Many contracts for the purchase of goods contain a clause titled, "Force Majeure" or "Excusable Delay." This clause basically frees either party from liability for a failure to perform if that failure is the result of an extraordinary event or circumstance beyond the control of the party, such as a war, embargo, riot, crime or a natural event such as a flood, earthquake, or tornado. Sometimes these natural events are referred to as "Acts of God."
Let's say that you are in the last year of a contract with a supplier who calls to tell you that he is not going to continue to supply you because his source for a particular type of steel fabric has gone out of business. The supplier says he is sorry, and he reminds you that his failure to perform is excused under the terms of your contract because of the following Force Majeure clause:
"No Party shall be liable for any failure to perform its obligations where such failure arises from causes or events beyond its control or is the result of Acts of God (including fire, flood, earthquake, storm, hurricane or other natural disaster), war, invasion, act of foreign enemies, embargo, or labor dispute."
Is your supplier excused from performance?
The answer depends on the specific facts of your situation. Generally, a court will excuse a party from performance only when there is an actual impossibility, and not merely an unexpected difficulty. If the steel fabric that your supplier requires is available from a different vendor at a higher price, then it may be more inconvenient for your supplier to perform--but it is not impossible. The fact that performance is more difficult for your supplier than had been expected at the time the contract was signed does not mean that the supplier is excused from liability for failure to perform under the Force Majeure clause.
In order to show impossibility, the supplier has to prove that an unexpected event or series of events has rendered his performance impossible, and that the consequences of the event could not have been averted by the supplier's exercise of reasonable care. If the steel source had threatened to shut down in the past and your supplier was aware of the threats, a court may conclude that the steel source's exit from its business was reasonably foreseeable and your supplier should have stocked up on the fabric in order to meet its supply commitment to you.
Sometimes people assume that if a natural event is involved, such as a fire or flood, then there is an automatic excuse for failure to perform because the event represents an "Act of God." But the general rule is that if the supplier could have avoided the adverse consequences of the event through reasonable skill or watchfulness, then the supplier is not excused from liability for its failure to perform. The supplier is also not excused if the adverse consequences are the result of the supplier's negligence or malfeasance.
Let's say that you expected to take delivery of some machines that were damaged by a flash flood while stored in an unmanned yard. The supplier claims that the damage was the result of an Act of God, and the supplier can prove that the flood resulted from rains which represented the highest rainfall levels in over fifty years for that area. But if the supplier had drainage pumps at the yard which failed to operate because of poor maintenance by the supplier, and those drainage pumps (if operable) could have prevented the damage to the machines, the supplier should not be excused from liability. In that event, even though a natural event such as the flash flood contributed to the damage to the machines, the actual cause of the loss was a human factor—the supplier's failure to exercise ordinary care in keeping the yard pumps in good operating condition.
"PLEASE NOTE: This article is provided for informational purposes only and is not intended to constitute legal advice."
Joe Lorenz practices in the field of corporate and purchasing law and specializes in automotive-related commercial matters and corporate transactions.
Mr. Lorenz’ legal practice has focused entirely on the automotive industry, and he benefits from the experience of having represented a variety of suppliers and OEM’s in all manner of corporate transactions.