May 6, 2020

Covid-19 Force Majeure: UAEC 2016 and SCTC Contract Terms and Conditions for DFN 2020

Written by Eurof Lloyd-Lewis and Benjamin Bryant

Introduction

This article seeks to explore the application of Clause 13 ("Force Majeure and Liability") of the California Almond Export Association LLC's Uniform Almond Export Contract 2016 ("UAEC 2016"), and Clause 25 ("Force Majeure and Liability") of the Specialty Crop Trade Council's Contract Terms and Conditions for Dried Fruit, Tree Nuts And Kindred Products 2020 ("SCTC 2020"), where an assertion of Force Majeure is made by a party to a sale contract incorporating UAEC 2016 or SCTC 2020, in an attempt to discharge their contractual obligations. It also provides advice to Sellers and Buyers trading on UAEC 2016 and/or SCTC 2020 terms, experiencing an increase in Force Majeure claims from contractual counterparties as a result of the current coronavirus pandemic (the "COVID-19 pandemic”), with a commentary on recent trends noted in disputes arising out of the Almond market.

Force Majeure under UAEC 2016

a. Governing Law

Clause 15 UAEC 2016 confirms that, unless otherwise specified in the Contract Confirmation, any contract into which UAEC 2016 is incorporated is to be governed according to English law. Under English law, the parties’ only recourse to Force Majeure as a means of suspending or discharging their obligations is through the express incorporation of Force Majeure wording into their contract.

b. Clause 13.1 UAEC 2016

Such wording is found at Clause 13.1 UAEC 2016, which states:

"In the event that Buyer or Seller is unable to perform its obligations with respect to any sale to which these terms and conditions apply due to events of force majeure, including but not limited to crop disease, destruction, acts of God, governmental action, fires, floods, explosions, strikes, slowdowns or other concerted acts of workers, war or hostilities, insurrections, rebellions, riots or any other civil disorder, embargoes, wrecks or delays in transportation, criminal conduct of third parties, or any failure of the other party to act as required but specifically excluding a party's lowered profit, cost of financing or other business considerations, then in that event and then only to the extent so justified, the party unable to perform shall, upon written notice to the other party, be relieved of its obligations, but only to the extent of the effects of force majeure and only for so long as the event of force majeure continues. The party unable to perform shall use its best efforts to remedy the effects of force majeure. Seller shall not be obligated, by reason of force majeure circumstances, to purchase Goods from others in order to enable it to deliver Goods to Buyer. If a force majeure event occurs within the meaning of this Clause and continues for more than twenty-one (21) Days, then either party may by notice to the other terminate the contract or, in the case of an instalment contract, that instalment, and be relieved of its obligations... "

i. Event of Force Majeure

Under Clause 13.1 UAEC 2016, a Seller or Buyer may suspend performance of its contractual obligations where it is "unable" to perform due to "events of force majeure". A Seller or Buyer wishing invoke Force Majeure, must first identify an event of Force Majeure, as non-exhaustively defined in Clause 13.1. The following merit consideration, in light of the COVID-19 pandemic:

(i) "Acts of God" - under English law the term Act of God generally denotes an event arising due to natural causes, without any human intervention, and which could not be prevented by any form of foresight, for example violent storms, floods and earthquakes. Whether the COVID-19 pandemic constitutes an Act of God is likely to be a question of interpretation. In this regard, Sellers and Buyers should note that none of the definitions provided in Clause 13.1 UAEC 2016 expressly refer to an epidemic, pandemic or infectious disease (outside of the scope of crop-specific disease); relatively little judicial guidance has been provided on the precise scope of Act of God in the context of Force Majeure, under English law.

(ii) "Government action" - this definition may encompass situations in which parties are unable to perform as a result of export restrictions or prohibitions, or where government orders are given, which have the effect of preventing performance… Whether this would include events arising as the result of government recommendations or self-imposed community responses, as opposed to outright decrees, is a further matter for interpretation and legal disputes as to the precise scope of this definition are to be expected.

(iii) "Delays in transportation" may apply in circumstances where a shipowner deviates owing to illness of crew members, or exercises its right to nominate an alternative port for loading or discharge.

(iv) "Events of force majeure, including but not limited to" - under English law, any use of the expression “Force Majeure” must be construed in light of the nature and general terms of the contract, as well as the words which precede and follow it. The above wording may therefore serve to broaden Clause 13.1 to "sweep-up" events similar to those expressly defined, occurring as a result of the COVID-19 pandemic. Again, legal disputes as to the precise scope of events caught by the above or similar wording are to be expected. English Courts will often apply a narrow interpretation to such questions, by reference to the specific wording and nature of the contract in question.

ii. Burden of Proof

A party seeking to rely on Clause 13.1 must prove that it was unable to perform. Under English law this requires a party to show that performance became physically or legally impossible (and not merely difficult or unprofitable). Clause 13.1 goes further and specifically excludes "a party's lowered profit, cost of financing or other business considerations" as sufficient grounds for asserting a claim to Force Majeure.

The same party must also prove that its performance was prevented by reason of the Event of Force Majeure identified, that the Event identified was beyond its control, and that there were no reasonable steps it could have taken to avoid or mitigate the event or its consequences. If the party asserting Force Majeure (i) would have defaulted in any event; (ii) could have performed by adapting its plans (e.g. by delivering at another nominated port) or (iii) is prevented only by commercial considerations, the causal link will likely not be satisfied.  Sellers should however note the express carve-out in Clause 13.1 UAEC 2016, which confirms that (contrary to the default position at English Common Law) a Seller "shall not be obligated, by reason of force majeure circumstances, to purchase Goods from others in order to enable it to deliver Goods to Buyer". Parties should bear in mind that, the more that the COVID-19 pandemic is understood and brought under control, the less arguable it will be that an event caused by COVID-19 which prevents performance, is an event beyond the control of the party asserting Force Majeure.

Clause 13.1 also imposes the additional requirement that the party seeking to invoke Force Majeure "shall use its best efforts to remedy the effects of force majeure". As a matter of English law, this requires a party to prove that it has exhausted all reasonable measures open to it (acting reasonably) to enable performance. This again, will be a question of interpretation in light of the particular circumstances.

iii. Remedies

Wrongfully seeking to invoke Force Majeure to excuse contractual non-performance will constitute a repudiatory breach of contract under English law, allowing the other party to the contract (should they wish) to terminate the contract and seek damages. Any party thinking of asserting Force Majeure should therefore obtain independent legal advice before notifying its counterparty. In the event that a Seller or Buyer can identify an Event of Force Majeure, and satisfy the above Common Law and contractual requirements, Clause 13.1 provides that:

(i) Upon written notice to its counterparty (in accordance with Clause 17.6), the party unable to perform, to the extent so justified, shall be relieved of its obligations, but only (i) to the extent of the effects of the Force Majeure and (ii) for so long as the event of Force Majeure continues; and

(ii) If the Force Majeure event continues for more than twenty-one (21) calendar days (unless specified as Business Days), either party may by notice to the other terminate the contract, or (in the case of delivery by instalments) that instalment, and be relieved of its obligations.

c. Limitations

Sellers and Buyers should ensure that they understand their position under UAEC 2016, where performance is merely delayed as a result of COVID-19 related-events, or otherwise falls outside the scope of the Clause 13.1.

Parties wishing to rely on the English law doctrine of Frustration, as an alternative to Force Majeure should be mindful that: (i) the Doctrine of Frustration already has a narrow scope, given the usual reluctance of English Courts to hold that a contract has been frustrated; and (ii) the presence of express Force Majeure wording, coupled with the lack of any express preservation of the Doctrine of Frustration in Clause 13 UAEC 2016, will serve to further narrow the scope of the parties' ability to rely on the Doctrine, in as much as, if the express Force Majeure wording is deemed to already cater for the event, it is no longer (by definition) an unforeseen, supervening event as required in order for the Doctrine of Frustration to operate.

Force Majeure under SCTC 2020

a. Governing Law

Under Clause 29 SCTC 2020, the validity, interpretation and performance of any sale contract incorporating SCTC 2020 is to be governed by the United Nations Convention on Contracts for the International Sale of Goods (the "Convention"), alternatively the domestic law of the State of California, U.S.A., where the Convention does not expressly settle the parties' rights and obligations. Sellers and Buyers contracting under SCTC 2020 are advised at the outset of any claim, to obtain independent legal advice from a US-qualified lawyer on their position under Californian State law, including but not limited to the determination of any specific legal interpretation to which the terms contained in Clause 25 may be subject, any additional, domestic law requirements which must be met in order to bring a claim of Force Majeure, and/or the law surrounding adequate assurances of performance.

b. Clause 25 SCTC 2020

The wording of Clause 25 SCTC 2020 is nearly identical to Clause 13.1 UAEC 2016, with the exceptions that Clause 25: (i) in addition, defines "shortage", "damage or loss" and "inability to obtain necessary materials or equipment" as events of Force Majeure; and (ii) does not entitle either party to terminate the contract by notice, following the continuation of the Force Majeure event for a certain period of time (twenty-one (21) calendar days under Clause 13.1 UAEC 2016).

i. Event of Force Majeure

In addition to the defined events discussed in relation to Clause 13.1 UAEC 2016, above, an "inability to obtain necessary materials or equipment" may merit attention in light of the COVID-19 pandemic.  

ii. Burden of Proof 

As a matter of construction, a party wishing to assert Force Majeure under Clause 25 SCTC 2020 will need to: (i) identify an event of Force Majeure as envisaged by that Clause; and (ii) prove that it is unable to perform its obligations due to the event identified. As with Clause 13.1 UAEC 2016, Clause 25 SCTC 2020 excludes lowered profit, the cost of financing and other business considerations as sufficient reasons for triggering Force Majeure, and requires that the party asserting Force Majeure first uses its best efforts to remedy the effects of the alleged event. It also confirms that Sellers shall not be obligated to purchase goods from other suppliers, if delivery is prevented by Force Majeure circumstances.

iii. Remedies

In the event that either party is able to satisfy the burden of proof under Clause 25 SCTC 2020, upon written notice to its counterparty (in accordance with Clause 34 SCTC 2020), the party unable to perform, to the extent so justified, shall be relieved of its obligations, but only (i) to the extent of the effects of the event of Force Majeure and (ii) for so long as the event of Force Majeure continues.

c. Adequate assurance of performance

If a party trading under SCTC 2020 has reasonable grounds to believe that its counterparty may default in performance of its contractual obligations, it may seek to protect its interests, in advance, by requesting an adequate assurance of performance (an "AAP") from its counterparty, that the other will perform its obligations. Pending such assurance, the requesting party may suspend performance of its own obligations, and if such assurance is not provided within a reasonable time, it may treat the contract as having been repudiated. Such remedy is provided for under Article 2 of the Uniform Commercial Code. Similar remedies, entitling a party to: (i) suspend performance; and (ii) avoid the contract all together upon failure of the other to provide an AAP, are also provided for in the Convention.

Recent trends in COVID-19-related claims arising out of the Almond Market

a. Assertion of Force Majeure by Buyers to discharge payment obligations

The aftermath of formal measures imposed by foreign governments in response to the COVID-19 pandemic, has seen a notable increase in assertions of Force Majeure by Buyers trading under UAEC 2016 and/or SCTC 2020, attempting to discharge their payment obligations under contracts for goods destined for ports allegedly affected by such measures. Those measures are reported to include restrictions to transportation services, limitation of business to essential services (as officially defined), state-wide curfews and the sealing of internal borders. Buyers trading under UAEC 2016, considering asserting Force Majeure on the basis of these or similar measures should bear in mind that, as explored above:

(i) Unless performance of their contractual obligations has been rendered physically or legally impossible, they will not have met the threshold for invoking Force Majeure under English law; any inconvenience or difficulty (whether logistical or financial) caused by the measures imposed, will not suffice to bring them within the legal definition of "unable", for the purposes of Clause 13.1; and

(ii) Wrongfully asserting Force Majeure constitutes a repudiatory breach of contract, entitling the innocent party, should it choose, to terminate the contract and seek damages.

Also relevant are the parties' obligations under any Incoterms which are incorporated by reference. For example, if the parties have contracted on CIF terms, a Buyer's obligations under the contract will amount to payment of the contractual purchase price, upon presentation of agreed documents to the Buyer's nominated bank. Unless it becomes physically or legally impossible for a Buyer to effect payment via its bank, as a result of the measures imposed, that party will not be entitled to rely on Force Majeure under Clause 13.1. The precise Incoterm chosen will also inform the correct time for determining whether or not the Buyer is able to perform its contractual obligations.

Buyers trading under SCTC 2020 should ensure they obtain independent legal advice from a US-qualified lawyer, in order to fully understand their position.

b. Government Circulars

Related, is the increased reliance by Buyers, on Notifications circulated by foreign governments announcing that the COVID-19 pandemic constitutes an event of Force Majeure, as evidence of their right to claim Force Majeure. Since Force Majeure does not exist as a term of art under English law, a Notification released by a foreign government or state authority confirming that COVID-19 constitutes an event of Force Majeure is likely to be of evidential value at most, and is otherwise irrelevant to the determination of whether an event constitutes Force Majeure under Clause 13.1 UAEC 2016. Such a Notification will not serve as a "golden ticket" entitling either party to invoke Force Majeure under Clause 13.1, without first satisfying the contractual and English Common Law requirements discussed. Again, Buyers trading under SCTC 2020 should obtain independent legal advice from a US-qualified lawyer, in order to fully understand their position under Californian State law.

Concluding thoughts

In light of the COVID-19 pandemic, Sellers and Buyers trading under UAEC 2016 and/or SCTC 2020 are likely to experience an increase in assertions of Force Majeure, brought by counterparties affected by the pandemic.

If you require clarification or assistance on any of the points discussed in this article, at Clyde & Co, we have extensive experience in advising Sellers and Buyers in drafting well-structured, clear and balanced sale and purchase agreements, under both English and Californian State law. We will be happy to assist you through our international network of offices in over 50 locations, including London and California, with offices in Los Angeles, San Francisco and Long Beach.