Risk of Loss
The subject of class today was the doctrine of commercial impracticability, known in the Code rather ponderously as "Excuse by Failure of Presupposed Conditions (2-615)," and issues relating to risk of loss (2-509, 2-510). This page will discuss the former while the next page will consider the latter.
In trying to understand the concept of impracticability, I did five things: first, I looked at terminology, then looked at the threefold test in 2-615 to determine commercial impracticability and, finally, I examined the fair apportionment provision (2-615(b)). I concluded the section by giving two examples that may be ambiguous under the Code and giving a few words about each of the two cases assigned for today.
A. The Terminology. The Chase case (p. 565) discusses the various terms that are sometimes used synonymously for the concept of impracticability. Suffice it to say that the common law of contracts knew of two terms: impossibility and frustration of purpose. They were similar in that they both required a "supervening event" after the time of contract formation and before contract performance that so altered the contract that it destroyed the value of the performance. The only distinction made at common law was whether this supervening event actually made performance impossible or just made it so difficult or expensive as to allow a ground for rescission (the common law term).
The more modern law of contracts/UCC abandons the terminology of impossibility, or redefines it (as we saw in 2-610) through the use of other terms. The two concepts of impossibility and frustration of purpose are generally collapsed into the one notion of commercial impracticability, 2-615 Cmt 1, 3, which itself becomes the definition or leading concept for the section entitled "Excuse by Failure of Presupposed Conditions." That is, the terminology that is usually used today is commercial impracticability; we look to the section on failure of presupposed conditions to discover the contours of the modern doctrine.
B. Test --"Made Impracticable (2-615(a))." Because this requires such a fact-intensive inquiry, there is no definition of impracticability in the Code. However, Comments 3 and 7 give us some contours. Comment 3 tells us that the word "commercial" is important to consider; we are not therefore in philosophical realms concerning whether something is literally or figuratively impossible or impracticable; we are looking at dealings between business people, weighing risks, costs and possibilities for performance on both sides. We do know, however, in Comment 7 that this is not just a mask for "convenience." "The failure of conditions which go to convenience or collateral values rather than to the commerical practicability of the main performance does not amount to a complete excuse." Courts are generally reluctant to grant relief under this provision because they (usually rightly) perceive that if someone invokes it, they are more often than not trying to get out of a contract that they would have been ill-advised to enter into in the first instance.
C. Test--"Occurring of Contingency (2-615(a))." The language of the Code here takes on phrasing unique to the Code. A cause of action under 2-615 might lie if performance 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." Sorting through this language is not as tough as its initial daunting character might appear. First, we go to Comment 1, which brings in the traditional language of supervening event. This section excuses performance "where his performance has become commercially impracticable because of unforeseen supervening circumstances not within the contemplation of the parties at the time of contracting." An important distinction should be made. The contingency in view is not the "destruction of the subject matter" (as it is known in common law contracts); that problem is dealt with in 2-613. Thus, the supervening cause must be something in the chain of causation other than cargo being lost at sea or something like that. What might those be? Comment 4 gives a non-exhausive list (see Comment 2, "The present section deliberately refrains from any effort at an exhaustive expression of contingencies...") such as "war, embargo, local crop failure, unforeseen shutdown of major sources of supply or the like." Note, however, that Comment 4 also emphasizes that "Increased cost alone does not excuse performance" unless the increase is due to an "unforeseen contingency" which alters the "essential nature' of the performance. Comment 5 treats the subject of failure of supply in more detail. Comment 8 is important in telling us that when the contingency is sufficiently foreshadowed at the time of the contract, this action will not lie.
D. Test--"No Greater Obligation (2-615, opening phrase). Students often skim over this phrase, but it should receive its due. The "no greater obligation" clause reminds us that here, as in many instances in Article 2, the parties may contract for things beyond the express words of the Code. That is, the Code becomes a default standard unless the parties contract otherwise (Of course, as we have seen, there are limits to what the parties may contract for; it must not "fail of its essential purpose" or its liquidated damage clause may not be a "penalty" or it may not be an "unconscionable" contract). How might a party assume a greater obligation? Suppose that someone contracts to deliver a certain good or crop to an agribusiness concern. The agribusiness concern is in the position to bargain a clause that says that even in the event of local crop failure, the other party will perform. Thus, even if there is a local crop failure, which normally would lead to commercial impracticability (Comment 4), performance will still be required.
E. The Principle of Allocation (2-615(b)). Often there will not be a complete inability to perform, but part of the crop will be damaged or part of the shipment will be lost or destroyed. This subsection explains how when there are several customers and there is an occasion for commercial impracticability, the seller must "allocate production and deliveries among his customers." The section goes on to say that "he may allocate in any manner which is fair and reasonable." However, little noted is the provision that allows the seller in this situation to include other regular customers not originally part of the contract in the distribution. The thought was that these other frequent customers might have been "in line" for another contract of the same kind immediately in the future; delivery of some goods to them would allow the seller to keep them as a client even in bad times.
I concluded my consideration of this section by giving two examples in class dealing with the ambiguities of this section: one considered how to allocate when proportional allocation was impossible and the other looked at the problem of failure to designate the land on which crops are grown. I also made a few comments on the two cases assigned for the day: Wegematic (p. 562) and Chase (p. 565).