LEGAL CONSIDERATIONS DURING COVID-19 PANDEMIC: CONTRACTUAL AGREEMENTS AND FORCE MAJEURE
With the onset of the COVID-19 pandemic, there is increasing disruption to supply chains for buyers and sellers of goods. From unpaid invoices to the inability to fulfill an order, your business may be dealing with issues that are increasingly becoming more common. It is important that we discuss applicable provisions and ideas in tackling such issues, such as force majeure and other defenses.
First off, when dealing with an issue such as an unpaid invoice for goods, you will look to the Uniform Commercial Code (“UCC”) which governs the sale of goods and has been adopted by most states across the United States. One issue you may run into is determining whether you have a binding contract before taking legal action. The sale of goods worth $500 or more must be in writing. UCC 2-201. Unsigned invoices typically cannot, on their own, create a contract or add terms to one. However, under UCC 2-207, parties may be found to have entered a binding contract despite the absence of a formal, final written document memorializing the agreement. UCC 2-207. The writing requirement may be fulfilled if the goods are to be specially manufactured for the buyer and are not suitable for sale to others or if goods have been received and accepted. UCC 2-201. The UCC looks to the actual dealings of the parties and gives legal effect to that conduct so it may be a good idea to consult an attorney, especially if there is considerable gray area. UCC 2-207.
In the event that you have a formalized written agreement, hopefully you have drafted a well-written force majeure clause. Translated quite literally, “force majeure” means “superior force” in French and such clauses seek to excuse nonperformance when certain unforeseeable circumstances beyond the control of the parties prevent performance.
There are several things to keep in mind when drafting a force majeure clause in your contract. Courts tend to interpret force majeure clauses narrowly. Therefore, expansive catch-all language contained in a force majeure clause, as well as named events constituting force majeure, will be ineffective. So if your clause expressly contemplates pandemics or other public health emergencies, there is a better argument for obtaining protection under force majeure in COVID-19 conditions. From here on out, contracting parties should consider expressly including “epidemics”, “pandemics” and/or “public health emergencies” and “government actions” relating thereto as events constituting forces majeure.
Legal Considerations During Covid-19 Pandemic – Other factors courts look to in determining whether the pandemic is sufficient to trigger a force majeure provision include foreseeability, mitigation, and notice. Firstly, courts tend to disfavor force majeure claims when the alleged triggering event was foreseeable at the time the contract was made, especially if the event is not specifically expressed in the force majeure provision. However, with new waves of COVID-19 being highly publicized and as likely to occur, pandemics have become foreseeable. Moreover, parties are generally required to show an attempt to mitigate a foreseeable risk of nonperformance and to resume performance as soon as possible subsequently, in order to be excused from nonperformance due to a force majeure event. Even if your force majeure clause does not expressly require it, it is advisable to do so in order to show that performance was truly impossible. Lastly, enforcement of a force majeure clause may require that notice of the occurrence of the triggering event be given within a defined period or by certain means. Failure to comply with the requirements may preclude a party from obtaining their force majeure clause protections.
If your contract does not contain a force majeure clause, and in some instances even when it does, a party may be able to invoke non-contractual defenses to nonperformance. One to consider is the defense of impracticability under UCC 2-615. UCC 2-615 provides that a seller is excused from any delay in delivery or failure to deliver goods if performance has become commercially impracticable as a result of either (i) “the occurrence of a contingency the non-occurrence of which was a basic assumption on which the contract was made” or (ii) “compliance in good faith with any applicable foreign or domestic governmental regulation or order whether or not it later provides to be invalid.” UCC 2-615. Other non-contractual defenses include the common law principles of frustration of purpose and impossibility. The doctrine of frustration of purpose results from a supervening event substantially obviating or frustrating the purpose underlying the contract while impossibility requires that performance becomes objectively impossible because either its object or the means of performance are no longer available. When nonperformance is anticipated, it is advisable to evaluate these remedies in light of particular circumstances of your case.
Contact Cartee, LC Today
The COVID-19 crisis brings about unprecedented territory along with many questions and at Cartee, LC, we are continuing to monitor developments in this regard. If your business faces any issues related to any of the issues discussed above, Anthony Cartee and his team are available to discuss any questions at (714) 942-2225.