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COVID-19 Has Forever Changed Service Contract Negotiations

COVID Pandemic Service Contract NegotiationMany individuals and entities learned it the hard way: events with a superior strength (force majeure)—like a health pandemic—must be accounted for in service contracts. Let’s face it, we all know that deadly infectious diseases and viruses exist in this world. But very few can honestly say they anticipated stay-home and quarantine orders, mandatory business and school closures, and a complete ban on certain types of services.  

If you are seeking to renegotiate the terms of an existing agreement, or in the process of entering into a new one, this article will prove to be helpful by highlighting some of the many key issues you should consider. Before delving in, however, it is important to get some of the underlying legal principles under your belt.   

The Need for a Meeting of the Minds

“Mutuality of agreement” is one of the five elements that must exist for a valid contract.1 In fact, it is well-established that a valid contract requires a “meeting of the minds” on all the essential terms of a contract.2 But how is this relevant in the context of unforeseen circumstances, like COVID-19that did and could take place again in the future? It simply goes back to the fact that, ideally, the parties should agree on what effect will such events have on the parties’ duties and obligations in the future under the contract. 

For example, if the number of COVID-19 positive cases surge again, leading to more restrictive government regulations that directly affect the subject matter of your contract, will you remain under a duty to provide services? Must you continue paying even if services cannot be provided due to mandatory closures? Will the contract terminate automatically? These are the kinds of questions you should aim to answer. 

After all, whether there is a “meeting of the minds” between the parties as to these terms is judged objectively, and courts first look to the “express” words and the parties’ “visible acts.3 Unfortunately, your subjective state of mind is largely irrelevant. 

Knowing that courts look to, among other things, the “express words” of the parties, the next issue goes to the threshold question of whether your contract must be in writing.  

Does it Really Have to Be in Writing?

Too bad . . . you should have gotten it in writing!” Sounds familiar? While it may be true that getting the terms of a contract in a signed writing is good practice, it is not always required. The “statute of frauds” is a legal defense intended to prevent. . . (you guessed it) fraud. The purpose of the signed-writing requirement is to prevent someone from committing fraud by claiming that a contract existed 

In Michigan, if the promised services are “by any possibility” capable of being completed within 1 year from the time the promise is made, then it need not be in writing.4 For example, if you promise to provide services on a monthly basis, like cleaning services for a school or religious institution, or lawn care and landscaping services for a commercial landlord, that promise does not have to be in writing. On the other hand, if the contract was for a term of 3 years, then it is impossible to complete performance in less than 1 year, and that contract is within the scope of the statute of frauds. That is, a contract for a fixed term of more than 1 year must be in writing.  

Of course, like most legal rules, there are exceptions to the statute of frauds. Nevertheless, the fact that you can enforce an oral contract under certain circumstances does not mean you should proceed without a written contract. Relying on memory is a risky route to take. In conclusion, generally speaking, “You should get it in writing.”  

Additionally, you should always aim to have the terms of a contractual agreement written clearly and in a way that leaves no room for wondering as to what the parties intended. Sounds easy? Maybe so, but only theoretically. How many times have you found yourself asking“What does this even mean?”, after reading something that initially seemed clear enough.  

Understanding the parties’ intentions and agreeing to put them in writing is the first stepClearly stating those intentions in unambiguous terms is the more important, second step. This brings us to the concept of contract interpretations and the court’s and jury’s role in deciding what a given term or contract provision or clause really means.   

The Interpretation of Contracts

Unsurprisingly, many disputes take place over what the parties agreed to, and it is the court’s role to determine the intent of the contracting parties.5  

It is not uncommon for two reasonable people to have two reasonable interpretations for the same word or sentence. So, if two reasonable interpretations exist, why should one judge decide which of the two interpretations the parties agreed to 

Keep in mind that we are not talking about vague terms here, i.e. terms that simply cannot be understood. We are referring to ambiguous terms: terms with more than one reasonable meaning.   

If that is actually the case, the judge leaves the interpretation of ambiguous terms and provisions to the factfinder (usually a jury). In other words, if the disputed word or sentence is ambiguousthe court will refrain from providing its own interpretation.  

Conversely, and usually more preferable to one of the parties, if the language of the contract is unambiguous, the courts construe and enforce the contract as written.6 The meaning of an unambiguous term is no longer a question for the jury; rather, clear and unambiguous terms are reflective of the parties’ intent as a matter of law and will be enforced as written.7 

Now that you have a basic understanding of why it is critical to write down the parties’ intentions using unambiguous and clear contractual provisions, you are better equipped to set straight the parties’ future expectations regarding events and circumstances that are outside the parties’ control—like a health pandemic.  

Starting with a Recitation of Facts

If you are in the process of renegotiating the terms of a contract, through an amendment for example, it is a good idea to start the amendment with a recitation of the facts that brought the parties to the negotiating table again. For example, if the coronavirus pandemic forced the parties to alter the needed services, which in turn directly affected the promised payments, such specific recitals of fact are likely to be taken as conclusive evidence under the doctrine of estoppel by recital.8

You must keep in mind, however, that an amendment to an existing contract is invalid without a showing of new consideration. Consideration is a bargained-for exchange with a benefit on one side, or a detriment suffered, or service done on the other.9 In other words, if one of the parties simply agrees to do what was already promised under the existing agreement, the amendment will be considered unenforceable for lack of new consideration.10

Force Majeure Clause and Other Equitable Defenses

Some people never heard of the so-called force majeure clause; others always included it in their contracts. Its literal translation from the French language is “superior strength.” There is no doubt that these types of clauses garnered the attention of many after COVID-19, especially with the subsequent government regulations and local executive orders that in many ways hindered the performance of service contracts.  

In essence, the purpose of a force majeure clause is to relieve a party from the consequences of breaching contract when an event (like the coronavirus pandemic) renders performance untenable or impossible. 

A typical force majeure clause contains language to the effect that “neither party will be liable for delays or failures in performance of its obligations under the agreement that arise out of or result from causes beyond such the party’s control, including acts of God; acts of the Government or the public enemy; natural disasters; fire; flood; epidemics; quarantine restrictions; strikes; freight embargoes; war; or acts of terrorism.” 

Including a force majeure clause, while a good starting point, is certainly not enough standing alone. Not being liable for a delay or complete failure in performance, as stated in the sample clause above, does not address the parties future contractual relationship. Nor does it speak to money owed or already paid. By way of illustration, you should consider whether a force majeure event gives either party the right to terminate the contract without repercussions. Or, if one party already paid a deposit for future services that could not be performed due to an executive order prohibiting large gatherings, that party is entitled to a full or partial refund.11

On a related note, some partiemight attempt to use the equitable-defense doctrines of impracticability and frustration of purpose as an excuse for failing to perform a contractual promise 

These equitable defenses, which are generally governed by similar legal principles, are usually applicable when the event at issue is not fairly regarded as within the risks the parties assumed under the contract. That is, the non-happening of the event must have been a basic assumption on which the contract was made. Although these legal principles might apply to contract breaches when the COVID-19 pandemic was first declared, it would be illogical to argue that further developments are not foreseeable, or even expected.   

What to Do Next?

These are only some of the many considerations. The reason this article starts with a special focus on the intention of the parties and contract interpretation is the fact that blanket force majeure clauses and similar equitable defenses might ultimately prove unsuccessful. Your best bet is to carefully think through what the future might hold and, accordingly, get into a mutually agreeable pre-determined solution. The last thing you want is to end up fighting in court over something that could have been accounted for from the very beginning. If it was accounted for in a clear and unambiguous manner, your legal position will be stronger, the likelihood of success increases, and the amount of money you spend will dramatically drop.  

 

1 Innovation Ventures v. Liquid Mfg., 499 Mich 491, 509; 885 NW2d 861 (2016).

2 Kamalnath v. Mercy Mem. Hospital Corp., 194 Mich App 543, 548; 487 NW2d 499 (1992).

3 Id.

4 MCL 566.132(a).

5 Quality Products Concepts Co. v. Nagel Precision, Inc., 469 Mich 362, 375; 666 NW2d 251 (2003).

6 Id.

7 Id.

8 Acme Cut Stone Co v New Ctr Dev Corp, 281 Mich 32, 47; 274 NW 700 (1937); Triphagen v Labbe, 332 Mich 583; 52 NW2d 226 (1952); Detroit Grand Park Corp v Turner, 316 Mich 241; 25 NW2d 184 (1946).

9 Gen Motors Corp v Dept of Treasury, Revenue Div, 466 Mich 231, 238–39; 644 NW2d 734 (2002) (“To have consideration there must be a bargained-for exchange. There must be a benefit on one side, or a detriment suffered, or service done on the other.”) (quotation marks and citations omitted).

10 Yerkovich v AAA, 461 Mich 732, 740–41; 610 NW2d 542 (2000) (“Under the preexisting duty rule, it is well settled that doing what one is legally bound to do is not consideration for a new promise.”)

11 See, e.g., NetOne, Inc. v. Panache Destination Mgt., Inc., 20-CV-00150-DKW-WRP, 2020 WL 3037072, at *5 (D. Haw. June 5, 2020) (stating that “nowhere in the force majeure provisions does it say that, if the contracts are terminated due to a qualifying event, the non-terminating party must return all deposits made. The provisions are simply silent in that regard.”)

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