COVID-19 has created many urgent questions for business clients, including how to handle commercial contracts. This article outlines the issues involved and provides general information to aid in certain decisions. Under the laws, there are multiple frameworks that might apply to your situation – explicit contract language, the UCC and the common law of contracts. An attorney can help you determine which of those frameworks applies to your circumstance. Each situation is unique and this article does not provide any specific advice.
Force Majeure Your commercial contract may contain a force majeure provision. A force majeure provision may excuse or delay certain contractual obligations during a major event, often referred to as an “Act of God”. The provision may specify what events constitute force majeure, such as riots, trade embargoes, strikes, natural disasters, and fire. Even if your contract has a force majeure clause, that clause might not specifically reference a pandemic. While you should discuss any questions with your attorney, even if pandemic is not specified as an event of force majeure in your contract, it is reasonable to make an argument that COVID-19 and the resultant governmental actions have triggered force majeure protections. Not all contracts contain force majeure language. The first step is to check the contract for any such language. The contract may state whether any official notice is required in order to be protected by that provision and set forth a time period in which notice must be delivered. The contract could instead include a clause on “excusable delay” or “excuse of performance”. These clauses will likely act as a force majeure clause in order to guide the parties as so what happens should a disaster or emergency occur. Do not wait for a dispute to arise, read the contract now. If your contract contains no such provision then you will likely be forced to look to the Pennsylvania Uniform Commercial Code for guidance.
Commercial Impracticability If you are a seller of goods, you will need to be aware of section 2615 of the Pennsylvania Uniform Commercial Code. This section is similar to the language of force majeure clauses but deals specifically with contracts for the sale of goods. If the COVID-19 pandemic has reduced your capacity to perform under existing contracts, the Pennsylvania Uniform Commercial Code requires you to allocate your production and deliveries among your customers. Customers must also be reasonably notified that this will occur. If you find that COVID-19 is impacting your capacity to perform whether due to a shortage of supplies, labor, or for some other reason, act quickly. Courts have held that a notice of delay in delivery due to a strike was insufficient when it was given six months after the strike began. Please be aware, however, that a drop in market price might not be considered a commercial impracticability by the courts
Frustration of Purpose and Impossibility of Performance The doctrines of frustration of purpose or impossibility of performance apply where: (i) a contract was dependent upon the continual availability of a certain thing and (ii) circumstances beyond the parties’ control causes the availability to cease. This applies when the frustration occurs through no fault of the parties, such as during a natural disaster. When that occurs, Pennsylvania law will typically treat the contract as having been dissolved and all contractual obligations as having ended due to a failure to perform. The parties may choose to either terminate the contract or waive the issue if practicable.
If you have a specific question about or involving Pennsylvania Law, please contact CGA Law Firm at (717) 848-4900.