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    Contract Force Majeure Clauses May Provide a Defense to Delays in Performance Due to the Coronavirus or Related Government Action

    3/30/2020

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     The coronavirus pandemic has made it difficult to impossible for dealers to perform certain contractual obligations.  Especially where shelter-in-place orders are in effect and auto dealer sales operations are considered to be non-essential businesses, a dealer forced to close its sales business may be unable to make payments due on floorplan loans or meet franchise sales quotas.  Other contractual obligations may be difficult or impossible to perform as well.
     
    One possible avenue for relief may be available in contract “force majeure” or Act of God clauses.  These clauses are typically contained in the contract boilerplate and are designed to allow a party to delay its performance or even terminate the contract if an enumerated force majeure event occurs.  The clause will list a series of events that typically include acts of military intervention, strikes, civil unrest, natural disasters, acts of God, and other calamities.  Some contracts include a “catch all” provision making reference to any unforeseen act beyond a party’s control, or words to that effect (e.g., “any act or occurrence beyond a party’s reasonable control and due to no fault of the party”).
     
    Reviewing Contract Force Majeure Provisions
     
    Force majeure clauses are not consistent across all contracts.  Your contract’s force majeure clause will dictate what events may delay or excuse performance.  An act of God is generally defined as an unusual or extraordinary natural event, such as floods, earthquakes, volcanic eruptions, tornadoes, hurricanes, blizzards, etc.  The contract clause may list pandemics or acts of government authority as examples of force majeure events or contain other language that may cover the coronavirus and associated government responses.  A general “catch-all” clause could also be argued to delay or excuse  performance.  The contract language of the clause will ultimately determine whether or not you may be able to delay performance of a contractual obligation.
     
    Know that courts generally interpret force majeure clauses strictly, meaning they will not give an overly expansive interpretation to the enumerated events such as by limiting acts of God to mean extraordinary weather-related events.  A contract without a catch-all clause will be most strictly construed.  A catch-all clause at least gives you an argument that the list is not meant to be exclusive and a party’s ability to control the event is the determinative factor. Know, however, that most courts interpret a general catch-all provision to cover only externalities that are similar to those specifically stated in the balance of the clause.
     
    If a Force Majeure Event Applies, What Performance Does the Contract Require?
     
    Assuming there is a specific reference to a pandemic or you want to argue a “catch-all” clause applies to make the coronavirus outbreak and government responses a force majeure event, you still need to review the contract clause to see what performance is required.
     
    Force majeure clauses may codify an impossibility standard and require that performance of contractual obligations be “impossible” before all obligations are excused. Others may be less stringent, requiring only that the performance, in light of the triggering event, would be “commercially impractical.” So if your state or municipality has adopted a ban on gatherings of more than 50 people, that may provide a basis to fail to perform a meeting scheduled during the applicable time.  Also, not all force majeure clauses provide for termination of an agreement; many only excuse a delay in  performance, providing that any failure to perform due to a triggering event during the force majeure event  will not constitute a breach under the relevant agreement.
     
    Many force majeure clauses also require the affected party to make reasonable efforts to perform during the force majeure event to the extent it can do so. Again, it is the language of your specific contract that determines whether this is the case.
     
    Notice Required to be Given to the Other Party
     
    All force majeure clauses require the non-performing party to give notice to the other party, sometimes within very tight time deadlines.  Notice provisions may specify the form of the notice, to whom it must be sent, and the manner in which it must be sent. Additionally, many agreements will require that notices must provide sufficient specificity to make clear why the relevant triggering force majeure event applies to a given provision in a contract.
     
    Be sure to read the clause carefully and give timely notice in the manner required by the contract.
     
    Impossibility of Performance Defense
     
    In many states under the common law, there is an implied defense to performance if  a situation occurs that makes performance impossible.
     
    The party asserting this defense will bear a heavy burden of proving that the event was unforeseeable and truly rendered performance impossible, and the doctrine generally is applied narrowly. For example, assertions that the event rendered performance more expensive or difficult have been rejected under the impossibility doctrine.  Asa  result, some states, like California, have enacted statutes to address the impossibility of performance defense.  In California, the California Civil Code excuses performance under a contract when: “it is prevented or delayed by an irresistible, superhuman cause, or by the act of public enemies of this state or of the United States, unless the parties have expressly agreed to the contrary.”
     
    The presence of a force majeure clause in a contract does not necessarily negate the defense of impossibility of performance but may cause the court to interpret the impossibility defense in a manner consistent with the force majeure clause.
     
    Summary
     
    For any contracts made difficult or impossible to perform due to the coronavirus or the acts of government authorities such as shelter-in-place orders, review your contract carefully with your attorney and pay particular attention to the force majeure clause.  Note whether you can argue it applies and, if so, deliver timely and sufficient notice, and comply with  any performance standards the clause requires.  Again, note that these clauses tend to be strictly construed by the courts but they may provide at least a bargaining chip to negotiate new performance arrangements with your counterparty.
     
     
    ​

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    Used Car Selling Compliance Risks and Best Practices

    3/20/2020

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    U.S. franchised dealers sold approximately 4.1 million used cars in 2019, an all-time high.  Overall, there were about 40 million used cars sold versus about 17 million new.   Used car sales are becoming a greater percentage of dealer sales generally.  Consumer “sticker shock” on new vehicle pricing (the average U.S. new vehicle sold for more than $37,000 in 2019, compared to just over $20,000 for a used vehicle) and the greater inventory of used vehicles spawned largely by vehicles coming off lease, were major factors. 
     
    But used car selling brings with it compliance risks that new car selling does not.  A new car typically comes with a manufacturer warranty and is priced at or below the manufacturer’s published MSRP.  The manufacturer assumes much of the risk relating to a new car sale.  
     
    A variety of different factors come into play with used cars including valuation, prior uses and vehicle condition, dealer or third-party warranties, title issues, and the dealer’s selling used vehicles that may be defective or less reliable than the consumer expects.  Litigation and arbitration relating to used vehicle sales is significantly higher than litigation and arbitration claims on new car sales.
     
    Let’s look at some compliance issues you need to be aware of in selling used vehicles.
     
    Used Car Buyers Guide
     
    The Federal Trade Commission (FTC) requires a Used Car Buyers Guide to be prominently affixed to every used vehicle a dealer offers for sale.  If the sales transaction is negotiated in Spanish, the customer must be given a Spanish copy of the Buyers Guide.  (Best practice: Give a copy of the Spanish Buyers Guide to any customer whose primary language is Spanish, even if the deal is negotiated in English).  The Buyers Guide becomes part of the sale contract and overrides any inconsistent terms.
     
    The FTC revised the Used Car Buyers Guide form in 2017.  You can find a copy on the FTC’s website, https://www.ftc.gov/tips-advice/business-center/guidance/buyers-guide.  Except in Maine and Wisconsin (which have their own forms), you should complete and display the FTC form on every used vehicle in inventory.  An FTC sweep of 94 dealers in 2018 revealed that only 7 were in compliance.  The others received a warning from the FTC that failure to comply may result in a fine of $43,280 per violation.  This is the measure of damages under Section 5 of the FTC Act prohibiting unfair and deceptive practices.
     
    The Used Car Buyers Guide focuses on dealer warranties, or the absence thereof.  Approximately 37 states permit “as is” sales of used vehicles without any dealer warranties.  The other 13 states and the District of Columbia do not permit disclaimer of implied warranties such as the warranty of merchantability which means the car runs as expected. 
     
    If you offer a warranty, it must be designated as a “full” warranty or a “limited” warranty.  You need to give the duration of the warranty, the specific vehicle systems covered in a limited warranty (the back of the Buyers Guide lists vehicle systems), the percentage of repair costs the dealer will pay, and any exclusions.  If a manufacturer or third-party warranty applies, you may, but are not legally obligated to, disclose that as well.  The detail is required only for a dealer warranty.
     
    There is no legal obligation for the consumer to sign the Buyers Guide but it is a good practice to do so.  You can put a box on the back of the Guide stating “I hereby acknowledge receipt of the Buyer’s Guide at the closing of this sale.”
     
    Complete the dealer information on the back of the Buyers Guide and designate a named person (not Used Car Sales Manager) and their phone number for a customer to contact.
     
    Remember that the Buyers Guide is not the warranty, only a summary of it.  Give the customer a copy of the complete warranty terms and conditions.
     
    Certified Used Vehicles
     
    A dealer can designate a used vehicle of the same franchise it represents as “certified’ if all of the following conditions are satisfied:
     
    1. A manufacturer or dealer warranty applies.
    2. A manufacturer representative has certified the vehicle.
    3. You have conducted additional inspections on the vehicle over and above the inspections you perform on used vehicles generally.
    4. You have cured any outstanding recalls on the vehicle.
    5. You have met all state law requirements for the sale of ‘certified’ vehicles.
     
    “As Is” Sales and Disclaiming Warranties
     
    As noted above, in approximately 37 states, a dealer can sell a used vehicle “as is” without any warranties.  In the other 13 states and the District of Columbia, implied warranties cannot be disclaimed.  In all states, implied warranties cannot be disclaimed if you provide an express warranty or sell the customer a vehicle service contract within 90 days of sale.
     
    Just because you are selling a vehicle “as is” does not mean you can withhold negative information about the vehicle from the consumer such as its prior use, whether it was in an accident, or is a lemon law or rebuilt salvage vehicle.  A number of states have lemon laws that define a “lemon” (usually based on the number of unsuccessful repairs) and require that the vehicle be disclosed as such.  Giving the customer a vehicle history report like a CarFaxÒ is a good idea but not an assurance of no liability.
     
    State laws govern the duty to inspect and disclose both patent and latent defects.  Any merchant is considered to be more qualified than a consumer to inspect and disclose any defects that a reasonable inspection would uncover.  Actively concealing defects or misrepresenting the condition of a vehicle is always a no-no.  Check with your local attorney to understand how far your state’s law goes in requiring inspections and disclosing the results.  It is always a good idea to keep a copy of the inspection report in the deal jacket to show your good faith.
     
    Claims Involving Vehicle Titling
     
    Some used car dealers retitle vehicles to avoid having to disclose vehicle damage.  A vehicle that has incurred water or hurricane damage may need a water damage title in some states and most states require a salvage title if an insurance company has declared the vehicle a total loss.  But some states do not.  “Title washing” occurs when a dealer takes the vehicle to a state that does not have the necessary title branding to obtain a clean title.  Title washing also occurs when an unscrupulous dealer removes the damage branding from the physical title.
     
    Title washing is a federal and state felony and dealers have served jail time for mass title washing.  Don’t even think about it.
     
    Odometer Disclosures
     
    The federal Truth in Mileage Act requires the seller of a vehicle to disclose the odometer reading on the vehicle and certify whether, to the best of their knowledge, the odometer reading is accurate, the reading is inaccurate, or the mileage is in excess of the odometer’s limits, such as if a car with a million miles was sold.  This is typically done on the title and both the buyer and the seller must sign the certification and disclosure.
     
    Odometer tampering is relatively easy to do.  It involves removing the vehicle’s circuit board or using a device on the circuit board.  A recent eBay search found such devices for sale for a price of approximately $120. 
     
    Rolling back odometers violates federal and state law.  Penalties start at $43,280 per violation as a deceptive practice under Section 5 of the FTC Act. The Truth in Mileage Act provides for civil penalties of up to $10,281 per violation with each vehicle a separate violation, criminal penalties, and up to three years imprisonment for willful violations.
     
    Other Issues
     
    Be careful when advertising used cars.  Try to avoid qualitative descriptions like “good as new,” “near new,” “runs perfectly.”  These can come back and bite you.  Stick to quantitative descriptions such as giving the year, make, model, and mileage, indicating the number of owners, and whether a full service history is available.  You also need to comply with Truth in Lending triggered terms if you are advertising financing of the vehicle.  Many states also have laws requiring that if you advertise a vehicle in any medium for a set price, you must offer that price to every consumer, even those who never saw the ad.  Be able to defend your pricing with reference to an industry source such as NADA, Kelley Blue BookÒ, or Black Book.
     
    Some dealers sell used vehicles without airbags or defective aftermarket airbags.  Unless disclosed to the consumer, some Attorneys General have ruled this to be an unfair or deceptive trade practice and it likely violates an implied warranty of merchantability as well.
     
    Selling ‘grey market” vehicles from Canada or Mexico should also be avoided.  These vehicles may not meet U.S. environmental and safety requirements and their sale in the U.S. frequently voids the manufacturer’s warranty.
     
    Recent Enforcement Activity
     
    State Attorneys General have been particularly active in scrutinizing dealer used car sales for violations.
     
    In 2020, the Arizona Department of Transportation brought criminal charges against seven persons operating an illegal ring that altered over 31,000 vehicle titles from unlicensed dealers in 42 states for about $100 per title.  The defendants altered the titles to make it appear as though the unlicensed dealers bought the vehicles from one of the suspects’ 31 operations with dealer licenses.
    In 2019, the California Attorney General brought two actions.  One against a dealership for title washing to conceal liens on used vehicles and another for deceptive advertising of used vehicles.  The Pennsylvania Attorney General sued for deception and missing disclosure documents, Massachusetts and Delaware sued for financing customers on terms they could not afford, and the Ohio Attorney General brought two actions for failing to deliver clean titles.  Many Attorney General actions are brought and settled in confidential examinations and enforcement actions.  The settlements usually involve substantial penalties and reimbursements to affected customers.
     
    Summary
     
    As the front-line seller of used vehicles, your obligations to disclose warranties, defects, and odometer readings, along with your obligation to deliver a clean and accurate title, can provide challenges in used car selling.  Do a reasonable inspection (and a beyond-reasonable inspection for certified vehicles) and be up front with the customer about issues and expectations for the vehicle.  Selling used vehicles is an area ripe for regulatory investigations, arbitration claims, and lawsuits, but having a systematic process to obtain, inspect, and disclose issues with the vehicle should help you manage used car selling successfully.

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      Author

      Randy Henrick is a leading auto industry compliance consultant. This article is not intended as legal or compliance advice due to the unique nature of a dealer's situation in each state. Randy's articles do provide issues and best practices that you may want to discuss with your attorney or compliance advisor for possible adoption in your dealership. Email Randy at AutoDealerCompliance@gmail.com
      Follow us on Twitter @randyh44

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