The COVID-19 pandemic has triggered many significant, unprecedented disruptions in the automotive world. While several OEMs and suppliers mobilized their crisis response months ago, many have yet to return to full production capacity. As a result, commercial relationships are being tested, and the rights and obligations set forth in parties’ terms and conditions and other contract documents have become exceptionally pertinent, especially the provisions that excuse nonperformance or delays in performance.
Force majeure, a phrase that was seldom used prior to the pandemic, has newfound importance in light of the challenges presented by the coronavirus. Force majeure contract clauses generally excuse a party’s failure to fulfill existing contractual obligations during extraordinary events, protecting that party from penalties and breach of contract claims. But all contracts differ. What happens when your contract does not contain a force majeure clause?
First, review your contract for other terms that may provide force majeure-like protection. For example, excused or delayed performance provisions closely resemble force majeure provisions and may offer similar safeguards. If your contract does not contain a force majeure clause or an excused/delayed performance clause, a party’s nonperformance or delay in performance may still be excused, depending on whether your contract governs the sale of goods or services.
The Sale of Goods. If your contract governs the sale of goods, such as automotive parts or tooling, the Uniform Commercial Code (UCC) excuses performance obligations under certain circumstances. Namely, under UCC § 2-615, a seller’s nonperformance or performance delay may be excused if it can prove commercial impracticability—that its performance “has been made impracticable by the occurrence of a contingency the non-occurrence of which was a basic assumption on which the contract was made.” Stated another way, a seller’s performance obligations may be excused if they can prove that: (i) there was an unforeseen event; (ii) the nonoccurrence of the event was a basic assumption underlying the contract; and (iii) the event rendered the seller’s performance commercially impracticable. To properly reserve this defense, however, the seller must notify the buyer “seasonably” that there will be delay or non-delivery. Further, if the seller can allocate goods, they must do so among their existing customers in a fair and reasonable manner.
Services. If your contract is for services, such as the repair/modification of automotive parts or tooling, the common law applies. Michigan’s common law recognizes various defenses that may excuse a party’s performance, including impossibility, impracticability and frustration of purpose. The impossibility and impracticability defenses have become synonymous, excusing a party’s performance obligations if they can prove that: (i) an event made performance impossible or impracticable; (ii) the non-occurrence of the event was a basic assumption underlying the agreement; (iii) the event was not their fault; and (iv) neither party assumed the risk of occurrence of the event. Under the frustration of purpose defense, a party’s performance obligations may be excused if they can prove that: (i) there was a supervening event that should excuse performance; (ii) they did not bear the risk of the occurrence of the event; and (iii) the event rendered the value of the party’s performance worthless.
The specific defense utilized is dependent on the subject matter of the contract, but non-performing parties to contracts lacking force majeure clauses have nearly identical arguments: The government-mandated shutdowns, labor shortages and product dearth accompanied by the pandemic were unforeseeable events that the parties did not contemplate when they entered into their contract, which frustrated the contract’s purpose or rendered performance commercially impracticable or impossible.
Warner attorneys take pride in staying up to date on recent developments in the law, which includes a close following of COVID-19-related legal issues. The virus is unpredictable, but our services are not. Regardless of whether you are the performing or non-performing party in your commercial relationship, Warner’s Automotive Industry Group is ready to help.