Covid-19 & The Impacts On Commercial Contracts

April 5, 2020

In response to the COVID-19 pandemic, Governor Whitmer issued an executive order that ordered Michigan residents to stay at home absent a need to engage in actions or services that are necessary to sustain or protect life beginning Tuesday, March 26, 2020.  The order, deemed a “stay-at-home” order, will significantly affect businesses, small and big alike, across all industries.

Particularly, the Order (and more specifically, the spread of COVID-19) will force many businesses to substantially decrease their production, in whatever form that may be, if not entirely close their doors.  As a byproduct, many businesses will not be able to meet their contractual obligations to other entities.  This article seeks to explain the potential legal ramifications of COVID-19 on commercial and business contracts in Michigan.  Ideally, businesses will work together to amicably resolve any commercial disputes that may result from the COVID-19 economic downturn.  However, in the event the parties cannot reach a resolution, the following legal principles may be implicated.

Force Majeure

Some, but not all, commercial contracts contain “force-majeure” (or “superior force” in French) clauses.  “Generally, the purpose of a force majeure clause is to relieve a party from penalties for breach of contract when circumstances beyond the parties control render performance untenable or impossible.”  Kyocera Corp v Hemlock Semiconductor, LLC, 331 Mich App 437, 438-439; 886 NW2d 445 (2015).  In other words, through force majeure clauses, parties to a contract agree that there may be certain, unanticipated events that are so detrimental that they excuse one, or both, of the parties’ performance of their obligations under the contract.  For example, in Kyocera, the parties agreed, in part, to the following force majeure clause:

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 (in each case, a “Force Majeure Event”). [Id. at 441.]

Michigan courts construe force-majeure clauses narrowly—meaning, Michigan Courts are disinclined to invoke such a clause unless the event is specifically enumerated in the contract.  Accordingly, in Michigan, “financial hardship and unprofitability do not constitute the type of delay or failure in performance sufficient to warrant relief under a force-majeure clause.”  Id. at 451.

It is certainly possible, if not likely, that parties to contracts in Michigan will cite to force-majeure clauses in their contracts to justify their non-performance under a contract.  Indeed, looking to the example above, a reasonable argument could be made that Governor Whitmer’s stay-at-home order constitutes an “act[] of the government” that would justify a party’s non-performance, such as failure to manufacture enough products or failure to build a home in a timely fashion.

Impossibility

Even if the parties did agree to a force-majeure clause, one party’s non-performance under the contract may be excused under the common-law doctrine of “impossibility.”  The theory of impossibility is that some event that arose during the course of the contract has rendered performance of the contract impossible or severely impractical.  That is, “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.”  Bissel v L.W. Edison Co, 9 Mich App 276, 285; 156 NW2d 623 (1967).  Generally, the doctrine of impossibility will only apply where the circumstances giving rise to the impossibility were not foreseeable; meaning, no reasonable person would have anticipated the circumstances.  For example, the burning of a house may not excuse payments on the mortgage on the house because one could imagine that a house would burn down.

A key distinction between force-majeure and impossibility is that force-majeure is a creature of contract and therefore confined by the contract; impossibility, on the other hand, was created by the courts may be asserted even if it is not contained within the contract.  Nonetheless, parties to a contract will likely try to assert impossibility in a similar fashion as they would force-majeure.  That is, upon non-performance of a contractual obligation, the non-performing will likely assert impossibility—“I couldn’t legally perform my obligations as a result the Order!”  Ultimately, whether the impossibility doctrine applies will turn on a determination of foreseeability, which may depend on the timing of the contract.  If the parties entered into the contract in 2015, a worldwide pandemic that brought the world to a screeching halt would likely be viewed as creating impossibility.  Alternatively, if the parties entered into the contract on March 22, 2020—the day before the Order was announced and after several other states issued stay-at-home orders—a court may view the argument differently

Conclusion

As if the health ramifications were not enough, the COVID-19 pandemic has also attacked our economy.  Businesses have been forced to close their doors, either temporarily or for good.  As a result, many businesses may find themselves in disputes over non-performance of a contractual obligation.  If you find your business involved in a contract dispute as a result of the economic downturn, the experienced business attorneys at Chase Bylenga Hulst, PLLC can help.

The information and opinions above are generalized and not intended to convey legal advice. If you have questions regarding your specific case, contact us at 616.608.3061 or  through our websites contact page for a FREE consultation.