely delivery of goods when his performance has become commercially impracticable because of unforeseen supervening circumstances not within the contemplation of the parties at the time of contracting.”

Official Comment 4 to Section 2-615, which lends some guidance on the issue of market forces as an unforeseeable contingency, states:

Increased cost alone does not excuse performance unless the rise in cost is due to some unforeseen contingency which alters the essential nature of the performance. Neither is a rise or a collapse in the market itself a justification, for that is exactly the type of business risk which business contracts made at fixed prices are intended to cover. 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 contemplation of this section.

Additionally, courts on several occasions have addressed the applicability of Section 2-615 as a result of market forces and have been reluctant to qualify such market forces as “unforeseeable contingencies”.  See TransAtlantic Financing Corp. v. U.S., 363 F.2d 312 (D.C. Cir. 1966); Eastern Airlines Inc. v. Gulf Oil Corporation, 415 F.Supp. 429 (S.D. Fla. 1975).  In fact, the only cases that have held market conditions to be an “unforeseeable contingency” are Aluminum Company of America (ALCOA) v. Essex Group, Inc., 499 F. Supp. 53 (W.D. Pa. 1980) and Roth Steel Products v. Sharon Steel Corp., 705 F.2d 134  (CA6 1983), with only ALCOA finding in favor of contract reformation as a result of market forces.

Impracticability

The second prong of the impracticability analysis considers whether performance of a contract has been made impracticable by the occurrence of an unforeseen contingency.  To meet this requirement, a seller must show more than the fact that performance has been made financially difficult or even onerous; rather, a court will likely require the seller to show extreme financial difficulty. 

Seller’s Right by Contract: Force Majeure Provisions

It is commonly viewed that the purpose of Section 2-615 was to provide a statutory basis for a claim of relief from burdensome contracts where the parties had not thought to provide their own force majeure clause.  However, if the parties have included a force majeure clause in their agreement, the relationship between such clause and Section 2-615 is not totally clear.  The predominant view is that when the term “force majeure” is merely recited in a contract, or the contract includes only a standard, boilerplate, catch-all force majeure provision, it is typically difficult to distinguish the contract provision from Section 2-615 and therefore it is assumed that the language in the contract only duplicates that standards found in Section 2-615 since these standards ought to reflect current and prevailing commercial practices.  In such cases, the force majeure clause, at least from the seller’s standpoint, adds nothing to the contract as the clause only gives the seller what would have been offered at law.  However, contracts often have force majeure clauses indicating events that excuse nonperformance such as bad weather, war, acts of God and political risks.  Generally, a party will only be excused from performance if the clause itself specifically and expressly includes the event alleged to have prevented performance, and this is especially true if the event allegedly justifying nonperformance is market fluctuation.  Economic hardship and market fluctuations are considered normal risks of contractual obligations and therefore do not typically constitute force majeure.

In United States v. Pan Handle Eastern Corp., 693 F. Supp. 88 (D. Del. 1988), the defendant sought to be excused from performance under an LNG purchase and sale agreement as a result in the unprecedented fall in the price of crude oil.  Although the contract included a force majeure clause, the court found that it did not expressly state that highly adverse economic market conditions would constitute a force majeure, and, therefore, the clause did not apply.

VI. The Convention on Contracts for the International Sale of Goods (“CISG”)

Article 79 of the CISG provides that:

A party is not liable for failure to perform any of his obligations if he proves that 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 its consequences.

While no American court has specifically interpreted or applied Article 79, caselaw interpreting analogous provisions of the UCC has been used when applying Article 79.  See Raw Materials Inc. v. Manfred Forberich GMBH & Co., KG, 2004 WL 1535839 (N.D. Ill. July 7, 2004); Delchi Carrier SpA v. Rotorex Corp., 71 F.3d 1024, 1028 (2d Cir. 1995); Chicago Prime Packers, Inc. v. Northam Food Trading Co., No. 01-4447, 2004 WL 1166628, at *4 (N.D. Ill. May 21, 2004).Courts in the United States have looked to analogous provisions of the UCC when interpreting this

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[1] Article 2 of the UCC regulates transactions for the sale of goods and, while Section 2-613 deals with the destruction of specific goods and Section 2-614 deals with transportation problems and payment problems, Section 2-615 deals with excused nonperformance based on commercial impracticability.

[2]   See Also Marionneaux v. Smith, 163 So. 206 ( La. App. 1^st Cir. 1935); Hughes v. Grant Parish School Board, 145 So. 794 ( La. App. 2^nd Cir. 1933).

[3] In the field of excuse for nonperformance, three different concepts are implicated:  physical impossibility, frustration of purpose and commercial impracticability.  While these concepts are distinct, they share the same underpinnings, the most important of which is that all three doctrines rely on courts to find that an implied condition in a contract.  For example, if someone contracts to perform a service personally, but dies before the performance is rendered, his performance is physically impossible.  In such a case a court will find nonperformance excused because both parties assumed (thereby creating an implied condition) that the death would not occur.  See The Tornado, 108 U.S. 342 (1883).  Frustration of purpose originated in England when lessees would rent an apartment along the coronation route.  If the coronation was cancelled due to illness of the king, the courts would find the purpose of the lease frustrated and nonperformance excused.  This section of the memorandum will focus on the doctrine of commercial impracticability as it is the most likely to arise due to the hurricanes.  

[4] The common law also provides for impracticability

[w]here, after a contract is made, a party’s performance is made impracticable without his fault by the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made, his duty to render that performance is discharged, unless the language or the circumstances indicate the contrary.

Restatement (Second) of Contracts § 261 (1981).  In states that recognize the doctrine as applicable to non-UCC contracts, the analysis is identical to that used under the UCC.  Indeed, the comments in the Restatement reference the UCC regularly.     

[5]           One such case is Transatlantic Financing Corp. v. U.S., 363 F.2d 312 (D.C. Cir. 1966).  In Transatlantic, the plaintiff had agreed to transport cargo from Texas to Iran.  Two days after departing from Texas, Israel invaded Egypt, and a few days later Egypt blocked the route the plaintiff intended to take through the Suez Canal.  After rerouting its ship around the Cape of Good Hope, the plaintiff sought to cover the additional expenses incurred as a result of the extended journey.  Denying the plaintiff’s claim, the court found that while a contingency—something unexpected—occurred and the risk had not been allocated either by agreement or by custom performance was not impracticable as the additional costs were merely 15% of the original contract rate. 

[6]           Similarly, the Restatement (Second) of Contracts provides:

impracticability” means more than “impracticality.”  A mere change in the degree of difficulty or expense due to such causes as increased wages, prices of raw materials, or costs of construction, unless well beyond the normal range, does not amount to impracticability since it is this sort of risk that a fixed-price contract is intended to cover. 

Restatement (Second) of Contracts § 261, Comment (b). 

[7]           I have been unable to determine whether the comment has been changed since these cases to add embargo, etc.

[8]           George Wallach, The Excuse Defense in the Law of Contracts: Judicial Frustration of the U.C..C. Attempt to Liberalize the Law of Commercial Impracticability, 55 Notre Dame L. Rev. 203 (1979).

[9]           The Middle Eastern oil embargo caused the price of oil to climb.  In finding the events foreseeable, the court reasoned that “[t]he record [was] replete with evidence as to the volatility of the Middle Eastern situation…[and] that oil [had] been used as a political weapon with increasing success by the oil producing nations for many years.” 

[10]         A couple of cases, not governed by New York law, have held certain non-pro rata allocations to affiliates to be unreasonable under UCC Section 2-615.  In Chemtron Corp. v. McLouth Steel Corp., 381 F.Supp. 245 (ND Ill. 1974),  McLouth and Chemtron entered into an agreement whereby McLouth agreed to provide a minimum quantity of liquid product to Chemtron.   McLouth delivered only one-third of the minimum amount of product called for under the contract yet supplied its own steel mill with its full requirement of liquid product.  When sued for breach, the court rejected McLouth’s defense of impossibility because McLouth's own conduct created the event causing the impracticability of performance.  Additionally, the court held that McLouth presented no evidence that it made any attempt to allocate the product between itself and McLouth, Chemtron’s only customer, in a fair and reasonable manner. 

            In Roth Steel Products v. Sharon Steel Corp., 705 F.2d 134 (6^th Cir. 1983), Sharon was under contract to deliver product to Roth.  Sharon, unable to meet its full obligations under all of its steel supply contracts, activated a wholly-owned subsidiary and began diverting steel to the subsidiary's warehouse.  When sued, Sharon claimed the defense of impossibility under UCC Section 2-615.  The court held that a “fair and reasonable” allocation requires sellers to limit participation in the allocation system to customers under contract and regular customers.  There was no evidence that the subsidiary was a customer under contract or a regular customer.  Therefore, the allocation to the subsidiary was deemed unreasonable.

[11]         Sample coverage under one law review article is as follows:  “When the impediment is only temporary, the excuse shall have affect for such period as is reasonable having regard to the effect of the impediment on the performance of the contract.”

[12]         The doctrines of impossibility and impracticability are typically combined into one doctrine as courts, in the interest of commercial reasonability, have held that “a thing is impossible in legal contemplation when it is not practicable, and a thing is impracticable when it can only be done at an excessive and unreasonable cost.”  TransAtlantic Financing Corporation v. U.S., 363 F.2d 312 (D.C. Cir. 1966).