Contracts in the Time of Coronavirus: A Series on Force Majeure, Impossibility, Frustration of Purpose, and other Doctrines Excusing Contractual Nonperformance.
Part III: UCC Excuses for Nonperformance
As the world continues to confront a prolonged battle with the coronavirus pandemic, the long-term impacts on business and contractual relationships become more and more visible. Business owners in countless industries may be faced with labor and supply shortages, as well as government intervention such as quarantines or emergency shelter-in-place orders, which will render non-performance of contractual duties ever the more likely. Despite the pandemic, contracts still remain valid and enforceable, and parties still face liability for breaching duties they owe pursuant to those contracts. However, those faced with the difficult decisions of how to fulfill contractual obligations in these unprecedented conditions may be able to excuse their performance under several doctrines of nonperformance. In this multipart series, the commercial litigation attorneys of FIDJ explore various doctrines which may excuse performance of contractual obligations.
In Part I of our series, we discussed the potential application of force majeure clauses to excuse nonperformance. In Part II, we discussed the common law doctrines of impossibility and frustration of purpose, which, depending upon the circumstances, may excuse contractual nonperformance. Part III of this series explores excuses for nonperformance which may be available to parties under the Uniform Commercial Code Article 2 (“UCC”) for contracts concerning the sale of goods.
Generally, domestic contracts for the sale of goods are governed by the Uniform Commercial Code as codified by the various states. Florida’s version of the UCC has been codified at Chapter 672, Florida Statutes. UCC § 2-615 (codified at Fla. Stat. § 672.615), titled “Excuse by Failure of Presupposed Conditions” codifies the doctrine of commercial impracticability and may provide sellers of goods relief from performance.
As the comments to 672.615 explain, the “section excuses a seller from timely delivery of goods contracted for, where his performance has become commercially impracticable because of unforeseen supervening circumstances not within the contemplation of the parties at the time of contracting.” Fla. Stat. § 672.615, cmt. 1. Section 672.615 provides in pertinent part:
Except so far as a seller may have assumed a greater obligation and subject to the preceding section on substituted performance:
(1) Delay in delivery or nondelivery in whole or in part by a seller who complies with subsections (2) and (3) is not a breach of her or his duty under a contract for sale if performance as agreed has been made impracticable by the occurrence of a contingency the nonoccurrence of which was a basic assumption on which the contract was made or by compliance in good faith with any applicable foreign or domestic governmental regulation or order whether or not it later proves to be invalid.
For Fla. Stat. § 672.615 to apply, the following conditions must be met.
First, the provision can apply to sale of goods contracts “except so far as a seller may have assumed a greater obligation” concerning the risk of loss of the goods. In instances where sellers contractually assumed the risk for loss in all instances, or have done so through the parties’ previous course of dealings, courts will more likely find that 672.615 does not provide an excuse to nonperformance. See Fla. Stat. § 672.615, cmt. 8.
Second, the occurrence of the event which prevented nonperformance must be either: i) “a contingency the nonoccurrence of which was a basic assumption on which the contract was made;” or ii) seller’s compliance with a supervening “applicable foreign or domestic governmental regulation or order.” Fla. Stat. § 672.615(1). In instances where “the contingency in question is sufficiently foreshadowed at the time of contracting,” 672.615 will not provide relief to sellers. Fla. Stat. § 672.615, cmt, 8. Of course, as with the previous doctrines discussed in this series, foreseeability is a fact intensive inquire and will vary depending upon the circumstances.
Third, the seller’s performance must be made “impracticable.” Fla. Stat. § 672.615(1). Sellers should note that the comments recognize the doctrine of “commercial impracticability” as distinct from common law doctrines of impossibility and frustration of purpose. Fla. Stat. § 672.615, cmt. 3. This is because the doctrine does not require impossibility of performance from the seller or buyer. However, while technically the commercial impracticability defense is an easier defense to assert, it is by no means a guaranteed win.
As comment 4 explains, “[i]ncreased cost alone does not excuse performance unless the rise in cost is due to some unforeseen contingency which alters the essential nature of the performance.” However, “a severe shortage of raw materials or of supplies due to a contingency such as war, embargo, local crop failure, unforeseen shutdown of major sources of supply or the like, which either causes a marked increase in cost or altogether prevents the seller from securing supplies necessary to his performance, is within the contemplation of this section.” Fla. Stat. § 672.615, cmt. 4.
With regard “supervening” changes in the law which render performance impracticable, “governmental interference cannot excuse [nonperformance] unless it truly ‘supervenes’ in such a manner as to be beyond the seller’s assumption of risk.” Fla. Stat. § 672.615, cmt. 10.
We also note that even if a seller satisfies the conditions necessary under subsection one, excuse will only occur if a seller complies with subsections two and three of the statute. Subsection two requires that if a seller’s partial performance is possible, then a seller “must allocate production and deliveries among his or her customers…in any manner which is fair and reasonable.” Fla. Stat. §672.615(2). “An excused seller must fulfill his contract to the extent which the supervening contingency permits, and if the situation is such that is customers are generally affected he must take account of all in supplying one.” Fla. Stat. § 672.615, cmt. 11.
Finally, subsection three requires sellers to “seasonably” notice buyers that there will be delay or nondelivery and, when allocation is required under subsection (2), of the estimated quota made available for the buyer. Fla. Stat. § 672.615(3). The UCC defines seasonable notice as notice “taken at or within the time agreed or, if no time is agreed, at or within a reasonable time.” Fla. Stat. § 671.204(2). However, whether a time is reasonable depends on the nature, purpose, and circumstances of the action. Id. at (1).
Fuerst Ittleman David & Joseph was founded with a focus on serving the legal needs of domestic and international businesses of all shapes and sizes. Our commercial litigation practice group has decades of experience litigating a wide array of business disputes in state and federal courts as well as domestic and international arbitration panels. In addition, our corporate transactional team can assist your company with a full range of corporate legal services which can take you (and your company) from the initiation of your business plan through the daily operation of your now-thriving company. For more information contact us at 305-350-5690 or info@fidjlaw.com.