Force Majeure And Requirements Contracts

The recent fire at the Carbide Industries plant in Louisville, Kentucky, has raised questions about the supply of calcium carbide, the price of product in the future and parties’ ongoing legal obligations to meet their contractual responsibilities. Although I have not reviewed any contracts between CI and other parties and can offer no specific legal advice to any person on these matters, I can offer some general guidance on the effect of force majeure provisions on the parties’ performance in requirements contracts.

In a requirements contract, one party agrees to buy all of its requirements for a certain product from a particular seller. In effect, it is an exclusive buy-sell arrangement.

Force majeure is a French term meaning “superior force.” When the seller’s performance is affected by some unforeseeable event, the seller’s performance is excused. The event may be an “Act of God” such as a fire, flood or tornado, or it may be labor unrest, war or insurrection. (CI declared their contracts affected by force majeure on March 22, the day after the fire.) In order for the seller to take advantage of this provision, the event may not be caused the seller’s negligence or intentional act.

If the seller’s performance is excused, the buyer must still purchase the product from the seller if the seller can find replacement product. If the seller is no longer able to manufacture the product, then the seller may get the product from another supplier for resale. (CI is attempting to obtain replacement calcium carbide from suppliers in five different countries.) But the question is at what price is that replacement product offered? The short answer is whatever the contract allows. If the contract is still in effect and has a fixed price, then that is the price of the replacement product. If the contract has a variable price, then the variable price is imposed.

What if the seller cannot perform at all? The buyer may then terminate the contract if the seller’s breach, even though resulting from force majeure, cannot be cured. Many contracts require the buyer to give some notice of breach (ten days or more, generally) to allow the seller an opportunity to cure the breach. If the seller cannot cure the breach and supply the product, then the buyer’s obligation to purchase its product requirements from the seller is also terminated, and the contract is no longer in effect.

What happens if the seller reenters the market? If the prior contract is terminated, then the parties must renegotiate new terms for a successor contract. They may use the prior contract’s terms as a starting point, but are not obligated to adopt them in the new contract.

Finally, please note that GAWDA members must conduct their business in accordance with the association’s antitrust guidelines. Members may talk to their competitors about alternative sources of supply for calcium carbide or alternative products, but may not discuss the price of the product from particular suppliers or the price to be offered to their customers in the market for acetylene or any other product.

Gases and Welding Distributors Association
Richard P. Schweitzer Meet the Author
GAWDA’s Government Affairs & Human Resources Legal Consultant Richard P. Schweitzer, Esq., is president of Richard P. Schweitzer, PLLC in Washington, D.C. Members can reach him at 202-223-3040 and rpschweitzer@rpslegal.com.