This is the third part in this series. Part Two of this series discussed purchase order contracts for materials which may have a force majeure clause of some description (including possibly in online terms). Where there is no explicit force majeure clause, suppliers should look to the Uniform Commercial Code (UCC) which provides an integrated body of rules for the sale of “goods” including moveable construction materials and equipment. The UCC is a matter of state law. The pertinent section is Article 2 section 2-615. The Minnesota version of the statute provides:
336.2-615 EXCUSE BY FAILURE OF PRESUPPOSED CONDITIONS.
Except so far as a seller may have assumed a greater obligation and subject to the preceding section on substituted performance:
(a) Delay in delivery or non-delivery in whole or in part by a seller who complies with paragraphs (b) and (c) is not a breach of 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.
(b) Where the causes mentioned in paragraph (a) affect only a part of the seller’s capacity to perform, the seller must allocate production and deliveries among the seller’s customers but may include regular customers not then under contract as well as the seller’s own requirements for further manufacture. The seller may so allocate in any manner which is fair and reasonable.
(c) The seller must notify the buyer seasonably that there will be delay or non-delivery and, when allocation is required under paragraph (b), of the estimated quota thus made available for the buyer. [emphasis added]
The supplier’s performance may be excused or modified where something happened that neither party could foresee. What it would take to prove that performance has become commercially unreasonable/impracticable is an open fact question except that the cause could not be foreseen. Simple increased cost or loss of a preferred source of supply might not be enough. A further analysis needs to examine how the event affects the supplier’s performance. First, the supplier must give notice that the event will affect performance. Secondly, does the event affect the supplier’s whole performance or just part? The statute a requires the seller to make commercially reasonable assessment of whether some part of the performance is still possible and allocate whatever product can be produced among the supplier’s customers if possible.
The following statute section 2-616 addresses how a buyer might respond to notice that its supplier is declaring commercial impracticability. Where the circumstances justify it the buyer may terminate the contract and try to find the goods elsewhere. Otherwise the circumstances may suggest supplier’s modified performance including some reasonable allocation. These statutes together also offer an opportunity and encouragement to the parties to work out an acceptable resolution between themselves where that is possible.
Both 2-615 and 2-616 fill in missing pieces of the purchase order contract, but under 2-615 the seller is not home free. The statute does not bar a buyer from suing the seller for damages which would test the supplier’s claim of impracticability. In fact, the supplier might be on the receiving end of a notice from its own supply chain and the analysis starts again.
Read additional posts in the series Construction Material Suppliers in the COVID-19 World here.