Court Enforces Microsoft’s Force Majeure Provision in International Contract
We’ve blogged before about the various challenges associated with translating international contracts. The case discussed below, Cypress v. SK., involves a force majeure provision in a supply contract between Microsoft and a Chinese company. Force majeure, a French term which translates to “superior strength,” involves, in the legal sense, unforeseen circumstances that work to prevent someone from fulfilling a contract. In the case below, a fire occurred at the defendant’s Chinese manufacturing plant, and Microsoft’s insurer claimed that the manufacturer breached the contract by not having a “disaster recovery plan” in place in the event of force majeure.
Given the current worldwide coronavirus outbreak where businesses are at a virtual standstill, force majeure provisions like the one discussed below are certain to be a central issue of contention in international breach of contract disputes in the coming months and years.
Lawsuit against the Chinese Manufacturer
In Cypress Ins. Co., v. SK Hynix Am., Inc, the plaintiff filed suit for breach of contract in the U.S. District Court in Seattle, Washington against a company that manufactured electronic memory chips in China. The plaintiff brought suit as the subrogee of Microsoft Corporation after the defendant failed to comply with a supply agreement. In 2004, Microsoft and the defendant entered into a supplier agreement by which the defendant agreed to provide Microsoft with Dynamic Random Access Memory chips (or “DRAM” chips) for use in Microsoft’s Xbox gaming console. In 2013, a fire broke out at one of the defendant’s manufacturing plants in Wuxi, China. Accordingly, the defendant was unable to comply with the terms of the supply contract with Microsoft. Microsoft then filed a claim with its insurer, the plaintiff, for the policy limit of $150 million. After covering Microsoft’s damages, the plaintiff then filed suit against the Chinese manufacturer for breach of contract in 2017.
Defendant Files for Summary Judgment
In 2018, the plaintiff filed a partial motion for summary judgment and the defendant filed a cross-motion for summary judgment. The plaintiff moved the court to determine that the defendant breached several provisions in the supply agreement as a matter of law and to dismiss the defendant’s “voluntary payor” affirmative defense. Conversely, the defendant moved the court to dismiss the plaintiff’s complaint on the grounds that it did not breach the contract but that if it did, the breach was excused by commercial impracticability. The defendant also argued that the parties’ agreement only required the defendant to use “commercially reasonable efforts” to supply the DRAM chips and only required defendant to provide Microsoft with “priority allocation” in the event of restricted capacity.
Court Grants Plaintiff’s Motion for Summary Judgment in Part and Denies it in Part
While the plaintiff argued that the defendant could have created a special task force and diverted additional DRAM chips to Microsoft after the fire, the defendant argued that it allocated 99% of its DRAM chips to Microsoft. The court held that whether a party had used “commercially reasonable efforts” was a question of fact and therefore the matter was not appropriate for summary judgment.
The court also rejected the plaintiff’s request for summary judgment on the grounds that the defendant failed to allocate enough DRAM chips, finding that the term “priority allocation” was not defined in the parties’ agreement.
The court did, however, decide that the plaintiff was entitled to summary judgment on its claim that the defendant failed to maintain a sufficient “buffer inventory,” which the parties understood to be two weeks’ worth of inventory. The plaintiff had argued that the defendant breached the agreement by not maintaining a “disaster recovery plan.” The plaintiff submitted evidence in the form of testimony from an employee of the defendant that the defendant company did not have any such plan in place before the fire. The court agreed with the plaintiff that it was entitled to summary judgment on this specific issue and rejected the defendant’s claim that the plaintiff had “waived” its rights to enforce this provision.
Finally, the court addressed the plaintiff’s claim that the defendant had breached the parties’ agreement by failing to supply the DRAM chips at a certain price level. The court rejected the plaintiff’s request for summary judgment on this issue, finding that there was evidence that Microsoft had agreed to pay a higher price for additional chips.
Court Rules on Defendant’s Affirmative Defenses
In its cross motion for summary judgment, the defendant argued that even if the court were to find that it was in breach of the contract, that it was entitled to summary judgment in its favor because performance of the contract became impractical following the fire. The defendant pointed to a provision in a state law statute which allowed an affirmative defense to be asserted when a seller is unable to deliver due to an unforeseen circumstance.
However, the court noted that the fact that the contract required the defendant to have a “disaster recovery plan” in place in the case of a force majeure event precluded summary judgment in the defendant’s favor as a matter of law. The court noted that the defendant had also allocated additional DRAM chips to other customers. The court also considered the defendant’s argument that the plaintiff’s damages were limited to only direct damages per the agreement, finding in the defendant’s favor on this issue.
Based on the forgoing, the court granted the plaintiff’s motion for partial summary judgment in part, finding that the defendant had breached the provision of the contract requiring the defendant to have a disaster recovery plan in place. The court granted the defendant’s motion as to the applicability of the limitation of damages provision in the agreement, finding that the plaintiff could not recover any “indirect, incidental, consequential, punitive, special, or exemplary damages.”
The case is Cypress Insurance Company v. Sk Hynix America, Court No. 17-CV-00467, decided by the Honorable Richard Jones on February 6, 2019 in the United States District Court for the Western District of Washington, at Seattle.
Contact legal translation service All Language Alliance, Inc. to obtain certified translation of force majeure clauses and provisions from Simplified Chinese, Arabic, Russian, French, Portuguese, German, Italian, Korean, Spanish, Norwegian, Swedish, and other languages to English.
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