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Contract Performance During COVID-19
The COVID-19 pandemic may prevent, or hinder, a party from fulfilling its contractual obligations. Failing to perform under a contract may constitute a contract breach, exposing the breaching party to liability, or relieving the non-breaching party of its obligations under the contract.
In determining whether to undertake efforts to enforce or avoid a contractual obligation, school officials should first review the contract language for applicable provisions, such as “force majeure” and “cure period” clauses. If the contract does not contain these provisions, other legal principles may still excuse performance.
Contracts often contain a “force majeure” clause (i.e., an event outside the reasonable control of a party that prevents the party from performing a contractual obligation), which generally excuses a party’s failure to perform a contractual obligation. Alternatively, the clause may extend the performance period where performance becomes impossible, or untenable due to circumstances beyond that party’s control.
Under Michigan law, force majeure clauses have been narrowly construed to excuse performance only if a specific event listed in the clause causes the non-performance. Accordingly, force majeure clauses typically contain a detailed list of circumstances that may excuse performance (e.g., war, strike, or power failure).
A force majeure clause executed before 2020 is unlikely to specifically list COVID-19 as a circumstance that excuses performance, but may include more general terms such as “pandemic” or “health emergency.” Importantly, there are few Michigan court decisions interpreting force majeure clauses, and neither the Michigan Court of Appeals nor the Michigan Supreme Court has addressed the enforceability of a force majeure clause in the COVID-19 context.
Contracts also may contain a “cure period” that effectively allows a party to delay performance for COVID-related reasons or, to cure a COVID-related breach within a defined timeframe without penalty (e.g., 30 days). A party that breaches a contract by failing to perform on a timely basis for COVID-19 related reasons could avoid legal liability for the breach if it cures the breach within the allowed period. Of course, that determination must be based on the specific contract language.
Non-performance may also be excused based on legal principles rather than express contract language. For example, a contract that was not approved by a school board (or its authorized designee) may be unenforceable.
Courts may also apply common law contract defenses, such as “impracticability” and “frustration of purpose”, to excuse a party’s non-performance of contractual obligations. Impracticability occurs when an event prevents a party from performing a contractual obligation, or makes performance extremely and unreasonably difficult. Frustration of purpose is a similar defense, which excuses performance when a party’s principal purpose for entering the contract is substantially frustrated due to an event.
As with force majeure clauses, impracticability and frustration of purpose have not been applied by the Michigan Court of Appeals or the Michigan Supreme Court in the COVID-19 context. Nonetheless, because these defenses are broad and analyzed by courts on a case-by-case basis, they may apply.
For example, a school that leases gymnasium or auditorium space to the public may be able to allege impracticability in allowing the space’s use based on EO 2020-110 (closing gymnasiums and indoor performance venues to the public). Similarly, EO 2020-142 may excuse a school’s payment for contracted busing services during Phases 1-3 since the order prohibits school busing under those circumstances. These examples are provided for illustrative purposes only, as each contract must be reviewed in its entirety to determine if a school’s obligations under the contract may be excused.
Even if COVID-19 has not prevented or impeded performance of contractual obligations, school officials may still need to amend a contract to change performance obligations (e.g., amending a collective bargaining agreement with custodial staff to increase work hours and cleaning requirements).
As parties grapple with increasing financial constraints caused by COVID-19, they will likely scrutinize contracts and contract defenses to avoid contractual obligations or liabilities. Whether school officials are seeking to avoid or enforce a contractual obligation, they should carefully review applicable contract language, and contact legal counsel when in doubt about a contract provision’s applicability or available defenses.