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Supply Chain Disruption: Article 8
With disruptions affecting every aspect of the supply chain,
companies are increasingly encountering legal arguments offered to
justify a failure to meet supply obligations. This article in the
Supply Chain Disruption Series provides a concise summary of the
three legal theories frequently invoked to excuse nonperformance of
contractual duties.
Force Majeure
Overview
The concept of force majeure (French for “superior
force”) originates in common law. Today, however, force
majeure primarily comes into legal play as a result of an express
provision in a commercial contract. This mechanism is used to
reallocate the risks of loss associated with a failure to perform
if the failure is caused by specified events or occurrences. Force
majeure provisions have taken on greater importance given the
increased supply chain disruptions, labor stoppages and slowdowns,
and freight delays arising directly and indirectly from the
COVID-19 pandemic.
Force majeure clauses set forth the circumstances in which a
party owing a duty under the contract (the obligor) is excused from
all or partial performance of that obligation, typically due to
circumstances beyond the obligor’s reasonable control. Although
state law varies, courts tend to construe force majeure clauses
narrowly. If the alleged force majeure event is expressly listed in
a contract as an occurrence that excuses performance, the parties
obviously contemplated the risk and decided to shift the risk of
the specified event to the party benefitting from the obligation
(the obligee). If the specified event occurs, the obligor is
excused from performance for the duration of the event or for some
other time period specified in the force majeure provision. If the
force majeure event is not listed or is expressly excluded,
however, courts are likely to find that the risk of that event
should remain with the obligor.
For any specified circumstances to be excused as a force majeure
event, the event must actually prevent performance. In addition,
the event must be wholly outside of the impacted party’s
influence or control, unless otherwise provided in the contract.
Stated differently, if an event may be prevented by the impacted
party, or if the impacted party did not do everything it could do
to avoid the event, it may not constitute a condition excusing
performance under the force majeure clause.
Catch-All Provisions
Although courts narrowly construe force majeure provisions, many
provisions contain “catch-all” language such as “or
any other circumstances beyond a party’s reasonable
control.” Courts in some states construe these provisions very
narrowly so that only events similar to the itemized list will be
captured under the catch-all provision.1 Courts in other
states construe these provisions more expansively, focusing more
closely on whether or not the event was beyond a party’s
reasonable control.
Duty to Mitigate
Even if a contract states that a party must mitigate a force
majeure event, the scope of the duty to mitigate will vary from
state to state. In some states, the duty arises only when
mitigation can be done at minimal or reasonable expense or effort.
In states that do not have any case law regarding mitigation of
damages in the force majeure context, courts generally hold parties
to the same general standard of mitigation used in breach of
contract cases.
In addition to specifying whether there is a requirement to
mitigate under the terms of the contract, parties also may
expressly state that partial performance may (or may not) be
excused. Courts may consider partial performance, if practical or
reasonable, to be an attempt to comply with the common law duty to
mitigate damages.
Commercial Impracticability
Overview
If a contract is silent on force majeure or if the event does
not meet the definition of force majeure under the parties’
contract, a party’s performance may still be excused in certain
circumstances under the doctrine of commercial impracticability.
That doctrine is applied if there is an unanticipated circumstance
that has made the performance of the contract vitally different
from what should reasonably have been within the contemplation of
the parties when the contract was executed. The rationale for the
impracticability defense is that the circumstance causing the
breach has rendered performance so critically different from what
was anticipated, that the contract cannot be reasonably thought to
govern the scenario. Impracticability functions as a gap filler,
and therefore does not alter the allocation of risk already
existing in a contract.
Impracticability is a common law doctrine. In some states, the
doctrine is impossibility, rather than impracticability, with
impossibility being a higher standard that requires the obligation
be impossible to perform, as opposed to only impracticable.
In states that have adopted Article 2 of the Uniform Commercial
Code (UCC) to govern contracts for the sale of goods, the doctrine
of impracticability has been codified as UCC §
2-615.2 That section provides that performance of the
contract’s obligations may be excused if it is made
impracticable either (1) “by the occurrence of a contingency
the non-occurrence of which was a basic assumption on which the
contract was made” or (2) “by compliance in good faith
with any applicable foreign or domestic governmental regulation or
order, whether or not it later proves to be
invalid.”3
Four Part Test Under The UCC
In determining whether an event renders performance under the
contract to be “commercially impracticable” under UCC
§2-615, courts employ a four part test, which requires a
showing that there was:
1. An unanticipated circumstance.
2. That the circumstance was not foreseeable.
3. The non-performing party did not contribute to the
circumstance
4. The non-performing party tried all practical alternatives
The test for whether the event was foreseeable involves
consideration of whether the risk of the circumstance, event, or
contingency was unusual or unforeseen, and the result so severe
that performance would grant the other party an advantage not
bargained for in the contract. If a contingency is foreseeable,
commercial impracticability is not applicable since the parties may
have contemplated the contingency’s occurrence in the
contract.
Seasonable Notice and Reasonable Allocation Under the
UCC
A non-performing party must seasonably notify the other party of
delay or non-delivery.4 If the cause of impracticability
only partly impairs a supplier’s ability to deliver goods, then
the party must allocate production and deliveries among customers
and seasonably notify such customers of the estimated quota made
available to the customer.5 In allocating production and
deliveries, the non-performing party may include regular customers
not then under contract and the party’s own requirements for
further manufacture, so long as the allocation is fair and
reasonable.
Frustration of Purpose
Overview
The legal theory of frustration of purpose excuses performance
when the cessation or nonexistence of some particular condition or
state of things has rendered performance impossible and the object
of the contract frustrated. This theory comes into play when, based
on the contract and surrounding context, the parties obviously
assumed a particular condition or state of circumstances would
continue to exist. If that condition or state ceases to exist, a
court may find that the entire purpose of the contract is
frustrated.
Unlike force majeure and impracticability, which focus on the
ability of the obligor to perform, frustration of purpose focuses
primarily on the obligee’s ability to enjoy the benefits of the
bargain. A simple example illustrates the difference. Sallie
contracts with a swim coach to help her prepare for the Olympics.
After executing the contract but before the coaching begins, Sallie
gets in a car accident and is left quadriplegic. The swim coach may
still stand ready to coach Sallie, but Sallie’s purpose for
entering the contract has been frustrated.
Restatement (Second) of Contracts
The Restatement (Second) of Contracts § 265 provides that
frustration of purpose may excuse performance when, so long as the
language or circumstances do not indicate the contrary: (1) a
party’s principal purpose is substantially frustrated; (2) such
party is not at fault; and (3) the contract was made on the basic
assumption that the cause of the frustration would not occur.
Two Part Test
The doctrine is generally given a narrow construction to be
applied sparingly. Further, courts apply a “rigorous”
two-part test. It must be shown that (1) the frustrating event was
not reasonably foreseeable; and (2) the value of performance has
been totally or nearly totally destroyed by the frustrating
event.
Conclusion
When navigating supply chain disruptions and uncertainties,
companies should understand the legal defenses available to excuse
performance. Companies can allocate certain risks through express
force majeure provisions in their contracts. In the absence of such
bargained-for provisions, additional defenses to performance such
as commercial impracticability and frustration of purpose may arise
under statute or common law.
| Legal Theory | Source | Focus | What events trigger excuse? |
| Force Majeure | Contract | Ability to perform | Listed events |
| Commercial Impracticability | Common law (services)
UCC (goods)
|
Ability to perform | Unforeseen events |
| Frustration of Purpose | Common law | Value of performance | Unforeseen events |
Footnotes
1 This approach follows the doctrine of ejusdem
generis (a Latin term meaning “of the same class”).
Under this doctrine, general catch-all clauses are construed to
include only those unlisted events that are of the same type as the
other listed events.
2 Louisiana is the only state that has not adopted
Article 2 of the Uniform Commercial Code. Uniform Laws Annotated
(Ed. Note 2021).
3 UCC § 2-615(1)
4 Id. § 2-615(3)
5 Id. § 2-615(2)
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
