This is “Excuses for Nonperformance”, section 15.4 from the book The Legal Environment and Business Law: Master of Accountancy Edition (v. 1.0). For details on it (including licensing), click here.
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15.4 Excuses for Nonperformance
Learning Objectives
- Recognize how parties are discharged if the goods are destroyed.
- Determine what defenses are valid when it becomes very difficult or impossible to perform.
- Understand the UCC’s position on the right to adequate assurances and anticipatory repudiation.
In contracts for the sale of goods, as in common law, things can go wrong. What then?
Casualty to Identified Goods
As always, the parties may agree what happens if the goods are destroyed before delivery. The default is Sections 2-613 and 2A-221(a) of the Uniform Commercial Code (UCC). The UCC says that “where the contract requires for its performance goods identified when the contract is made, and the goods suffer casualty without fault of either party before the risk of loss passes to the buyer,…then (a) if the loss is total the contract is avoided; and (b) if the loss is partial the buyer may nevertheless accept them with due allowance for the goods’ defects.” Thus if Howard ships the original Bruegel to Bunker but the painting is destroyed, through no fault of either party, before delivery occurs, the parties are discharged. If the frame is damaged, Bunker could, if he wants, take the painting anyway, but at a discount.
The UCC’s Take on Issues Affecting “Impossibility”
Although this matter was touched on in Chapter 11 "Discharge of Obligations", it is appropriate to mention briefly again the UCC’s treatment of variations on the theme of “impossibility.”
Impracticability
Sections 2-614(1) and 2A-404(1) of the UCC require reasonable substitution for berthing, loading, and unloading facilities that become unavailable. They also require reasonable substitution for transportation and delivery systems that become “commercially impracticable”; if a practical alternative exists, “performance must be tendered and accepted.” If Howard agreed to send the prints by rail, but a critical railroad bridge is unusable and no trains can run, delivery by truck would be required.
Section 2-615 of the UCC says that the failure to deliver goods is not a breach of the seller’s duty “if performance as agreed has become 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 government regulation or order whether or not it later proves to be invalid.” Section 2A-405(b) of the UCC is similar for leases.
The CISG provides something similar at Article 79: “A party is not liable for a failure to perform any of his obligations if he proves that the failure was due to an impediment beyond his control and that he could not reasonably be expected to have taken the impediment into account at the time of the conclusion of the contract or to have avoided or overcome it or its consequences.”
Right to Adequate Assurances of Performance
Section 2-609, Comment 1, of the UCC observes that “the essential purpose of a contract…is actual performance [but] a continuing sense of reliance and security that the promised performance will be forthcoming when due is an important feature of the bargain.” Thus the UCC says that if one party has “reasonable grounds for insecurity arise…either party may in writing demand adequate assurance and until he receives such assurance may if commercially reasonable suspend [his own] performance[.]”
The CISG has a similar take at Article 71: “A party may suspend the performance of his obligations if, after the conclusion of the contract, it becomes apparent that the other party will not perform a substantial part of his obligations. A party suspending performance, whether before or after dispatch of the goods, must immediately give notice of the suspension to the other party and must continue with performance if the other party provides adequate assurance of his performance.”
Anticipatory Repudiation
Obviously if a person repudiates the contract it’s clear she will not perform, but what if she repudiates before time for performance is due? Does the other side have to wait until nonperformance actually happens, or can he sue in anticipation of the other’s default? Sections 2-610 and 2A-402 of the UCC say the aggrieved party can do either: wait for performance or “resort to any remedy for breach.” Under the UCC, Sections 2-611 and 2A-403, the one who has anticipatorily repudiated can “retract his repudiation unless the aggrieved party has since the repudiation cancelled or materially changed his position[.]”
Suppose that Howard has cause to suspect that if he does deliver the goods, Bunker won’t pay. Howard may write to Bunker and demand—not request—assurances of adequate performance. If such assurances are not adequately forthcoming, Howard may assume that Bunker has repudiated the contract and have remedies.
Article 72 of the CISG is pretty much the same: “If prior to the date for performance of the contract it is clear that one of the parties will commit a fundamental breach of contract, the other party may declare the contract avoided.”
Key Takeaway
If, through no fault of either party, the goods are destroyed before the risk of loss has passed from the seller to the buyer, the parties are both discharged. If the expected means of performance is impossible, but an alternative is available, the alternative must be utilized. If performance becomes impracticable because of an unexpected contingency, failure to deliver the goods is excused. But a party who has concerns whether the other side will perform is entitled to adequate assurances of performance; if they are not forthcoming, the worried party may suspend performance. Where a party repudiates a contract before performance is due, the other side may sue immediately (anticipatory repudiation) or may wait until the time performance comes due and then sue.
Exercises
- Suppose Plaintiff sues Defendant for breach of contract, and Defendant successfully raises an excuse for nonperformance. What liability does Defendant have now?
- The contract read that the goods would be “shipped F.O.B. Seattle, by Burlington Northern Rail to the buyer in Vancouver, B.C.” Due to heavy rain and mudslides, the rail line between Seattle and points north was impassable. Buyer insists Seller is obligated to send the goods by motor truck; Seller insists her performance has become impossible or at least that shipment must await the rail-line clearance. Who is correct? Explain.
- Buyer manufactured ceramic insulators and ordered the dies into which the liquid ceramic would be poured for hardening and finishing from Seller, to be delivered April 15. The first test batch of a dozen dies arrived on February 15; these dies were defective. Buyer wrote inquiring whether the defects could be remedied in time for the final delivery. Seller responded, “We are working to address the problems here.” Buyer again inquired; Seller responded, “As I said, we are working on the problems.” Buyer fretted that the deadline—two months in the future—would not be met. What remedy, if any, does Buyer have now?