Community Association Service Contracts and COVID-19
Community associations just wrapped up soliciting, reviewing, negotiating and executing contracts with vendors for a multitude of services to be performed throughout this upcoming year, including landscaping, infrastructure maintenance, repairs and new construction, just to name a few. COVID-19 now is threatening to disrupt those services on both sides of these contracts: both vendors and community association members may not be able to work under Michigan’s stay-at-home order, resulting in services that vendors cannot perform and community associations that are strapped for cash.
In unanticipated crises such as COVID-19, Michigan common law may provide a basis for parties to reasonably delay or get out completely from these service contracts but the ability to do so, without breaching the contract, depends on the contract’s language and the facts surrounding each contract. Accordingly, below we explain three contractual defenses that may be applicable to community association service contracts; however, community associations with service contracts that have been impacted by COVID-19 should reach out to competent counsel as soon as possible for legal advice specific to their situation.
1. Force Majeure
A community association’s service contract with a vendor may contain a force majeure clause, which typically looks like this:
Neither Buyer nor Seller shall be liable for delays or failures in performance of its obligations under this Agreement that arise out of or result from causes beyond such party’s control, including without limitation: acts of God; acts of the Government or the public enemy; natural disasters; fire; flood; epidemics; quarantine restrictions; strikes; freight embargoes; war; acts of terrorism; equipment breakage (which is beyond the affected Buyer’s or Seller’s reasonable control and the affected Buyer or Seller shall promptly use all commercially reasonable efforts to remedy) that prevents Seller’s ability to manufacture Product or prevents Buyer’s ability to use such Product in Buyer’s manufacturing operations for solar applications; or, in the case of Seller only, a default of a Seller supplier beyond Seller’s reasonable control….
Many people are more familiar with the phrase “act of God”; however, an “act of God” is limited to those “‘inevitable accident[s] without the intervention of man or the public enemy.’” Tobin v Lake Shore & M.S. Ry Co, 192 Mich 549, 551; 159 NW 389 (1916). Merriam-Webster’s Dictionary, however, defines “force majeure” as “superior or irresistible force” or “an event or effect that cannot be reasonably anticipated or controlled” and, as evidenced above, force majeure events can be broader and include human-divined events, such as war or terrorism.
Even if a contract does not have a provision specifically labeled “force majeure”, there may be a basis to argue the contract’s language can be reasonably interpreted to include a force majeure clause. In Erickson v Dart Oil & Gas Corp, 189 Mich App 679, 686-87; 474 NW2d 150 (1991), a lease never used the term “force majeure” but did include a paragraph with the following language:
If, while this lease is in force, at, or after the expiration of the primary term hereof, it is not being continued in force by reason of the shut-in well provisions of paragraph 3 hereof, and lessee is not conducting operations on said land by reason of (1) any law, order, rule or regulation, (whether or not subsequently determined to be invalid) or (2) any other cause, whether similar or dissimilar, (except financial) beyond the reasonable control of the lessee, the primary term hereof shall be extended until the first anniversary date hereof occurring ninety (90) or more days following the removal of such delaying cause, and this lease may be extended thereafter by operations as if such delay had not occurred.
The trial court and Michigan Court of Appeals interpreted this paragraph as a force majeure clause based on its language invoking the principles of force majeure, even though the paragraph or events were not specifically labeled as “force majeure”.
Force majeure clauses are designed “to relieve a party from penalties for breach of contract when circumstances beyond the party’s control render performance untenable or impossible.” Kyocera Corp v Hemlock Semiconductor, LLC, 313 Mich App 437, 438-39; 886 NW2d 445 (2015) (citation omitted). However, even if a contract has a force majeure clause, both parties may still be obligated to perform. Michigan courts strictly interpret force majeure clauses so any party seeking to either delay or avoid performing their end of the deal without breaching the contract must be able to show that the event delaying their performance or making their performance impossible is specifically listed in the force majeure clause. Kyocera Corp, 313 Mich App at 447. Accordingly, if a service contract has a force majeure clause that only lists wars and strikes as force majeure events, then an argument that a delay or failure to perform is not a breach of contract based on an ongoing pandemic will likely be unsuccessful. Moreover, even if the force majeure clause identifies the event that is preventing performance, a party may only be entitled to a reasonable delay in their performance, as opposed to not having to perform at all, based on the contract’s terms and facts specific to the situation. However, moving forward, it may be advisable to put provisions in contracts that specifically excuse or delay performance in the event of a disease, such as coronavirus, to avoid litigating these issues.
2. Impossibility or impracticability
The doctrine of impossibility may provide another basis for a party to delay its performance or get out of the contract without committing a breach. Whether the doctrine of impossibility is applicable to a particular service contract will again be a highly fact-specific inquiry, taking into consideration whether either party assumed the risk of being unable to perform their end of the bargain when entering into the contract and whether the event making performance impossible was reasonably foreseeable at the time the contract was formed.
When a party raises the doctrine of impossibility as an excuse for their failure to perform under a contract, the party need not necessarily show it is literally impossible to perform but instead that it is impracticable:
… the promised performance was at the making of the contract, or thereafter became, impracticable owing to some extreme or unreasonable difficulty, expense, injury, or loss involved, rather than that it is scientifically or actually impossible[.]Nathan v Brownstone Plastics, LLC, 511 BR 863, 867 (ED Mich, 2014).
An event leading to impossibility/impracticability is either original or supervening, depending on when it arose:
‘Impossibility of performance may be classified as original impossibility or supervening impossibility. The former is impossibility of performance existing when the contract was entered into, so that the contract was to do something which from the outset was impossible; whereas Supervening impossibility is that which develops some time after the inception of the contract.’Bissell v L.W. Edison Co, 9 Mich App 276, 284; 156 NW2d 623 (1967) (citation omitted) (emphasis added).
Whether the impossibility/impracticability is original or supervening, the crux of a Michigan court’s analysis of an impossibility/impracticability defense is to determine the following:
The question whether a promisor’s liability is extinguished in the event his contractual promise becomes objectively impossible to perform may depend upon whether the supervening event producing impossibility was or was not reasonably foreseeable when he entered into the contract. Risk of nonperformance of a contract should not fairly be thrown upon the promisor, if an unanticipated circumstance had made performance of the promise vitally different from what should reasonably have been within the contemplation of both parties when they entered into the contract.Roberts v Farms Ins Exch, 275 Mich App 58, 73-74; 737 NW2d 332 (2007) (citations omitted).
Consequently, if the alleged impossibility/impracticability is original, or existed at the time the contract was entered into, then a party may still be required to perform their contractual obligations or risk breaching the contract as the impossibility/impracticability was likely reasonably foreseeable at the time the contract was formed.
Even if the alleged impossibility/impracticability is supervening, or developed after the contract was formed, a party may still not be shielded by the impossibility/impracticability defense. By way of example, the Michigan Supreme Court rejected a supervening impossibility/impracticability defense for a contract involving the dedication of access roads for public use, in which both parties understood from the beginning the risk that the county road commission may not accept the dedication:
Defendant entered into the contract knowing that it would have to secure the approval of the Road Commission of Macomb County. The fact that that permission was not forthcoming is not an excuse for nonperformance. Helms, supra. It is clear from the deposition and stipulated evidence that Leo Vergote would not have signed the contract without adequate assurance regarding dedication of the entire ring road. That assurance was specifically given in the second from last sentence in ¶ 10 as amended that “dedication of the improved roads as well as the dedication of the land which is not required to be improved: shall be secured by the purchaser.”Vergote v K Mart Corp, 158 Mich App 96, 112; 404 NW2d 711 (1987).
Consequently, even though the county’s failure to accept the dedication, making performance impossible, arose after the contract was formed, the parties understood at the time they entered into the contract that the county may not accept the dedication.
Similarly, the Michigan Court of Appeals rejected a supervening impossibility/impracticability defense when a defendant failed to close on the sale of home because they were unable to secure financing. Rock Constr, Inc v Onyebuchi, unpublished per curiam opinion of the Court of Appeals, issued May 25, 2001 (Docket No. 222503). In rejecting this defense, the Michigan Court of Appeals stated:
Defendants’ failure to secure financing was reasonably foreseeable by the parties at the time of contracting. The very terms of the contract indicate that defendants’ failure to obtain financing had been expressly considered and contemplated by the parties. For example, any failure to obtain a commitment letter or to fulfill conditions of the commitment letter obligated defendants to notify plaintiff of such failure and was a ground under which the parties could rescind the contract. Because the event was foreseeable, contemplated, and anticipated, the failure to obtain financing cannot be excused by the defense of impossibility.Id. at 2.
Similarly to force majeure clauses, even if there is a basis to assert an impossibility/impracticability defense, a party may only be entitled to reasonably delay in performing their contractual obligations until the impossibility/impracticability is removed, as opposed to not having to perform at all, depending on the facts surrounding the contract.
Refocusing on a community association’s service contract, whether a party will be excused from performing their obligations under the contract will depend on whether the pandemic and the resulting shutdown were reasonably foreseeable and contemplated by the parties when the contract was formed. Section 465 of the First Restatement of Contracts provides the following examples of when a party may be excused from performing under a contract based on circumstances similar to today:
1. A contracts with B to work for a term in a certain neighborhood. Cholera breaks out in the neighborhood and continues during the term of the contract, giving reasonable ground for apprehending that one working in the neighborhood will catch the disease. A’s duty is discharged. The result would be the same if the disease was diagnosed by competent persons as cholera, but later was proved to be neither serious nor contagious…
3. A contracts with B, the owner of a theatre, that C shall sing in opera at the theatre on a certain night. On that night C, though able to sing, is advised by competent physicians that doing so will almost inevitably lead to an attack of pneumonia. A’s duty is discharged…
9. A contracts with B to pasture B’s cattle on A’s land. After the formation of the contract foot and mouth disease breaks out in B’s cattle. A has no cattle, but the presence of the diseased cattle on A’s land is likely to spread the disease to the cattle of A’s neighbors and indirectly to be injurious to human health. A’s duty is discharged.
10. A contracts with B to hold a fair of which a baby show is an important part. An epidemic of infantile paralysis occurs and competent physicians express the opinion that the gathering of a number of babies for the show will be dangerous for them and for the public. A’s duty is discharged.
These examples illustrate a supervening impossibility/impracticability that was not reasonably foreseeable by either party at the time the contract was formed, therefore excusing the party’s obligation to perform. However, Section 465 of the First Restatement of Contracts also illustrates a supervening impossibility/impracticability that was reasonably foreseeable and contemplated by the parties when the contract was formed, therefore requiring the parties to still perform even during an epidemic:
4. A contracts with B to serve for a year as a nurse in a hospital for contagious diseases. During the year an epidemic of smallpox occurs and a number of patients having that disease are received in the hospital. Though no persons having that disease were in the neighborhood at the time the contract was made, the duty thereunder is not discharged, since from the nature of the employment A assumed the risk.
A pandemic and resulting shutdown, though unprecedented, may not relieve a party from fulfilling their obligations under a service contract if these events were reasonably foreseeable and contemplated by the parties when they formed the contract. Moreover, even if these events were not reasonably foreseeable or contemplated by the parties when forming the contract, a party may only be entitled to a reasonable delay in their performance and, therefore, still required to perform once the impossibility/impracticability is removed, such as when stay-at-home requirements are lifted.
Many times a community association’s obligation under a service contract is just to compensate the vendor for their services. While community association members may be facing financial difficulties, which in turn may affect the community association’s financial bottom line, Michigan courts generally consider future financial difficulties to be reasonably foreseeable and an assumed risk when entering the contract. Accordingly, as explained in more detail here, community associations should be sensitive to their members’ financial difficulties but at the same time ensure they can meet all their financial obligations.
3. Frustration of purpose
A party’s failure to perform under a contract may also be excused under the doctrine of frustration of purpose. In order to demonstrate a contract’s purpose has been so frustrated that performance is no longer required, a party must show the following:
There, this Court explained that “[f]rustration of purpose is generally asserted where ‘a change in circumstances makes one party’s performance virtually worthless to the other, frustrating his purpose in making the contract.’ ” […] Furthermore, “ ‘[t]he frustration must be so severe that it is not fairly to be regarded as within the risks that he assumed under the contract’ ” and “ ‘the non-occurrence of the frustrating event must have been a basic assumption on which the contract was made.’ ”City of Flint v Chrisdom Props, Ltd, 283 Mich App 494, 499; 770 NW2d 888 (2009) (citations omitted).
Further, “… the frustrated party’s purpose in making the contract must have been known to both parties when the contract was made; [and…] this purpose must have been basically frustrated by an event not reasonably foreseeable at the time the contract was made, the occurrence of which has not been due to the fault of the frustrated party and the risk of which was not assumed by him.” Rooyakker & Sitz, PLLC v Plante & Moran, PLLC, 276 Mich App 146, 159-60; 742 NW2d 409 (2007).
As with the doctrine of impossibility, a pandemic and resulting shutdown may not relieve a party from fulfilling their obligations under a service contract if these events were reasonably foreseeable at the time the contract was made. Furthermore, depending on the nature of the contract, a party may only be entitled to a reasonable delay in their performance until the event frustrating the contract’s purpose has passed.
Force majeure and the doctrines of impossibility/impracticability and frustration of purpose may come into play for community association service contracts that have been affected by COVID-19; however, each of these potential defenses are highly fact-specific and community associations with service contracts that have been impacted should reach out to counsel knowledgeable in community association law as soon as possible to ascertain what their obligations may be under these service contracts and options for moving forward. Similarly, in order to avoid litigation, we urge community associations moving forward to specifically negotiate provisions into their service contracts that provide remedies in the event of disease or pandemics.
Kayleigh B. Long is an attorney with Hirzel Law, PLC and focuses her practice in the areas of appellate law, community association law and civil litigation. Ms. Long received her Bachelor of Arts degree in International Studies from Indiana University. Prior to attending law school, Ms. Long joined Teach for America, teaching kindergarten in Harper Woods, Michigan and southeast Washington, D.C., and received a Master of Arts in Teaching from Oakland University. Ms. Long then obtained her Juris Doctor degree from Indiana University Robert H. McKinney School of Law, where she graduated in the top 5 of her class and served as the Senior Executive Editor on the Indiana Law Review. Her law review note was published in the Indiana Law Review, and she has published a law review article in the Denver Law Review. She can be reached at (248) 478-1800 or [email protected].