Wednesday, September 16, 2020
Non-performance Related to the COVID-19 Crisis Under UCC Article 2: Impracticability and a Role for Injunctions? Part I
The challenges of the COVID-19 crisis have created issues of nonperformance and enforcement of contracts. Parties simply may be unable (or unwilling) to fulfill their contractual obligations. While these issues arise across many types of contracts, it is worth looking at particular issues arising in cases arising under Article 2. Without much deliberation, one can predict that there will be arguments that reference COVID-19 in connection with modifications (§2-209), adequate assurances (§2-609), casualty to identified goods (§2-614) and excuse to failure of presupposed conditions (§2-615). We might expect for the time being that parties might argue the effects of COVID-19 in many cases for breach of contract. While breach cases might seem routine, at least two courts in interesting cases have already taken up whether the court should grant an injunction due to COVID and one takes up an allegation of impracticability that is relevant to COVID-19 related breach arguments.
The first of these cases is Steves and Sons, Inc. v. Jeld-Wen, Inc., 2020 WL 1844791 (E.D. Va. Apr. 10, 2020), which concerned a claim of breach of contract brought by the buyer (“Steves”) against the seller (“Jeld-Wen”) for the purchase of eighty percent (80%) of Steves requirements of interior door skins (see §2-306). The dispute between the parties arose from Jeld-Wen’s allocation of door skins, during a shortfall of supply that arose when the two largest providers of door skins, which included Jeld-Wen, announced substantial price increases would take place in 2020. After buyers, including Steves, increased orders in 2019, Jeld-Wen did not fill Steves’ orders in full, claiming the orders were disproportionate to Steves’ forecasts and prior orders. In February 2020, Steves brought suit for breach and sought a preliminary injunction in the case, which the court granted.
This might appear to be a routine, but interesting, dispute in a requirements contract where there is a dispute arising from alleged shortages created by the seller’s own announcement of dramatic price increases to hit in the near future and an argument that Steves’ orders were disproportionate to stated estimates. The court found that Steves’ increases in its orders to Jeld-Wen were minor, only 7.11%. Moreover, the contractual provision for allocation in the event of “shortage in production capacity” was not triggered where Jeld-Wen actually had excess capacity. Two aspects of this case, though, are notable in a COVID-19 marketplace: (i) Jeld-Wen’s claim of impracticability under §2-615 and (ii) Steves’ request for a preliminary injunction.
As to the claim of impracticability under §2-615, it is important to note that Jeld-Wen’s alleged shortages began before COVID-19. However, the court’s consideration of contract language regarding potential shortfalls may have implications in other cases where parties desire access to §2-615 allocations due to COVID-19-related shortages. Jeld-Wen claimed that §2-615 supported its allocation of door skins where there was a production shortage in two styles of the door skins, as that provision permits a seller to “allocate production and deliveries among his or her customers but may at his or her option include regular customers not then under contract as well as his or her own requirements for further manufacture.” The court rejected application of this provision, finding that Jeld-Wen could not demonstrate any contingency the “non-occurrence of which was a basic assumption on which the contract was made.” Instead, the parties’ contractual language that addressed shortages precluded Jeld-Wen’s argument that shortages were not contemplated as anticipated under §2-615(a). The court also rejected Jeld-Wen’s argument that increases in market price themselves can be a contingency under §2-615 where there was no expectation that prices would remain level, such that its allocation was supportable.
In considering whether to grant the preliminary injunction to Steves’, the court found a likelihood of irreparable harm to Steves and took up the balancing of hardships and, in particular COVID-19. The court noted that “[i]n balancing the hardships, it is necessary to assess what impact, if any, the coronavirus (COVID-19) spread has, or reasonably may be expected to have, on the parties and on the public interest.” While not requested by the parties, the trial court, sua sponte, asked the parties to submit briefing on the question. The court recognized that COVID-19 has affected businesses and will be challenging in terms of operations in light of government restrictions. Of course, that does not mean that a party is (or is not) entitled to an injunction in a transaction occurring in a COVID-19 environment. Instead, the court concluded that Jeld-Wen did not have any reduction of capacity due to COVID-19 or that the spread of the disease was considered in the allocation of capacity made by Jeld-Wen. Moreover, any “possible future damage” arising from COVID-19 and any volatility in the marketplace from it did not “change the analysis,” and the court granted the preliminary injunction to Steves. Not surprisingly, Jeld-Wen has appealed to the 4th Circuit in this case.
Jeld-Wen may be instructive as to other cases arising due to non-performance during the pandemic. First, the inclusion of contract language that addresses pricing issues, product shortages and allocations of supply would seem to be applicable to other transactions affected by COVID-19. Parties will be bound by the language that they had the foresight to include. Second, while the court did not believe that Jeld-Wen could access the allocation provisions of §2-615 due to price increases, it may be that price escalations and product demand might be unforeseen circumstances in other cases due to COVID-19. Finally, in cases where an injunction is requested, it is clear that if a contracting party can demonstrate a COVID-19 impact, the court will consider it in balancing hardships. In short, COVID-19 is not a license for breach, and contracting parties are still expected to fulfill their obligations.
This post continues in Part II.