With the federal government and the State of Iowa taking more restrictive and extended measures to mitigate the impact of COVID-19, health care providers are increasingly challenged in their ability to perform or receive performance under contract.
As discussed in an earlier blog post, contractual obligations may not be performed during the COVID-19 emergency for any number of reasons, whether lack of workforce or supplies, prohibition of performance, or financial considerations or restraints. Health care providers, like all companies, should carefully consider their contractual obligations as they sort through issues of non-performance during this emergency.
Under contract law, a party may be excused from performing under contract where such performance becomes impossible or impracticable due to unforeseeable events outside their control. Such events are termed “force majeure” events. If a force majeure event occurs, a party may be excused from part or full performance until the force majeure event ends and/or a party may be permitted to terminate the contract.
Parties often include boilerplate provisions in their contracts to capture this concept. A typical force majeure provision would state that if certain events occur, e.g., natural disasters, acts of war, labor disruptions, epidemics, acts of government, etc., a party is excused from performance until the event ends. These provisions often include some notice requirement. In many instances, the provisions have catch-all language, under which a force majeure event includes “all other acts beyond the parties’ reasonable control.”
Even if a contract provides for no such clause, a party may still be excused from performance “if such performance has unexpectedly become impracticable as a result of a supervening event.” Whether termed “impossibility/impracticability” or “frustration of purpose,” the concept generally applies when an event that the parties assumed would not occur at the time of contracting arises and makes performance impracticable through no fault of the nonperforming party.
In addition—and particularly relevant to healthcare providers due to the governmental response to COVID-19—a party may be excused from performance if a governmental act or regulation subsequently prohibits the subject matter or consideration of the contract.
Companies should appreciate that other contract provisions may have a similar effect as a force majeure provision. For instance, in many health care provider agreements there is a provision that if there is a change of law or regulation that materially impacts the ability of a party to perform under the contract, the parties may be required to renegotiate the terms and conditions of the contract and/or permitted to terminate the contract.
COVID-19 and Force Majeure
The COVID-19 pandemic has significantly impacted the ability of companies to perform under contract, whether due to the impact of the highly contagious virus, the federal and state government’s response, or the downstream effects of both (e.g. business closures). Health care providers, many of whom already had workforce shortages, will lose additional workforce as employees and contractors become sick or quarantined. Such providers will also face supply shortages (as suppliers have similar workforce issues and are unable to supply resources). In addition, certain types of performance, e.g. the provision of elective surgeries, are now prohibited under state law and thus not able to be performed.
Few courts have analyzed the application of force majeure to a pandemic like COVID-19. An informative case in Iowa is Rembrandt Enterprises, Inc. v. Dahmes Stainless, Inc., No. C15-4248-LTS (N.D. Iowa), in which the federal court ruled on whether an egg producer (Rembrandt) was excused from paying its contractor (Dahmes) for the construction of an egg drying machine due to the 2015 avian flu outbreak. When the avian flu broke out, Rembrandt killed much of its herd, reduced production, and claimed force majeure to excuse it from meeting certain production quotas to its buyers. Rembrandt then notified Dahmes to halt construction on the drying machine. Rembrandt claimed that it was excused in not continuing the construction, and paying Dahmes, because of “frustration of purpose.” Notably, Rembrandt was unable to claim that the force majeure provision in its contract with Dahmes excused its performance, because the provision only applied to Dahmes’s performance—and not its own. The court ultimately held that Rembrandt was not excused from breaching its obligations with Dahmes because “it was Rembrandt, and no one else, that made the business decision to terminate the agreement.” Nonetheless, Rembrandt was only liable to pay Dahmes for reasonable value of the work performed—and not the full contract price.
The Rembrandt decision is in line with other court decisions on the concept of force majeure. Courts have generally found that economic hardship, including decreased demand or increased costs, without more, does not constitute a force majeure event under contract or a basis for impracticability/impossibility or frustration of purpose. In addition, courts have required that a party claiming force majeure must establish causation. That is, the party seeking to excuse its performance must show that the unforeseen event—the COVID-19 pandemic, in this case—actually caused the non-performance. That ultimately, is a very fact-specific inquiry.
The Rembrandt decision is also notable that in many contracts, a force majeure provision may only apply to excuse the performance of the party who is providing a good or service—and not the performance of the party paying for the service. To avoid the payment of the full contract price, the party paying for the good or service may have to rely on other contract provisions and doctrines regarding termination and damages/mitigation of damages in the event of a breach.
What Should Companies Do with Issues of Non-Performance and Their Contracts?
Health care providers anticipating non-performance due to the impact of COVID-19 should act quickly to evaluate the performance obligations and potential damages under contract. Such actions include:
- Review the Contract - Does the contract have a force majeure provision? Are there other provisions in the contract that might excuse performance or permit termination?
- Analyze Any Force Majeure Provisions - Does a provision in the contract excuse performance? Specifically, how does the COVID-19 pandemic and/or governmental response cause the non-performance?
- Consider Non-Contract Excuses to Performance - If there is no force majeure or like provisions in the contract, analyze the applicability of the doctrines of impossibility/impracticability or frustration of purpose, including under the Uniform Commercial Code, as applicable, as well as whether performance is prohibited under the governmental response.
- Provide Notice/Communicate - Is there a notice requirement under the contract, whether for force majeure or otherwise? Provide any such notice with the stated time frame. In any event, effectively communicate either that the party will not be able to perform or, conversely, the party expects full performance from the breaching party.
- Mitigation - A party claiming force majeure for non-performance has a duty to mitigate damages caused by the non-performance. This generally means that a party cannot claim force majeure if the potential non-performance is foreseeable and could have been mitigated or prevented. Similarly, the non-breaching party has a duty to mitigate damages from what it will allege is a breach of the contract.
Force Majeure in Contracts Going Forward
Given the experience to date with COVID-19, it will become more difficult for companies to argue that the impact of the pandemic was unforeseeable. Going forward, companies will rely less on broadly drafted force majeure provisions and will more often include the terms “pandemic” and “COVID-19” in the identified list of force majeure events in contracts.
As contracts are modified in the wake of the pandemic, parties should consider among other things:
- the trigger event for when the modification would end, such as when state government declaration of public health emergency ends
- whether one party has discretion in determining when the emergency ends
- whether the party seeking the modification has the discretion and ability to further modify the agreement
- what remedies there might be during the modification, e.g. reduced purchase or delivery requirements or reduced payment
While force majeure provisions are often negotiated via exchange of boilerplate language, the provisions are like any other provision in the contract such that there is an opportunity for flexibility for the parties. Whether in new agreements or amendments to existing agreements, parties can build in the protections they need in order to better manage the risk of events like COVID-19.
If you have questions about contractual obligations during the COVID-19 emergency, you should contact an attorney. More information is also available on our Coronavirus/COVID-19 Legal Resources page.
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