Pet Food & Animal Feed Update (No. 1)

PART 1—Force Majeure Clauses

Currently, industry is awaiting the Food and Drug Administration’s (FDA) issuance of rules implementing the Hazard Analysis and Risk-Based Preventative Controls provisions of the Food Safety Modernization Act (FSMA). Without a doubt, the pet food, animal feed, and related industries will be faced with costly new regulatory requirements regarding their operations. However, FSMA will impact not only the internal operations of participants in the pet food and animal feed industries, but also the commercial relationships between those participants as well as other business arrangements, such as insurance. Through a series of short articles, we will examine how various provisions of FSMA may impact your commercial contracts and other business dealings. The first several articles will focus on various clauses commonly found in commercial contracts, including supply agreements.

Force Majeure Clauses

Many commercial contracts contain what is commonly known as a force majeure (French for “superior force”) clause. Force majeure clauses are intended to excuse a party’s non-performance of its contractual obligations when certain circumstances beyond that party’s control (such as a tornado or earthquake) make it impossible, illegal, or commercially impracticable to perform. Without a force majeure clause, parties to a contract are forced to rely upon narrow common law contract doctrines such as “impracticability” or “frustration of purpose.” Such common law doctrines rarely excuse a party’s failure to honor a contract.

Force majeure clauses vary widely. However, they typically include a list of specific events that are considered force majeure along with catch-all language such as, for example:

Neither party hereto shall be liable to the other for failure or delay in performance of its obligations hereunder when such failure or delay is occasioned by a cause not within its reasonable control, including, but not limited to, acts of God, acts of public disturbance, riots, war or the public enemy, fire, windstorm, floods, strikes or other labor disputes, or governmental intervention.

Force majeure clauses are typically toward the end of the contract as part of the “boilerplate” language. While these clauses may be boiler plate, FSMA provides new reasons to pay greater attention to them.

FSMA gives the FDA broad power and authority to effectively shutdown an animal feed or pet food facility without a court order by suspending the registration of the facility. The FDA also now has the authority to administratively detain food when it has “reason to believe” (which is a relatively low standard) that the food is adulterated or misbranded. In addition, there are new requirements for imported foods. These new provisions, when taken together, greatly increase the probability that your supply chain, or your ability to comply with your contractual obligations, will be disrupted by some regulatory action by the FDA.

Since the likelihood that a governmental action may disrupt your supply chain or your ability to honor your contractual obligations has increased, you should examine the force majeure clauses in your new commercial contracts and your older commercial contracts that come up for renewal.

Carefully consider the types of circumstances that will be covered by the force majeure clause. While governmental interventions may be covered, you may want to specify that only governmental action not caused by the act or omission of a party will excuse performance. Further, you could go so far as to specify that issues relating to regulatory compliance shall not be considered a force majeure event. Of course, what you seek to include in your force majeure clause will vary depending on the nature of the commercial contract, which side you are on as well as other factors.

Conclusion

Every contract involves a different set of facts and circumstances. Taking a few extra minutes to carefully consider how the force majeure clause may actually impact your business may prevent future surprises, which may be more likely to occur given the FDA’s expanded ability to disrupt supply chains. Therefore, while the force majeure clause may be boilerplate, you should not just skip over it as FSMA may have magnified the importance of the clause.