No one wants to be in the position peach growers are in now. As my colleague Chip Carter discussed in this publication’s recent article, What happens when the unthinkable happens? Southeast peach growers hunker down, this year’s crop in Georgia is projected to be the worst in a century, and growers in South Carolina are dealing with even worse results.
What can growers and sellers do to mitigate losses caused by similar events in the future? One part of what should be a multi-pronged approach must involve the force majeure clause in your contract. Force majeure is French for “superior force” – these clauses govern what happens if an unpredictable, inevitable, and uncontrollable event makes it impossible for a party to fulfill its obligations under the agreement. They usually state something to the effect of:
“Neither party shall be liable or have the right to terminate this Agreement for any delay or default in performing hereunder if such delay or default is caused by conditions beyond its control including, but not limited to, Government restrictions (including the denial or cancellation of any export or other necessary license), wars, insurrections and/or any other cause beyond the reasonable control of the party whose performance is affected.”
These clauses are rarely given much thought until someone tries to rely on them. To mitigate any future unanticipated losses, a supplier and buyer must consider and negotiate who will shoulder risk of such an event. Where there is a strong relationship, they may choose to share the burden.
What are the key items to consider in analyzing such a clause and deciding how to allocate risks?
Understand the underlying law – UCC and PACA
Under the Uniform Commercial Code (UCC) and the jurisprudence under the Perishable Agricultural Commodities Act (PACA) “a farmer who has contracted to sell crops to be grown on designated land” is excused from selling the crops if the specific crop fails, but only if the land on which the crops are to be grown is specified in the contract. This also applies to a distributor, but in that case the rule is narrowly interpreted. There are also statutory exemptions and requirements for notice and other matters applying to force majeure events, and they differ by state. Unless your contract overrides them, you must follow any such statutory requirements to the letter.
Include events that are a threat to your particular business
If there is a list of events that would constitute a force majeure event, but that is not a complete list, a court will likely only apply the clause to events similar to those already listed under the legal principle of ejusdem generis, which states that when a limited list of specific things also includes a more general class, that the scope of that more general class is be limited to other items more like the specific items in the list.
Maybe an example will help with all that legalese: Say the clause defines force majeure event as in the example above: “including, but not limited to, Government restrictions (including the denial or cancellation of any export or other necessary license), wars, insurrections and/or any other cause beyond the reasonable control of the party whose performance is affected.” No weather or other natural events are listed, which means that a seller is likely not freed from its obligations to provide product even if it is impossible to obtain any product due to a freeze, flood, earthquake, or other event. Not only should you include these as a supplier of fresh produce, but you should also include any insect or disease to which your products are particularly susceptible. Those who import or export may want to consider making catastrophic price fluctuations part of their force majeure provisions.
Consider limiting the clause
If the event or product is such that the supplier could reasonably obtain the product from another producer, the parties may want to exclude that event from the list, or state that it doesn’t apply to a particular product under certain circumstances. For example, a supplier may substitute oranges of the same type from another region. Also consider the duration of a possible force majeure event, and the effect that may have – a disruption of 3 days may not have the same impact as an event that lasts 3 months.
Describe the scope of a party’s responsibility in specific circumstances
Building on the previous example, the parties may choose to specify what their obligations are under certain events. For example, the buyer may be required to supply a loan to the grower to help mitigate the grower’s losses so that next year’s harvest is not also put at risk. Alternatively, a grower that provides product to many suppliers might be required to allocate resources proportionately to each of its buyers.
Like most force majeure lists, this list is certainly not exhaustive, but we hope it provides some food for thought on how to allocate these risks and sets you in the right direction. Remember that each circumstance is different and your lawyer will be able to guide you toward what is best for you in your specific situation.
[This column is published for the purposes of providing a general understanding of the law. It is in no way a substitute for individual legal consultation and anyone with a legal problem should not rely on these answers but should instead consult their attorney. If you have a legal problem and do not know an attorney, call your local Bar Association’s Lawyer Referral Service.]