For the first time in many decades, the U.S. Dollar is no longer the international currency marker, as the Dollar trades at record lows against the Euro and the Canadian dollar, and trades at an eight-year low against the Yen. Foreign sellers who negotiated fixed-price contracts for payment in U.S. Dollars are now telling their American customers that they cannot afford to perform under that contract. Some foreign sellers have begun to look for ways to terminate their long-term U.S. sales obligations in the face of what the media calls “the Sinking U.S. Dollar." Not surprisingly, their American customers are insisting that their foreign “partner" perform as required.
Hoping to find a legal “escape-hatch" in the governing contract, foreign sellers are looking to a provision found in many purchase orders and supplier contracts -- the “force majeure" clause. Most written purchase orders or supply agreements contain a “force majeure" clause, usually found in what lawyers call the “boilerplate" of the contract’s terms and conditions. The legal concept of “force majeure" was originally defined strictly as an Act of God or natural occurrence, such as a flood, fire, earthquake, typhoon and other natural disaster. If a “force majeure" occurs that prevents the seller from performing, the seller may be legally excused without penalty from certain obligations under the contract. Over many decades, contract-writers have expanded the list of possible “force majeures" to include certain uncontrollable, man-caused actions that make a party’s performance impossible. These events include, for example, wars, acts of terrorism, uprisings, labor strikes, and embargoes.
Some foreign sellers are now asserting that this record devaluation of the U.S. Dollar is a “force majeure" that makes it impossible for them to sell their product at the fixed-dollar contract price. They assert that under the “force majeure" clause, their performance is legally excused. Similarly, sellers are asserting that the increasing costs of obtaining raw materials (e.g. petroleum-based components) for their products is a “force majeure" that excuses performance.
But neither argument is supported by U.S. case law. Nearly all of the reported case opinions in the U.S. have ruled that, in the words of one federal court, “economic unprofittableness is not the equivalent of impossibility of performance of contract." In short, the Courts have said that the seller’s inability to make a profit on a sale does not excuse his performance under a “force majeure" clause. Even where the seller faces bankruptcy due to having to perform the contract at a significant loss, does not excuse the seller’s obligation to perform.
Not all contracts contain the same “force majeure" clause, however. There may be some exceptions to the courts' strict application of this rule, especially if the specific language of the “force majeure" clause at issue specifies qualifying events that are not natural disasters. That is, if the “force majeure" clause specifically includes acts of terrorism, war, strikes, and other non-natural events that are beyond the control of the seller, it might be possible for a seller to successfully argue that an unexpected and “record" currency devaluation excuses the seller’s obligation to sell at a fixed price. However, the courts will certainly be reluctant to accept such an argument unless the contract specifically identifies that event or some comparable “force majeure" events. For example, if the seller’s inability to obtain raw materials at a “fixed" price is identified as a “force majeure," then an extreme currency-devaluation might arguably also be “force majeure." At best, though, this is a weak argument.
But if the “force majeure" clause does not offer any assistance to a seller who is drowning in a sea of devalued currency, what options does the seller have?
The best way to approach this problem is to address it proactively, rather than waiting to the point when a currency-exchange fluctuation occurs, and the factors affecting profitability are far beyond the seller’s control.
For example, a foreign seller’s written contract should anticipate that a currency-exchange fluctuation might occur. The parties' contract should include a provision that limits the seller’s exposure in the event that a currency change occurs that exceeds, say, 20% of the current exchange-rate. The right to “suspend" sales upon sixty (60) daysEnotice in the event the value of the currency at issue drops by a specific percentage should also be provided for in the contract. Even if the contract is already signed and in effect, it might be useful for the foreign seller to seek to request the agreement be amended now rather than wait until the situation worsens.
If you are a seller that has now found (or likely will find) itself facing a profit squeeze or worse, significant losses, because of either the current devaluation of the U.S. Dollar, or because of escalating raw-material costs, now is the time to contact your attorney to discuss how this problem can be solved. Even if it is too late to change the language of an existing contract, there are still arguments that can be made to convince the buyer that amending the contract is to the advantage of all parties. Keep in mind that the seller and buyer benefit if both parties are able to profit from a long-term sales contract. It is our experience that reasonable business persons are usually accommodating if approached in a timely and open manner.
If you have any questions regarding “force majeure" or long-term contracts, or want us to provide you and your management with a presentation on this subject, please contact Jerrold Fink or Ed Underhill. Both are members of Masuda, Funai’s Distribution and Sales Group, each with more than 25 years of experience in advising and assisting clients on distribution matters.