Friday, September 18, 2020
Part III: Non-performance Related to the COVID-19 Crisis Under UCC Article 2: The Role of Repudiations and Adequate Assurances
Jennifer S. Martin
In Part I, I discussed the lessons from Steves and Sons, Inc. v. Jeld-Wen, Inc., 2020 WL 1844791 (E.D. Va. Apr. 10, 2020), and how it might be instructive to others asserting breach related to COVID-19, particularly where an injunction is desired. In Part II, I highlighted Volga Dnepr UK Ltd. v. Boeing Company, 2020 WL 2850572 (W.D. Wash. June 2, 2020), where a party who repudiated the aircraft wanted to retract the repudiation due to an increase in business arising from COVID-19. Here, I would like to look at the problem of repudiation and §2-609 adequate assurances and how that might affect parties affected by COVID-19. In particular, how might parties seek to “get it right” and what have courts said recently when faced with repudiations and requests for adequate assurances.
Recall that in Volga, the buyer, Volga Dnepr UK Ltd. (Volga), a cargo transport operation, contracted with the seller, Boeing Company (Boeing), for the purchase of five aircraft in 2006, with delivery of the aircraft occurring over multiple years, with the parties amending the contract multiple times. Volga initially notified Boeing on January 22, 2020, of the “impossibility to fulfill our obligations,” though it later claimed this was an invitation to work cooperatively and to alert Boeing of its difficulties. Boeing’s initial response on January 28, 2020, which it confirmed on February 5, 2020, clearly considered there to be a repudiation and requested retraction. Yet, the parties held meetings and on April 13, 2020, Boeing again restated its position that Volga had repudiated.
The decision of the trial court takes up these matters only in the context of Volga’s motion for a temporary restraining order. Does that necessarily mean that Boeing will prevail in the end? Perhaps not. Section 2-610 provides actions that a contracting party can take in the event that there has been a repudiation, but it does not permit a party to unilaterally characterize a communication as a repudiation. Of course, comment 1 does suggest that an “overt communication of intention or an action which renders performance impossible or demonstrates a clear determination not to continue with performance” is a repudiation. And, Volga did state it was “impossible to fulfill” its obligations concerning the aircraft. Yet, the parties’ continued discussions and meetings might undercut Boeing’s position in this case on the certainty that Volga had in fact repudiated, especially given the uncertainties of COVID-19, which were becoming apparent during the early months of 2020 while the parties were having their discussions about aircraft.
It might be questioned during court proceedings why Boeing did not access the available rights to request adequate assurances under §2-609. Boeing had at its disposal the means to avoid this issue in litigation and to make sure that Volga would either “fish or cut bait” by demanding a thirty day (30) response in light of Volga’s clear communications that performance would be challenging at the least. As Spring 2020 progressed, Boeing was still working with Volga and COVID-19 was spreading, making it obvious that the demand for freight aircraft might increase, thereby increasing the likelihood that Volga would perform under the contract. Of course, further complicating matters, in March 2020, Boeing notified Volga that it was suspending its own operations due to COVID-19. We might wonder if Boeing itself wasn’t ready to provide the aircraft or that it was simply able to sell the aircraft at a higher price to another customer once the demand increased. In any event, it does not appear that Boeing availed itself of its ability to request adequate assurances, which the communications of Volga and the pandemic would have given it the legal right to do.
It is worth noting, though, that accessing adequate assurances during COVID-19 does not provide a party a certain route toward declaring a repudiation. However, it might clear up some of the uncertainties that will now need to be litigated by Boeing. As to how adequate assurances might play out, the case of AMG Vanadium LLC v. Global Adv. Metals USA, Inc., 2020 WL 1233752 (Sup. Ct. Del. Feb. 6, 2020) is instructive. In that case, the court found that a fire in a mine in Brazil was enough of an event to entitle the buyer to request adequate assurances under §2-609. The sourcing of the tantalum pentoxide at issue was important due because it would be classified a “conflict” mineral if improperly sourced. Yet, the court found, at least at the summary judgment stage, that the response by the seller to the buyer’s request for adequate assurances created questions of material fact as to sufficiency, such that the buyer might not have been entitled to claim a repudiation.
The biggest takeaway from these cases is that parties have recourse under §2-609 (assurances) and §2-610 (repudiation). The ongoing pandemic would seem to be a trigger for adequate assurances under §2-609, just as the fire was such an event in AMG Vanadium. There is uncertainty for parties that claim repudiation due to COVID-19 outright, especially if their own ability to perform might be at issue. Recall that after Volga had sent their initial letters to Boeing, Boeing itself sent out notices that it was suspending its own operations due to COVID-19. COVID-19 clearly affects many participants in a commercial marketplace, buyers and sellers, as is demonstrated in the Boeing case. A seller that wants to preserve its rights against a “shaky buyer” like Volga and make decisions regarding other potential customers, is better served by making the request for adequate assurances. It is not known why Boeing did not do this, but there might have been problems with Boeing’s own ability to deliver during COVID-19. My last point here, though, is that even where a party does request such assurances due to uncertainties from COVID-19, it does not necessarily equate with a right of cancellation, as the other party has the ability to respond with the required assurances.