COVID-19 Delays in the Sale of Goods – Get to Know the UCC
In my last post, I addressed the legal concepts of force majeure, impossibility and frustration of purpose in the context of real estate contracts and leases. In general, these concepts all relate to how an unforeseen catastrophe may affect a party’s duty to abide by the terms of a contract. A similar concept that applies to the sale of goods is “commercial impracticability.” As contract disputes arise from coronavirus-related delays within the supply chain, buyers and sellers will debate whether the pandemic made delivery of promised goods “impracticable.”
The Uniform Commercial Code (or UCC) is a model set of laws that governs commercial transactions including the sale of goods. Virtually all states in the U.S. have adopted the UCC as part of their statutes, although some minor differences can be found on a state-by-state basis. UCC Section 2-615 (as adopted in North Carolina as N.C. Gen. Stat. § 25-2-615) addresses the defense of commercial impracticability, which can excuse a seller from timely delivery of goods due to unforeseen circumstances. Under North Carolina law, a seller can be excused where:
1. Performance has become impracticable. While impracticality is a lower standard than impossibility, it will still require unusual circumstances. For example, a mere increase in the cost of obtaining the goods is not a sufficient excuse; but a “severe shortage of raw materials or of supplies” due to a major calamity may suffice.
2. The impracticability was due to the occurrence of some contingency which the parties expressly or impliedly agreed would discharge the promisor’s duty to perform. Where delivery of the goods becomes impracticable because of an event or circumstance that could not have been foreseen by a reasonable person, an implied agreement to excuse performance may be found.
3. The promisor did not assume the risk that the contingency would occur. If the seller agreed to be liable for delivery even in the event of a catastrophe, the defense of commercial impracticality will not apply.
4. The promisor seasonably notified the promisee of the delay in delivery or that delivery would not occur at all. The seller must give the buyer notice of the problem in a timely manner.
The N.C. Court of Appeals has stated that “when an exclusive source of supply is specified in a contract or may be implied by [the] circumstances . . . failure of that source may excuse the promisor from performance.” However, absent a “single source clause” in a contract or other evidence that the parties knew the seller had only one source to obtain the promised goods, a seller may not be excused merely because it could not obtain goods from its anticipated supplier. Accordingly, in the 1996 case of Alamance County Board of Education v. Bobby Murray Chevrolet, Inc., a General Motors dealer was not excused from delivering 1,200 school bus chassis to a group of school systems, even though its anticipated supplier, GM, could not timely provide the goods. Although the dealer referenced “GM” goods in its bid, the contract also said that “products of any manufacturer may be offered.” The N.C. Court of Appeals therefore held that the dealership could have sourced the goods from another supplier and was liable for $150,000 in additional cost that the school systems had to incur to obtain the goods from another seller.
Whether COVID-19 will provide an excuse for not delivering promised goods will depend on the provisions of a given contract – including provisions allocating risk or specifying whether the seller is restricted to one supplier. It will also depend on when the contract was formed. Whether the coronavirus pandemic was foreseeable in mid-2019 is an entirely different question from whether it was foreseeable at the start of 2020. Furthermore, the analysis will be affected by whether the seller gave timely notice of delay. In cases where a seller cannot timely deliver goods due to COVID-19 issues, an attorney who is familiar with the UCC can help analyze whether the failure is excusable – or whether it creates a viable claim by the buyer for money damages.
Elliot has practiced law for over 20 years and is a member of the Federal, North Carolina and Forsyth County bar associations. He is an experienced litigator with major case experience in state and federal courts and in private arbitrations.