Hindsight is 20/20: Service Contract Considerations in Light of the COVID-Era

The COVID-19 pandemic has significantly impacted all aspects of school operations, including school services contracted out to independent contractors. As school officials renegotiate or execute new service agreements (e.g., with transportation, custodial, or other contractors), they should be mindful about establishing contract terms that offer flexibility and tolerance for changing circumstances that may be beyond their control.

Scope of Services and Payment Terms

When contracting for services, school officials should consider the possibility of unexpected school closures, including periods of remote-only instruction. Rather than agreeing to pay for services that are based on a pre-determined schedule, school officials might consider negotiating a payment schedule that requires payment to a contractor only for work actually per­formed or the hours actually worked. We recommend that the contract also give school officials the ability to require that work be performed remotely when appropriate, or to forgo services without penalty when school is not in session, especially if the work is unnecessary due to an unanticipated school closure.

Termination for Convenience

Some contracts include language that permits termination for convenience only after the first full year of the agreement or only for cause (e.g., a material breach of the contract). This language is inadvisable because it does not provide flexibility to address changed circumstances. Instead, we recommend including a termination provision that authorizes school officials to terminate a contract at the school’s convenience with advance notice. Typically, we suggest 30 days’ or 60 days’ advance written notice, although this may be modified depending on the type of services being offered or the relationship with the contractor. This flexibility allows a school to easily terminate contracts with unfavorable terms, if the school’s needs related to the contract change, or if the contractor is not performing adequately.

Some contractors are unwilling to negotiate a termination-for-convenience provision. In that case, school officials should ensure that the school is permitted to terminate the contract “for cause” and identify events that establish cause for termination. Such events may include a material breach of the contract, loss of state funding, changed circumstances no longer necessitating such services, and failure or inability to perform due to a global pandemic or local health order.

Force Majeure

Contracts may contain a “force majeure” clause, which generally excuses a party’s failure to perform a contractual obligation due to an unforeseeable event outside their reasonable control. Alternatively, the clause may extend the performance period where performance becomes temporarily impossible or untenable due to circumstances beyond that party’s control. Under Michigan law, force majeure clauses are narrowly construed to excuse performance only if a specific event listed in the clause causes the nonperformance.

School officials should ensure that if a force majeure clause is included in a contract, it includes a variety of circumstances that excuse performance, such as compliance with any order, decree, law, or request of any governmental authority; declaration of national or state emergency; or global pandemic. We recommend that school officials establish that if a force majeure event occurs, it does not extend the term of the contract nor does it entitle the contractor to any type of damages or additional fees.

Additionally, the contract should make clear that the school is not required to pay the contractor for periods in which work is not performed.

Indemnification/Limitations of Liability

An indemnification provision in a contract allocates the risk and expense in the event of a breach, default, or misconduct by one of the parties. Generally, indemnification provisions are used to shift potential costs from one party to the other.

As a matter of law, school boards cannot agree to indemnify and hold harmless the other contracting party. The Michigan Court of Appeals has ruled that boards of education do not have the authority to agree to indemnification provisions and that agreeing to such provisions exceeds the board’s statutory power. Similarly, boards must not agree to limitation of liability provisions, as they may violate Michigan’s Constitution based on an impermissible lending of state credit.

As school officials navigate entering into new service contracts or renewing old contracts with independent contractors, we recommend involving legal counsel to assist with review and negotiations.