Vendor Contracts in a COVID-19 World
When the coronavirus forced many of the usual community association activities to shut down this past spring, some of your clients may not have needed all of the services they’d already contracted for — or their vendors might not have been able to perform due to government orders or staff shortages. In such circumstances, it’s possible a party to a contract can avoid its obligation to perform. But don’t count it.
The Force Majeure May Be with You
One potential defense to breach of contract claims is known as force majeure. “Force majeure clauses protect a party from being held liable for breaching a contract if it’s unable to perform due to an event that was unforeseeable when the contract was executed,” says Kayleigh Long, an attorney with Hirzel Law, a Michigan firm that focuses on condominium and real estate law.
Force majeure preempts liability for a breach of contract that’s due to causes beyond the party’s control, such as:
- Acts of God, government, or “the public enemy,”
- Natural disasters,
- Quarantine restrictions,
- War or acts of terrorism, and
- Certain equipment breakages.
Typically, if a contract specifically identifies force majeure events, delays or failure in the performance of contract obligations are excused only if due to one of those enumerated events.
If the event that later delays or prevents a party from being able to perform isn’t specifically listed in the contract’s force majeure clause, a court probably will find that party liable for a breach of contract. So if, for example, a construction contract includes a force majeure clause that lists only wars and strikes, a breach based on a pandemic won’t be excused under the clause.
According to Blake Strautins, a partner with the Chicago law firm Kluever & Platt, LLC, explicit force majeure clauses aren’t common in community associations’ vendor contracts. “A lot of these contracts are basic and rudimentary,” he says.
But force majeure could apply by virtue of a state statute. California Civil Code Section 1511(2), for example, excuses performance when it’s “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.”
In states without statutory force majeure protections, Strautins suspects the contractual clauses will pop up more frequently in the wake of the coronavirus crisis. “I think this is something that’s going to be on people’s radar,” he says. “They’re thinking about how to protect against such circumstances in the future, so I think you’re going to see more and more force majeure clauses placed in these contracts.”
Associations should consult their lawyers about whether to add such clauses to their contracts going forward.
Whether in effect by contract or statute, a party hoping to be excused from performance based on force majeure will need to satisfy certain requirements. “It’s very specific to the jurisdiction,” Strautins says. “But it’s a high burden.”
In addition, even if force majeure is established, it doesn’t necessarily provide an unqualified “get-out-of-jail-free” card. The party that shows force majeure might just be entitled to a reasonable delay in performance, rather than freed from the performance obligation entirely and without penalty.
Impossibility or Impracticability Could Block Performance
“The doctrine of impossibility/impracticability protects a party from being held liable for breaching a contract if its performance becomes impossible or impracticable due to an event that wasn’t reasonably foreseeable at the time the contract was entered into,” Long says.
Again, the determination of whether such a defense applies is very specific. In addition to considering whether the event was reasonably foreseeable when the parties entered the contract, a court will look at whether either party assumed the risk of not being able to perform when entering the contract.
Strautins says it’s unlikely that this defense would apply to an association’s obligation to pay a vendor. Future financial problems usually are deemed reasonably foreseeable events that an association assumes the risk of when signing the contract.
Also, as with force majeure, an impossibility or impractability defense may entitle the party to only a reasonable delay, until the impediment is removed, such as when a governmental order is lifted.
When the Purpose of the Contract is Frustrated
Consider a scenario where the association hires a maintenance company to regularly clean the community party room, which is closed to the pandemic. Or perhaps an association rents exercise equipment for a gym that has been closed by governmental order. The association might argue it shouldn’t have to pay the vendor because the purpose of the contract has been frustrated.
The doctrine of frustration applies when an event that wasn’t reasonably foreseeable when the contract was executed makes one party’s performance virtually worthless to the other party.
The frustrating event must be severe and not within the risks assumed under the contract — in other words, non-occurrence of the event must have been a basic assumption on which the contract was made.
“If a service vendor performs its end of the bargain, and time was not an essence of the contract,” Long says, “an HOA may have a difficult time arguing it is not required to pay the service vendor because the purpose of the contract was frustrated.”
But, she says, an HOA would have a stronger argument if it can show the contract had a specific purpose, the service vendor knew of this specific purpose, and the pandemic and/or stay-at-home orders have rendered the contract’s purpose worthless to the HOA.
“An example is a contract to provide services for a specific event (catering, etc.) that an HOA may have scheduled that has been cancelled as a result of COVID-19,” she says. “While technically the vendor may still be able to provide the catering, the purpose of the contract was to cater for a specific event that is no longer occurring.”
Leave the Court of Out of It
Before you fall back on contract provisions or state law defenses, Strautins suggests working with your clients’ vendors to find common ground.
“The burden is going to be on the party that wants to exercise one of these defenses, and it’s going to be an uphill battle,” Strautins says. “I’d advise my associations clients to find a way to resolve this. You don’t want to go to court because there’s so much uncertainty.
“Lawyers are expensive — I’m the first to admit that.”