Force Majeure and Purchase and Sale Agreements
By Adrian Karborani, Robert Allen Law
When reviewing any force majeure clause, it is important to note that not every clause will cover events such as the Coronavirus. This may be due to the approach that some drafters take or if the agreement was not reviewed by a capable attorney before execution. Although the words “Coronavirus” will almost certainly not appear in your agreement as a defined force majeure event, there should be language broad enough to encompass health pandemics like the Coronavirus.
Force Majeure in the International Yacht Broker Association (“IYBA”) Purchase and Sale Agreement
Fortunately, for parties utilizing IYBA PSA, the procedure is very straight forward. If you are using one of the two most recent versions of the PSA (2018 and 2020), Section 7 is where you will want to direct your attention. Section 7 of the PSA states that:
Either party’s obligation to perform will be suspended to the extent required to accommodate unforeseeable events beyond that party’s reasonable control (“Force Majeure Events”), including, without limitation, acts of God, acts of terrorism, strikes, lockouts, riots, acts of war, fire, communication line failures, computer viruses, power failures, accidents, tropical storms, hurricanes, earthquakes, or other natural disasters. If a Force Majeure Event occurs, the time periods referred to in this PSA, including, without limitation, the Closing Date, will be deemed extended by the time necessary to permit the affected party to perform in accordance with this PSA; provided, however, if the Force Majeure Event delays the Closing Date for a period of at more than 30 days, either party may terminate this PSA with the same consequences as if Buyer had rejected the Vessel.
In essence, the PSA states that upon the occurrence of certain unforeseeable events that affect a party’s ability to perform according to the terms of the agreement, all dates will automatically be extended for as much time as is necessary to permit the party to perform under the agreement, except that the Closing Date may not be extended for more than 30 days and in such a case either party may terminate the agreement.
If you are concerned that a deal will not close within 30 days of the Closing Date and the parties wish to extend the Closing Date until the force majeure event ends, the parties are encouraged to execute a written addendum to the PSA in accordance with their new terms. If the parties do not execute a written addendum on new terms, and in the event the Closing Date is exceeded by more than 30 days, the parties will each have the right to validly terminate the agreement.
Although most agreements will automatically suspend performance, some may delineate a specific procedure that you must follow to properly invoke force majeure. However, for agreements that automatically invoke force majeure, like the IYBA PSA, best practices dictate that the party invoking force majeure should provide written notice to the other party(ies) explaining the reason for invoking the clause and the anticipated time when they will be able to resume performance (if possible).
Can I Invoke Force Majeure Due to Coronavirus?
Even when considering the global reach and effect of the Coronavirus, there is no one size fits all answer to this question. For example, if the vessel that is the subject of your transaction is currently located in Italy and still requires a survey before closing, invoking force majeure may be proper because it is currently impossible to have a survey performed in Italy due to the virus. On the other hand, if all other terms of the agreement have been fulfilled and all that is left to close is for the Buyer to deliver the funds at closing and execute the closing documents, invoking force majeure may not be proper if the banks are available to initiate the wire transfers and the closing documents can otherwise be validly executed.
Agreements Without Force Majeure and One-Sided Force Majeure Clauses
Many agreements are not as well-drafted as the IYBA PSA and some may even contain force majeure clauses that only provide for an extension of performance to one party. If you find yourself with an agreement that does not have a force majeureclause or the force majeure clause in the contract only gives one party the right to delay performance, you may have alternative recourse available if you are affected by the Coronavirus.
Most U.S. states recognize the common law contract doctrine of “impossibility.” Impossibility provides a defense to parties who breach a contract where their performance under the contract becomes impossible due to unforeseeable events that arise after the contract’s execution. The key difference between force majeure and the doctrine of impossibility is that under force majeure, the contract is not breached, but instead provides for an extension to a party’s performance. On the other hand, impossibility only comes into play after a party has already breached the contract because they failed to comply with the contractual provisions. Impossibility generally protects the breaching party from liability due to the breach.
It is important to note that if you entered into a contract without a force majeure clause after the Coronavirus pandemic, you may be unable to alleviate yourself of the impossibility defense because the impact of the virus may no longer be deemed unforeseeable. Parties to agreements with a one-sided force majeure clause may also not be able to take advantage of the impossibility defense because a tribunal could conclude that the parties previously agreed that only one party would be able to claim impossibility due to unforeseen events. You should attempt to work with the other party(ies) and consult an attorney if you find yourself in such a situation.
Force Majeure and New Build Contracts
Delivery dates are extremely important under new build contracts, and these agreements are usually heavily negotiated and have robust force majeure provisions. When considering force majeure clauses, buyers are usually most concerned about how long they will have to bear the burden of a delay due to a force majeure event. Some contracts provide for an absolute cap on how many days the vessel may be delayed due to force majeure, while others may indefinitely extend the dates under the contract until the force majeure event ends. Each new build contract is unique, so you will have to review your particular agreement to determine how long the shipyard can delay the vessel.
In addition, certain other laws may provide builders with an extension on performance. One such law is the United Nations Convention on Contracts for the International Sale of Goods (“CISG”). The CISG governs contracts for the sale of commercial goods to signatory nations unless expressly waived in the contract. Similar to the impossibility defense, Article 79 of the CISG may excuse nonperformance that results from an unforeseeable event beyond a party’s reasonable control that it could not have overcome. The CISG provides builders in nations who are parties to the agreement (the U.S. is a party) to excuse their performance under circumstances similar to the impossibility defense.
The U.S. also has a set of laws known as the Uniform Commercial Code (“UCC”) that may also excuse a domestic builder’s performance (or an agreement governed by U.S. law) under the contract. Under a sale of goods contract, the UCC excuses performance where the performance is rendered “impracticable” by either: (1) the occurrence of an event “the nonoccurrence of which was a basic assumption on which the contract was made” or (2) good faith compliance with foreign or domestic government regulation. Unlike the impossibility defense, this is a much lower standard and theoretically allows a party to demonstrate that although performance is not impossible, it has become prohibitively expensive to perform the contract.
In summary, the Coronavirus is affecting our everyday lives in unforeseeable ways. If you have pending brokerage or new-build purchase agreements, you should carefully review your agreement to determine your rights and responsibilities during this time. If you are concerned that your contracts may be affected by the Coronavirus and would like to receive advice on your particular situation, Robert Allen Law remains fully operational and its attorneys are available to meet your needs during this difficult time.
* Nothing herein constitutes legal advice. Please contact an attorney to discuss the specifics of your circumstance.