Last week, we discussed the legal fallout from the West Coast Ports dispute. In particular, we talked about how a force majeure clause in a supply chain contract can help supply chain partners avoid disputes. Force majeure clauses allocate which supply chain partner bears the risk – and the cost – in the event disaster strikes and may excuse performance entirely in some circumstances. (We also discussed the fact that meat producers’ inability to export meat out of the country means a delicious meat surplus in grocery stores here in the United States!)
But, what do you do if your supply chain contract does not contain a force majeure clause? How do you handle catastrophe then?
If a supply chain contract does not contain a force majeure clause, then – not surprisingly – supply chain disputes become even more likely. In the West Coast Ports situation, economists tell us that the financial impact to U.S. companies has been very high, and that we are not even remotely done feeling those costs. In short, we fully expect litigation here. Many companies and their senior management will not be able to bear the unexpected increased costs.
If there is litigation, who wins?
Buyers will tell you that suppliers bear the obligation and the cost, no matter how high, of getting products to buyers. But, for U.S. supply chain contracts, this probably is not correct. Even if a supply chain contract does not contain a force majeure clause that excuses performance in the event of disaster or hardship, the UCC provides relief to suppliers in some circumstances.
UCC 2-615, which bears the catchy title, “Excuse by Failure of Presupposed Conditions,” states that unless a supplier has “assumed a greater obligation” by contract, its performance is excused if performance 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.” Comment 4 to this provision clarifies that “[i]ncreased cost alone does not excuse performance” under this section, “because that is exactly the type of business risk which business contracts made at fixed prices are intended to cover.” U.S. courts have not, however, interpreted this provision consistently, and sometimes do excuse supplier performance because of increased costs.
In the force majeure case that we discussed last week, Melford Olsen Honey, Inc. v. Adee, 452 F.3d 956 (8th Cir. 2006), the court analyzed both the force majeure clause contained in the parties’ supply chain contract and UCC 2-615. (This itself is unusual. Most courts believe that a force majeure clause supplants any UCC 2-615 analysis.) In a short discussion, the court upheld the jury’s finding that UCC 2-615 did not excuse the supplier’s obligation to deliver honey, notwithstanding a draught. Again, the supplier had not made a sufficient showing of the degree to which the draught negatively impacted his business or made performance impracticable.
So what does this mean for West Coast Ports disputes? Unfortunately, as a general matter, it is almost impossible to say. Buyers will no doubt argue that the increased logistics costs, and suppliers’ difficulty in getting goods into and out of the U.S., is merely a financial issue that can be resolved by making other transportation arrangements, albeit at greater cost. Suppliers will no doubt counter that the congestion at the West Coast Ports is a “contingency which has made performance impracticable” under UCC 2-615. It will fall to the individual facts and circumstances in each case to determine who is right.
Which leads us to our main point. Relying on UCC 2-615 in times of trouble is rolling the dice. Including a tailored and thoughtful force majeure clause to allocate responsibility in disaster conditions is the best practice in supply chains. Force majeure clauses should not, by the way, necessarily be identical in all supply chain contracts. Each buyer-supplier relationship has unique dangers and contingencies, and (for critical supply chain relationships, at least) will require individual consideration.