Chapter 12 Contract Force Majeure Under New York Law
VII. Summary Statement of New York Law of Force
From the reported decisions, the following steps emerge as the analysis a New York court undertakes when considering a force majeure claim:
1. Did an event occur that was not the fault of the claiming party?
2. Does the contract have a force majeure clause that allocates risks different from the case under the common law or UCC doctrines? If so, the court will apply the contract clause.
3. If there is no contract clause and the court is applying UCC or common law doctrines:
a. Did the seller not assume the risk of the unknown contingency?
21 Transatlantic Financing Corp. v. United States , 363 F.2d 312, 319 (D.C. App. 1966), citing UCC § 2615 comment 4.
22 Comment 4 to UCC § 2615; see Missouri Public Serv. v. Peabody Coal Co. , 583 S.W.2d 721, 726 (Mo. App. 1979), cert. denied 444 U.S. 865, applying Missouri law (fi nding the Arab oil embargo was foreseeable. Id. at 728.). See also Chainworks, Inc. v. Webco Industries, Inc. , 2006 WL 461251 (W.D. Mich. 2006) (“the parties knew that the steel market was volatile and that an increase in raw material costs was foreseeable.”).
23 Publicker Indus., Inc. v. Union Carbide Corp ., 1975 WL 22890, 17 UCC Rep. Serv. 989 (E.D.
Penn. 1975) (“We are not aware of any cases where something less than a 100 % cost increase has been held to make a seller’s performance “impracticable.”); Maple Farms, Inc. v. School District of Elmira , 76 Misc. 2d 1080, 1085, 352 N.Y.S.2d 784, 14 UCC Rep. Serv. 722, (NY Sup. Ct. 1974) (six months after contract was bid and made, price of raw milk rose 23 percent, increasing cost to deliver bottled milk 10.4 percent; not suffi ciently commercially impractica- ble to allow unilateral termination).
b. Was the nonoccurrence of that contingency a basic assumption underlying the contract?
c. Did the occurrence of the contingency make performance commercially imprac- ticable?
d. Did the claiming party “seasonably” notify the other of delay?
4. If there is a contract clause and the court is applying it:
a. Is the claimed event covered in a narrow construction of the clause?
b. Was the claimed event foreseeable at the time of contracting?
c. Did the claimed event actually prevent the claiming party from performing the contract? (Or, in some cases, render it “commercially impracticable”?)
d. Did the claiming party comply with the procedural notice provisions of the clause?
Table 12.1 Examples of judicial review of claims for increased costs of performance
Case Law Price increase Force
Majeure clause in contract?
Did claimant prevail?
407 East 61st Garage, Inc. v. Savoy Fifth Ave. Corp. , 23 N.Y.2d 275, 244 N.E.2d 37, 41 (N.Y. 1968)
NY Savoy hotel closed, was demolished, and no longer needed garage’s services
No No
Ace Service Corp. , 86-3 B.C.A. (CCH) P 19031, 1986 WL 20042 (Armed Serv. B.C.A.
1986)
U.S. 24 Increase in unit cost from $3.13 to $10.00 due to unexpected closure of proximate dump
None reported No
Aluminum Co. of America v. Essex Group, 499 F.Supp.
53, 72 (W.D. Pa. 1980)
IN Costs increased
$60 million over and above what it could recover under the contract’s infl ation escalator clause 25
None reported Yes
(Continued)
24 Cases reported as being decided under “U.S.” law are generally disputes on government contracts, which are subject to a further body of law not discussed here.
25 This case is the subject of a forthcoming article by the author, currently having the working titleCrazy Judges and the Common Law.
SUMMARY STATEMENT OF NEW YORK LAW OF FORCE MAJEURE IN CONTRACTS
Case Law Price increase Force
Majeure clause in contract?
Did claimant prevail?
American Trading &
Pro. Corp. v. Shell International Marine Ltd., 453 F.2d 939, 941–42 (2nd Cir. 1972)
NY 31.6 % addi- tional expense of
$131,978.44 vs.
contract price of
$417,327.36. (Suez Canal case)
None reported No
In re Atlantic Gulf Communities Corp., 369 B.R. 156
(Bkrtcy. D. Del., 2007)
NY Land on which construction was to take place was condemned
None reported No
Bernina Distribs., Inc.
v. Bernina Sewing Machine Co. , 646 F.2d 434 (10th Cir. 1981)
NY 7 % devaluation in the dollar against Swiss franc halved importer’s return
None reported No
Butler v. Nepple , 354 P.2d 239, 245 (Cal.
1960)
CA Only “grossly overpriced” drilling casing available
Yes No
Chainworks, Inc. v.
Webco Indus., Inc., 2006 WL 461251 (W.D. Mich. 2006)
MI $300,000 increase from steel global steel crisis costs, would have ren- dered supplier insolvent
None reported No
Commonwealth Edison Co. v. Allied-
General Nuclear Servs. , 731 F. Supp.
850, 855 (N.D. Ill.
1990)
NY Fact-specifi c analy- sis of inability to ob- tain processing plant license for spent nuclear fuel reprocessing contract
Yes Yes
Di Scipio v. Sullivan, Case 99052, Order June 1, 2006 (N.Y.
App. Div. 2006)
NY Death of a party No No
(Continued)
Case Law Price increase Force Majeure clause in contract?
Did claimant prevail?
East Capitol View Community Develop- ment Corp., Inc. v.
Robinson , 941 A.2d 1036 (D.C. 2008)
DC Employer lost grant funding for
employee’s position
No No
Eastern Air Lines, Inc. v. Golf Oil Corp., 415 F. Supp. 429, 438 (S.D. Fla. 1975)
FL Arab oil embargo fuel price increase
None reported No
Exelon Generation Co., LLC v.
General Atomics Tech- nologies Corp. , 559 F.Supp.2d 892 (N.D.
Ill. 2008)
NY Increase in pro- duction costs for fi xed price uranium contracts (to $15/
ton on $11.89/ton sale) would have led to $10 million loss for supplier
None reported No
Florida Power & Light v. Westinghouse, 826 F.2d 239, 277 (4th Cir.
1987)
FL? New nuclear waste disposal regulation compliance would have turned
$18–20 million profi t into $80 million loss; lower court evaluated the additional cost against the entire $222 mil- lion contract, while the appellate court reversed, restricting analysis to the relative costs of only the disposal portion of contract
Not part of decision
Yes
(Continued)
SUMMARY STATEMENT OF NEW YORK LAW OF FORCE MAJEURE IN CONTRACTS
Case Law Price increase Force
Majeure clause in contract?
Did claimant prevail?
General
Electric Co. v. Metal Resources Group, Ltd. , 293 A.D. 2d 417 (N.Y.
App. Div. 2002)
NY Commod- ity swap contract
$1,874,188.05 out of the money
No No
Geronimo Service Co. , ASBCA No. 30003, 1985 WL 16567 (1985)
U.S. Increased costs caused by 400 percent increase in dumping fees
None reported No
Helms Construction
& Development Co. v.
Nevada Dept. of High- ways , 634 P. 2d 1224 (Nev. 1981)
NV Arab oil embargo increased con- tractors cost for highway contract by
$135,000
No No
Holder Construction Group v.
Georgia Tech Facili- ties , 282 Ga. App. 796, 640 S.E.2d 296 (Ga.
App. 2006)
GA 67-day delay and $1 million extra costs
Yes No
Hoosier Energy Rural Elec. Co-op.
v. John Hancock Life Ins. , 582 F.3d 721 (7 th Cir. 2009)
NY Co-op’s credit insurer suffered downgrade, tempo- rarily not replace- able during credit crisis
None reported “Temporar- ily” at the District Court; dis- favored by the Seventh Circuit
Innomed Labs, LLC v. Alza Corp., 2001 WL 406211 (S.D.N.Y.
2001)
CA? Franchise agree- ment uneconomical
Yes No
Inter-Power of New York, Inc. v. Niagara Mohawk Power Corp. , 208 A.D.2d 1073, 1074 (N.Y. App. Div.
1994)
NY Regulatory delay of power plant con- struction permit did not excuse perfor- mance under agree- ment to sell power from that plant
Yes No
(Continued)
Case Law Price increase Force Majeure clause in contract?
Did claimant prevail?
Iowa Electric Light v. Atlas Corp. , 467 F.Supp. 129, 134 (N.D.
Iowa 1978)
IA Increase in seller’s costs by 52.2 % resulting in the sell- er’s loss of approxi- mately $2,673,125
None reported No
Jalaprathan Cement Co. Ltd., 79-2 B.C.A. (CCH) P 13927, 1979 WL 2356 (Armed Services B.C.A. 1979)
U.S. Cement contract to sell at $17.90/bag when market price rose to $24.05/bag, would have led to loss of $439,772
None reported No
Karl Wendt Farm Equipment Co., Inc.
v. Int’l Harvester Co. , 931 F.2d 1112, 1117 (6th Cir. 1991)
MI Due to dramatic downturn in farm equipment market, seller losing $2 million per day by staying in business and might have to declare bankruptcy if it can’t terminate the contract
None reported No
Kel Kim Corp. v. Cen- tral Markets, Inc. , 70 N.Y.2d 900, 902, 519 N.E.2d 295, 296 (N.Y.
1987)
NY Contractor uninsur- able
Yes No
Louisiana Power &
Light Co. v. Allegheny Ludlum Industries, Inc. , 517 F.Supp. 1319 (D.C. La. 1981)
NY 24 % rise in nickel, 185 % rise in fer- rochrome, and 21 % rise in labor turned a $589,500 profi t on $1,100,000 power plant steel tubing contact into
$428,500 loss
None reported No
Macalloy Corp. v.
Metallurg, Inc. , 284 A.D.2d 227 (N.Y. App.
Div. 2001)
NY Plant shut down due to cost of complying with environmental regulations
Yes No
(Continued)
SUMMARY STATEMENT OF NEW YORK LAW OF FORCE MAJEURE IN CONTRACTS
Case Law Price increase Force
Majeure clause in contract?
Did claimant prevail?
Mainline Inv. Corp. v.
Gaines , 407 F.Supp.
423, 427 (N.D. Tex.
1976)
TX Arab oil embargo Yes No
Maple Farms, Inc.
v. School District of Elmira, 76 Misc.
2d 1080, 1085, 352 N.Y.S.2d 784, 14 UCC Rep. Serv. 722, (NY Sup. Ct. 1974)
NY Price of raw milk rose 23 % , increas- ing cost to deliver bottled milk 10.4 %
None reported No
Millers Cove Energy Co. v. Moore , 62 F.3d 155, 158 (6th Cir.
1995)
VA? Mineral lessee did not want to pay mining royalty when mining was not eco- nomically feasible
Yes No
Missouri Public Serv.
v. Peabody Coal Co. , 583 S.W.2d 721, 726 (Mo. App. 1979)
MO Arab oil embargo, federal regulations, and wage and mate- rial infl ation turned
$5 million/year sales into $1,800,000 loss in 1976 and $4 million annually pro- jected in 1977–1979
None reported No
Moyer v. City of Little Falls , 134 Misc.2d 299, 510 N.Y.S.2d 813 (N.Y. Sup. 1986)
NY 666 % cost increase due to regulatory action closing local landfi ll is “exces- sive” as a matter of law
No Yes
Northern Indiana Pub.
Serv. Co. v. Carbon County Coal Co. , 799 F.2d 265, 275 (7th Cir.
1986)
IN Long-term coal supply contract was
$181 million above market which utility feared it could not recover in rates
Yes No
(Continued)
Case Law Price increase Force Majeure clause in contract?
Did claimant prevail?
One World Trade Center LLC v. Cantor Fitzgerald Securities , 789 N.Y.S.2d 652, 654–55, 6 Misc. 3d 382, 386 (N.Y. Sup.
Ct. 2004)
NY Tenant still owes rent even when building is de- stroyed
Yes Yes
OWBR LLC v. Clear Channel Communica- tions , 266 F.Supp.2d 1214, 1222–23 (D. Hawaii 2003)
HI Post-9/11 cancella- tion of hotel reser- vations not excused by 9/11 as a force majeure
Yes No
Pettinelli Electric Co.
v. Bd. of Ed. of the City of New York, 56 A.D.2d 520 (N.Y. App.
Div. 1977)
NY School district wanted to cancel construction con- tract for two schools when district ran out of money
None reported No
Publicker Indus., Inc. v. Union Car- bide Corp. , 1975 WL 22890, 17 UCC Rep.
Serv. 989 (E.D. Penn.
1975)
PA Price of ethanol rose in Arab oil embargo — loss of $.10/gal would lead to $5,800,000 aggregate loss;
“We are not aware of any cases where something less than a 100 % cost increase has been held to make a seller’s performance
‘impracticable.’”
None reported No
Raytheon Co. v. White, 305 F.3d 1354 (Fed.
Cir. 2002)
U.S. Missile system cost overrun of 57 %
None reported No
(Continued)
SUMMARY STATEMENT OF NEW YORK LAW OF FORCE MAJEURE IN CONTRACTS
Case Law Price increase Force
Majeure clause in contract?
Did claimant prevail?
Soletanche Rodio Nicholson (JV) , 94–1 BCA (CCH) ả 26,472, 1993 WL 453475 (1993)
U.S. Due to differing site conditions, construction would have taken 17 years and $400 million rather than 720 days and $17 million
None reported Yes
Southern Dredging Co., Inc., 92-2 B.C.A.
(CCH) P 24886, 1992 WL 47920 (Corps Eng’rs B.C.A. 1992)
U.S. Contractor not entitled to price in- crease for fuel (45 % fuel price increase;
7 % total contract price increase) due to Gulf War because volatility in Middle East is normal and increase in price of oil “was entirely foreseeable”
None reported No
Spindler Constr. Corp. , 06-2 BCA (CCH) ả 33,376, 2006 ASBCA LEXIS 66 (Armed Servs. B.C.A. July 31, 2006)
U.S. 23 % price increase due to global steel crisis created 5 % overrun of the total subcontract price
None reported No
Stand Energy Corp.
v. Cinergy Servs. , 144 Ohio App.3d 410, 416, 760 N.E.2d 453, 457 (Ohio App. 2001)
OH? Fixed price energy contract at $23.90/
MWh when prices exceeded $600/
MWh
Yes No
Stasyszyn v. South East Assocs. , 161 A.D.2d 269, 271 (N.Y. App.
Div. 1990)
NY Inability of landlord to obtain permits to renovate no excuse for obligation to tenant to put her back into renovated building
No No
(Continued)
Case Law Price increase Force Majeure clause in contract?
Did claimant prevail?
Team Marketing USA Corp. v. Power Pact, LLC, 41 A.D.3d 939, 839 N.Y.S.2d 242 (N.Y.
App. Div. 2007)
NY Event staffi ng company sought to cancel contract due to erratic scheduling changes
Yes No
TECO Coal Corp.
v. Orlando Utilities Com’n , 2008 WL 4498966 (E.D. Ky.
Sept. 30, 2008)
FL Index priced con- tract, cost increases of $16.84/ton while price indexes in- creased the contract price for coal by only $4.27/ton leads to seller loss of $49 million.
Yes Remanded
Transatlantic Financ- ing Corp. v. United States, 363 F.2d 312, 315 (D.C. App. 1966)
U.S. (Suez Canal case);
14 % cost increase that brought cost of performance
$44,000 over the
$306,000 contract price
None reported No
Trump, Donald J. et al.
v. Deutsche Bank Trust et al., New York Su- preme Court, Queens, 026841/2008
NY Borrower seeking loan payment deferral due to economic downturn
Alleged Pending
United States v. Wege- matic Corp. , 360 F2d 674, 3 UCC Rep Serv (CBC) 372 (2d Cir.
1966)
NY? Engineering diffi culties would allegedly have taken 1–2 years and $1 and $1.5 million, with success likely but not certain
None reported No
(Continued)
SUMMARY STATEMENT OF NEW YORK LAW OF FORCE MAJEURE IN CONTRACTS
Case Law Price increase Force
Majeure clause in contract?
Did claimant prevail?
United States v. Pan- handle Eastern Corp., 693 F.Supp. 88, 96 (D.
Del. 1988)
NY Many millions of dollars in market fl uctuations in natural gas prices in liquefi ed natural gas (LNG) take-or-pay contract
Yes No
Wuhan Airlines v.
Air Alaska, 1998 WL 689957 (S.D.N.Y.
1998)
NY Inability to acquire airplane promised for a lease
Yes No
Failure Is an Option
Bankruptcy Risks and Considerations in Project Finance Transactions
Nathan F. Coco *
I. INTRODUCTION
As one commentator notes, “project finance transactions might fairly be called the 800-pound gorillas of structured finance” because of their “complexity, sheer magni- tude, and social importance.” 1 Like an 800-pound gorilla, an energy project can be difficult to manage and control at times, and will occasionally run amuck. A project finance transaction can fail for any number of reasons. A defect or delay in the engineering, procurement, and construction process can shutter the project before it even becomes operational. Project sponsors, investors, or lenders can suffer illiquid- ity, depriving the project of necessary working capital. Persistent technological or operational failures can subvert productivity. Rising raw materials and input costs or falling output prices can render the entire project uneconomic. An offtake purchaser or hedge provider can default on its obligations causing the anticipated revenue stream to evaporate. The list goes on.
Given the complexity and intricacy involved in a project finance transaction — not to mention the high degree of leverage — it is surprising that projects do not fail more often than they do. 2 When they do fail, however, a bankruptcy proceeding is likely.
* Nathan F. Coco is a partner in the Chicago offi ce of McDermott Will & Emery LLP. Mr. Coco is a member of the Corporate Department and the Troubled Transactions and Bankruptcy Practice Group.
1 Carl S. Bjerre, Project Finance, Securitization, and Consensuality , 12 DUKE J. COMP. & INT’L
L. 411 (2002).
2 See Kevin Kelhoffer, Standard & Poor’s Risk Solutions Analysis Offers Strong Project Finance