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COVID-19: Managing Contractual Uncertainty

March 19, 2020
Litigation Advisory

ContractsCOVID-19 impacts everyone and has brought into focus parties' contractual rights and obligations. This is not a novel issue. In the 1870s, smallpox swept through Alpena, Michigan[1] resulting in extended school closings[2] and the school district refusing to pay teachers their contracted salary. Predictably, litigation ensued. The school district argued its obligation to perform (paying teachers) was excused because the smallpox epidemic was an act of God.[3] The school district prevailed at trial but lost in the Michigan Supreme Court.[4] The court reasoned that although the school district's decision to close was wise, it was merely a "strong expediency" not an "absolute necessity,"[5] and that, in the absence of any act of God provision (also known as a force majeure provision), teachers should not suffer from the district's decision.[6] The decision remains good law and highlights the difficulty in establishing contractual impossibility of performance in a contract that lacks an act of God provision.

Michigan cases recognize the defense of impossibility in only narrow circumstances. The Michigan Commercial Code (MCC), which specifically deals with the sale of goods, recognizes a related but broader defense of impracticability. The impracticability doctrine excuses a seller's delayed or non-delivery of goods in two scenarios: where the inability to perform is due to compliance with governmental regulations or when performance becomes impracticable due to the occurrence of an unforeseeable event.[7] Sellers cannot always rely on the impracticability defense, however, because they often agree to assume a greater obligation in the contract that expressly allocates liability to them even in circumstances otherwise covered by the MCC's impracticability defense.[8]

Contract terms can create certainty in uncertain circumstances if they cover the circumstances at hand. If they do not, uncertainty can create legal exposure. But that legal exposure can be managed. 

As the effects of COVID-19 unfold, parties may resist ongoing compliance, or simply fail to comply, with a broad range of contracts due to the social, cultural and governmental responses to the outbreak. Similarly, we have already encountered scenarios in which parties attempt to wield this phenomenon as a tool to renegotiate unfavorable agreements. To determine the strengths and weaknesses of any such arguments, a contracting party must ascertain whether its contract contemplates the specific scenario and allocates risk in advance (as the Alpena school district's teaching contract neglected to do, to its detriment). One in this position must also ascertain whether, and to what extent, the default rules provided in the common law or the MCC will govern. The answers to these important threshold questions, among others, will guide the contracting party's strategy in challenging or defending its rights and obligations under a disrupted contract.

Should you find yourself in a contract dispute or simply need to gain a fuller understanding of your rights and obligations under a contract in light of COVID-19, Varnum's Coronavirus Task Force, comprised of a multidisciplinary team of experienced attorneys, can swiftly and calmly navigate you through these uncertain times.

[1] Historical records suggest the epidemic occurred in 1873. See Haltiner, R., The Town That Wouldn't Die, Alpena, Michigan, excerpts available at http://sites.rootsweb.com/~mialpena/HistDoc/townthat.htm.
[2] Dewey v Union Sch Dist, 43 Mich 480, 481; 5 NW 646 (1880).
[3] Id. at 482. 
[4] Id. at 483.
[5] Id.
[6] Id.
[7] MCL 440.2615(a).

[8] MCL 440.2615.

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