Events Impairing Performance: The Code Response

In the previous post we looked at situations where ‘reasonable grounds for insecurity’ concerning the other party’s performance have arisen, as well as action which can be taken in such a situation to ‘demand adequate assurance of performance.’ The first sentence of Section 2-609(1) notes in this regard  ‘A contract for sale imposes an obligation on each party that the other's expectation of receiving due performance will not be impaired.' The impairment contemplated by Section 2-609 is the result of some behavior by one of the contracting parties.

            Section 2-615 also contemplates a situation where performance is not forthcoming; however, in this instance, the non performance is not caused by the behaviors of one of the parties to the transaction.  Rather, the non performance (or partial performance) contemplated by Section 2-615 is the result of some event which makes performance ‘impracticable.'  Section 2-615(1)(a) reads as follows:

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 his duty under a contract for sale if performance as agreed 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 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.

In order for the event to come within Section 2-615, it must be of such a nature that the non occurrence of that event was ‘a basic assumption on which the contract was made.' 

The other situation contemplated by Section 2-615 is where the party who is unable to perform is precluded from performance by ‘any applicable foreign or domestic governmental regulation.' As noted in the text, it is irrelevant if the regulation is later proved to be invalid.

            There are several things which should be noted in the initial discussion of Section 2-615..  First, Section 2-615 deals with a situation where performance has become ‘impracticable.'  This is not the same thing as ‘impossible.'  As noted in Official Comment 3 to Section 2-615, the word ‘impracticable’ was used ‘to call attention to the commercial character of the criterion chosen by this Article.'  Second, although the section is drafted as pertaining only to the seller, Official Comment 9 states in part that in certain situations ‘the reason of the present section may well apply and entitle the buyer to the exemption.' There is case law which supports that result.  Third, a dramatic price change is not within the purview of Section 2-615.  That stated, there must have been some event that caused the dramatic price change, and that is where the focus should be directed.

In order to avail oneself of Section 2-615(1) the party must comply with Sections 2-615(a)&(b). Section 2-615(b) is activated when the triggering event affects only part of a seller’s capacity to perform and requires an allocation of product by the seller:

Where the causes mentioned in paragraph (a) affect only a part of the seller's capacity to perform, he must allocate production and deliveries among his customers but may at his option include regular customers not then under contract as well as his own requirements in any manner which is fair and reasonable.

Note, upon activation of Section 2-615(1), the seller ‘at his option’ may include ‘regular customers not then under contract’, and may also include its own requirements for further manufacture. 

Any allocation must be done in a ‘fair and reasonable manner.'  Once again, we see an opportunity to draft what is, or is not, an allocation which is fair and reasonable, and if this is done, the inquiry will be limited to: were the called for standards of ‘fair and reasonable’ met; and if so, were these standards not ‘manifestly unreasonable’ per Section 1-302.  As will be demonstrated shortly, this is one of several creative drafting provisions that can pay big dividends in the event of litigation.

            Section 2-615(c) states the final requirement for Section 2-615(a) to be properly utilized:

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.

The procedure required for the notice referred to is contained in Section 2-616(1)(a)(b)(2)(3).*

            The general freedom of contract principle contained in Section 1-302 is explicitly stated in the first sentence of Section 2-615(a) which states in relevant part as follows : Except so far as a seller may have assumed a greater obligation... The ‘greater obligation’ does not need to be stated as guarantee of delivery in a Section 2-615 situation.  The greater obligation can be created through a remedial provision.

             Gold Kist v Stokes 138 Ga. App. 482 (1976), 226 S.E.2d 268 involved an appeal from a summary judgment.  There were a number of evidentiary issues at the trial court which the appellate court required to be heard by a jury.  Another issue raised was the failure of the trial court to include the introductory language of Section 2-615 in its jury instruction as it relates to ‘seller assuming a greater obligation’.  The contract in the Gold Kist case had the following provision:

... [i]f the producer is unable to deliver the quantity contracted for solely because of reasons beyond his control, the measure of damages for failure to deliver is the difference between contract and market price on the day of breach.

In reversing the trial court, the appellate court found that under the noted provision, seller had ‘assumed a greater obligation’ via the damage provision, and that the failure of the jury instruction to include the introductory language of Section 2-615 as it pertained to the assumption of a greater obligation by the seller was error.

            The case graphically illustrates a point made throughout these posts. Proper drafting yields great results.   The remedial provision probably got very little notice by the seller during negotiations or one would assume the seller’s attorney would have objected to the provision.  As a result of inclusion in the contract, the remedial provision effectively overrode the result that would have occurred under Section 2-615.

           

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*(1) Where the buyer receives notification of a material or indefinite delay or an allocation justified under the preceding section he may by written notification to the seller as to any delivery concerned, and where the prospective deficiency substantially impairs the value of the whole contract under the provisions of this Article relating to breach of installment contracts (Section 2-612), then also as to the whole,

(a) terminate and thereby discharge any unexecuted portion of the contract; or

(b) modify the contract by agreeing to take his available quota in substitution.

       (2) If after receipt of such notification from the seller the buyer fails so to modify the contract within a reasonable time not exceeding thirty days the contract lapses with respect to any deliveries affected.

         (3) The provisions of this section may not be negated by agreement except in so far as the seller has assumed a greater obligation under the preceding sections.

Documents of Title: Shipment Under Reservation

The sale of goods often involves the commercial movement of goods by carrier and sometimes the subsequent storage of those goods.  Article 7 of the UCC- Documents of Title- governs the shipment of storage of goods under the Uniform Commercial Code.  At the outset, it must be pointed out that shipments of interstate transactions are governed by the Federal Bill of Lading Act 49 U.S.C.801 et. seq., and the storage of agricultural commodities may be governed by the United States Warehouse Act 7 U.S.C. 241.

A major distinction between these two acts is that the FBLA is a mandatory act, governing shipments in interstate commerce, while the USWA is a voluntary licensing statute in which a warehouse can apply for approval by the Secretary of Agriculture. 

The purpose of the posts relating to the movement and storage of goods will be confined the Uniform Commercial Code; however, given the statistic provided by the Farm Bureau Agency that 47% of all warehouse space in the United States falls within its purview, anyone involved in matters involving the storage of commodities should definitely investigate the applicability of the USWA to a particular transaction.  With respect to other goods which may be stored, Article 7 will control.

The following is an excerpt from The Uniform Commercial Code Made Easy and is designed as a general introduction to bills of lading including the delivery of goods under a bill of lading.  Special emphasis is given to the concept of a ‘shipment under reservation’ which is governed by Section 2-505.

V.    DELIVERY OF GOODS

(A)  Bill of Lading

(B)  Person Entitled to Take Possession of Goods;

          Person Entitled Under the Document.

(A) Bill of Lading[1]

When the carrier receives the boats it will issue  a document known as a bill of lading.   This document will acknowledge the carrier’s possession of the boats, and in addition will contain a contract for delivery of the boats. In such a situation, the carrier is called a bailee.[2] The person from whom the carrier receives the goods is called the consignor,[3] here, Royal. Since the contract calls for delivery to the order of Royal, Royal would also be the consignee.[4]

                                                 Form of Document of Title

A document of title can take one of two forms. It can be negotiable or non negotiable. Section 7-104 specifies when a document is negotiable or non-negotiable:

• (a)  Except as otherwise provided in subsection (c) a  document of title is negotiable if by its terms the goods are to be delivered to bearer or to the order of a named person;

(b)  A document of title other than one described in subsection (a) is non-negotiable.

(c)  A document of title is non-negotiable if, at the time it is issued, the document has a conspicuous legend, however expressed, that it is non-negotiable.

In the instant situation, the goods are to be delivered to the order of a named person, Royal. Thus, the form of the bill of lading falls squarely within Section 7-104(a). As is obvious from the quoted definition, whether or not a bill of lading [or any document of title] is negotiable or non-negotiable is simply a matter of form. To the extent that the bill of lading does not have the proper form, it is non-negotiable.[5] The distinction between negotiable and non-negotiable documents pervades all of Article 7. In fact, the last sentence to the first paragraph of the comments to Section 7-104 states as follows:

The distinction between negotiable and non-negotiable documents in this section makes the most important sub-classification employed in this article....

There are many reasons under Article 7 as to why this is so; it is, however, beyond the scope of this memorandum to discuss all of these. In the instant situation, the question for our purposes is: how does procurement of a negotiable bill of lading to the order of Royal reserve a security interest in Royal?  That is, how does Royal’s procurement of a negotiable bill of lading to its order secure payment or performance of an obligation, per Section 1-201(b)(35). The simple straightforward answer is that the carrier would be required to deliver the boats only to Royal, inasmuch as Royal would be the holder of the negotiable document (bill of lading),  and delivery to anyone else would be unlawful. Again, some further analysis is required to illustrate how this works under Article 7.

(B) Person Entitled to Possession of the Goods; Person Entitled under the Document

The first relevant section in dealing with this question is Section 7-403(a) which reads in pertinent part as follows:

The bailee shall deliver the goods to a person entitled under the document of title if the person complies with subsections (b) [dealing with bailee’s lien] and (c) [surrender or notation of deliveries on document of title]....

As previously noted, the bailee in the instant situation would be the carrier, who, per Section 7-403(a) noted above, must deliver to a “person entitled under a document,” which is defined under Section 7-102(a)(9) ) as follows:

Person entitled under the document means the holder, in the case of a negotiable document of title, or the person to which delivery of the goods is to be made by the terms of, or pursuant to written instructions in a record under, a nonnegotiable document of title.

As indicated, since a negotiable bill would be used here, the “person entitled under the document” would be the holder of that document. Holder is defined under Section 1-201(b)(21)(B) as ‘the person in possession of a negotiable tangible document of title if the goods are deliverable to bearer or to the order of the person in possession’. Thus, as long as Royal maintains possession of the negotiable document of title issued to its order, Royal is the person entitled under the document as the holder of the negotiable document. Should the carrier deliver to anyone other than the holder, it would be an improper delivery for which the carrier would be liable.  The carrier knows this and will only deliver to Royal or the subsequent holder of the document. Royal doesn’t want the boats; it simply wants to maintain possession of the bill of lading until it gets paid.

The next series of posts will roughly track the statutory provisions discussed in the memorandum above as it relates to bills of lading.  Warehouse receipts will be covered thereafter.  

 

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          [1] “Bill of Lading” means a document evidencing the receipt of goods for shipment issued by a person engaged in the business of transporting or forwarding goods.... Section 1-201(b)(6).

A bill of lading is a document of title under Section 1-201(b)(16). That section states as follows:

“Document of title” includes dock warrant, dock receipt, warehouse receipt or order for the delivery of goods, and also any other document which in the regular course of business or financing is treated as adequately evidencing that the person or possession of it is entitled to receive, hold and dispose of the document and the goods it covers. To be a document of title a document must purport to be issued by or addressed to a bailee and purport to cover goods in the bailee’s possession which are either identified or are fungible portions of an identified mass.

The use of documents in commercial transactions is extremely important and will be discussed in some detail in this book. For now it should simply be borne in mind that in many situations the document is treated as the equivalent of the goods it covers and that transfer of the document or rights thereunder will generally be equivalent to a transfer of the goods so covered.

[2] “Bailee” means the person who by … bill of lading or other document of title acknowledges possession of goods and contracts to deliver them. Section 7-102(a)(1).

[3] “Consignor” means the person named in a bill as the person from whom the goods have been received for shipment. Section 7-102(a)(4).

[4] “Consignee” means the person named in a bill to whom or to whose order the bill promises delivery. Section 7-102(a)(3).

[5] Section 7-104(c) previously quoted, states as follows:

(c) A document of title is nonnegotiable if, at the time it is issued, the document has a conspicuous legend, however expressed, that it is nonnegotiable.

This provision is contained in the newest amendments to Article 7 and is absent under Section 7-104. The amendment is logical insofar as it indicates a clear intent of the issuer, and presumably the consignor, that the document be treated as nonnegotiable. The importance of negotiability will be seen shortly in Doug’s memorandum.