Resources

Earthquakes, Tsunamis and Force Majeure Clauses—What Do They Mean To Your Business?

May 4, 2011

The recent natural disasters in Japan have resulted in disruption to supply chains for many companies whose products incorporate goods or materials from the impacted areas, including the inability to meet delivery and production schedules, among other things. As a result, many are evaluating their contracts for an often-overlooked (or nonexistent) clause: the force majeure clause.

If your contract contains a force majeure clause, that provision will govern the rights and responsibilities of the parties. However, if your contract does not contain a force majeure clause (or the clause is lacking in some respect), the Uniform Commercial Code’s instructions regarding commercial impracticability will apply.

What is commercial impracticability under the UCC?

Under UCC 2-615, “commercial impracticability” is defined as “performance as agreed has been made impracticable by the occurrence of a contingency, the nonoccurrence of which was a basic assumption on which the contract was made.”

Is performance excused for a seller if the cost of supplying the contracted goods increases substantially due to natural disasters?

Greatly increased costs to the seller, even if not expected, are generally not sufficient to establish commercial impracticability, and increased costs do not excuse performance under the UCC. Most courts hold that if the seller can perform, even at a substantially higher cost, the seller must so perform. For instance, if the seller’s low-cost production facility has been impacted by natural disasters but it has other facilities from which it can manufacture the goods in question (but at a higher cost), the seller generally must perform. This does not mean, and it is unlikely, that a court would require a seller to expend the costs to rebuild a completely destroyed facility.

What if the parties’ contract requires that the goods at issue be manufactured exclusively at a specific plant?

If the parties’ contract requires that goods be produced from a specific facility or an exclusive source, the destruction of such facility may qualify to excuse performance under UCC 2-615. For the automotive industry, Production Part Approval Process (PPAP) or other validation processes that specify places of production may contribute to the assertion that a source of supply is exclusive.

What type of measures must a seller employ before relying upon UCC 2-615 to excuse performance?

UCC 2-615 will not excuse performance unless the seller has employed “all due measures” to assure itself that its source will not fail. Further, a seller cannot create or contribute to the event that causes the event that makes performance commercially impracticable.

Can a purchaser rely upon UCC 2-615 to excuse performance and avoid buying goods or materials?

Generally speaking, only the obligations of a seller are excused by UCC 2-615. Some cases and comments suggest that a purchaser might have relief, but such cases and comments are not the norm. Additionally, remember to check your written contracts, which may provide relief to sellers and buyers.

Dykema's Japan Crisis Task Force is ready to assist companies impacted by the recent natural disasters. Please contact one of the individuals listed below to discuss how we can help you navigate this difficult situation.

Supply Chain Issues/Litigation 
 
Contract Issues 

Laura Baucus 

248-203-0796   

 

Sheryl Toby 

248-203-0522 

Thomas Bishoff  

313-568-5341 

 

Janet Stiven   

312-627-2153   

Marilyn Peters  

248-203-0768 

 

Stephen Tupper   

249-203-0895 

Regulatory  
 
Labor & Employment

Grant Gilezan

313-568-6789  

 

Martin Jay Galvin

313-568-6912   

Paul Laurenza

202-906-8646  

     
Products Litigation 
   

Fred Fresard

248-203-0593  

 

Derek Whitefield

213-457-1777  

 

For more information about Dykema’s Automotive Industry Group, please contact Aleksandra Miziolek at 313-568-6762, or your Dykema relationship attorney.


As part of our service to you, we regularly compile short reports on new and interesting developments and the issues the developments raise. Please recognize that these reports do not constitute legal advice and that we do not attempt to cover all such developments. Rules of certain state supreme courts may consider this advertising and require us to advise you of such designation. Your comments are always welcome. © 2011 Dykema Gossett PLLC.

As part of our service to you, we regularly compile short reports on new and interesting developments and the issues the developments raise. Please recognize that these reports do not constitute legal advice and that we do not attempt to cover all such developments. Rules of certain state supreme courts may consider this advertising and require us to advise you of such designation. Your comments are always welcome. © 2017 Dykema Gossett PLLC.