In Part 1 of this blog, I discussed several common contract provisions and a party’s performance might be excused in light of the Covid-19 pandemic. Here in Part 2 I am providing some pointers on unwritten contract rules. These are common law contract principles or concepts that may provide relief to a party from strict adherence to the contract. I’ll discuss five prominent ones in today’s blog: accord and satisfaction; adhesion contracts; frustration of purpose; impossibility; and the implied covenant of good faith and fair dealing. As the Covid-19 pandemic impedes parties’ ability to fulfill contract obligations, these and other contract principles will come into play. I’ll give brief examples for each principle.
Accord and Satisfaction is an agreement or “accord” between the parties to accept a reduction or change to required performance under their contract. The changed performance is the “satisfaction.”
The parties’ acceptance of something less or different than what was originally agreed must be done knowingly and intentionally. As long as the parties agree to the substituted performance, there doesn’t need to be a force majeure event (see Part 1), impossibility or frustration of purpose. Unlike the other remedies, any or no reason at all can be the basis for an accord and satisfaction. If you are able to reduce or change the substance of your contract with the other party, be sure to do so in writing to avoid any misunderstanding or disagreement. An accord and satisfaction is a substituted contract so it should be in writing just like the original contract.
Covid-19 example: A manufacturer is unable to assemble a product in accordance with the specifications in the contract because of shortage of a material due to a government-mandated Covid-19 order of closure affecting the material supplier. However, a substitute material is available in sufficient quantity. The buyer agrees to accept the product with substituted material and the manufacturer delivers it as agreed.
Adhesion Contract is typically a standard form or “boilerplate” contract. Adhesion contracts can be obtained from companies specializing in form contracts or drafted by one of the parties without any participation by the other. The non-drafting party has little or no bargaining power and must either accept the contract as is or not at all. Adhesion contracts are common in insurance, apartment rental, car purchase and lease and residential construction contracts. Courts may void unfair or unconscionable clauses in an adhesion contract and possibly the entire contract, depending on the circumstances of its formation and if it is manifestly unfair as a whole.
The Boston Marathon Expo exhibitor discussed in Part 1 of this blog was provided an adhesion contract – a form contract which he was required to sign if he wanted to display his wares. He had no other choice if he wanted to market product. The contract includes a force majeure clause which appears at first glance to be fair: “[e]xhibitor agrees that in the event due to war, fire, strike, government regulation, public enemy, or other cause, the show or any part thereof is prevented from being held, is canceled by Show Management, Show Management, in its sole discretion, shall determine and refund to the applicant his proportionate share of unused funds.” (Covid-19 causes italicized). However, the highlighted language renders any deposit refund due to force majeure clause completely within the control of the exhibit manager. This adhesion contract could be and would likely be reformed by the court, perhaps by changing the language to “...Show Management shall refund...”.
Frustration of Purpose A contract doctrine in which a buyer may be excused from performance. If the seller knows of the buyer’s primary purposed in entering into the contract and an unforeseen event occurs later which removes that primary purpose, i.e., “frustration of purpose”, the buyer may be excused from performance.
A well-drafted contract includes a section at the beginning typically titled “Recitals”. It provides background for the contract and may include information concerning the parties’ business, general objectives and specific reasons for entering into the contract. Think of it as a preamble to the substantive part of the contract. Here is sample language from a real estate lease contract:
“Lessor owns real property consisting of land and a 3-story office building situated at [street address], [city], [state], [zip code], and more particularly described in a deed recorded at book [number], page [number] in the [county], [state] land records (the “Building”);
Lessor is in the business of leasing space in the Building for use by office tenants;
Lessee desires to lease space from Lessor in the Building for its office use, consisting of a customer service center to accommodate 150 employees;
Lessor is willing to lease to Lessee 12,000 square feet of space on the second floor for Lessee’s contemplated use and Lessee desires to lease such space;
NOW THEREFORE, in consideration of the mutual promises herein and for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties agree as follows: ...
In this set of recitals, the lessee’s purpose in entering into the lease is highlighted above. If the leased space is rendered unusable after the contract is made because of a zoning change or a local government order barring occupancy for example, then the lessee’s purpose (i.e., the buyer) is effectively frustrated.
Covid-19 example: A couple rents a large banquet facility for a wedding reception of 200 people to be held in June 2020. The facility owner is aware of the couple’s intent. In April 2020, the state government issues an order limiting gatherings to 10 people due to the Covid-19 pandemic. The order remains in effect through the date of the scheduled reception, frustrating the couple’s intent to enter into the contract.
Impossibility is what it sounds like –performance isn’t required because an unforeseen event occurs which makes it impossible. Normally the unforeseen event be supervening - it must occur after the contract is made. Impossibility has been defined as a situation in which performance is excused due to destruction of the subject matter of the contract or by operation of law. In the Taylor v. Caldwell case discussed in Part 1, the theater where a series of musical performances were to occur – the “subject matter” of the contract burned down, rendering the theater’s owner’s contractual promise impossible to perform.
Covid-19 example: These frustration of purpose examples also illustrate impossibility. If a government order mandates that the banquet facility cannot be open, it is obviously impossible for the facility owner to allow the wedding reception. Similarly, it is impossible for the office landlord to provide the leased space. Note that frustration of purpose lies with the buyer/lessee and impossibility with the seller/lessor/owner.
Implied Covenant of Good Faith and Fair Dealing Another concept that sounds like what it is – the parties must be fair and cooperative with each other and cannot utilize excuses to avoid performance that aren’t legitimate or prevent the other party from receiving its end of the bargain. The covenant of good faith and fair dealing applies to all contracts because no contract can possibly address every possible contingency. Another way of looking at the covenant is to read between the lines and ask what the parties would have agreed to had they thought to negotiate language for a particular issue. There likely are and will be numerous situations where one or both parties will be seriously impeded because of Covid-19 and its effects on commerce. Courts will expect the parties to be fair and reasonable with each other, regardless of any common law doctrine or statute.
Covid-19 example: A gym shuts down because of a Covid-19 order of the state government and refuses to allow members to cancel or suspend membership payments, stating that the payments will be applied to an extended membership period. (This really happened and there are two state statutes barring the gym’s actions). Setting the violation of law aside, it is clear that the gym’s policy is completely unfair and unreasonable. Even in the absence of the statutes a court would find in favor of the members.
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