Contractual Implications of COVID-19: Force Majeure

In the early stages of the COVID-19 pandemic, individuals and businesses were forced to adapt to rapidly changing governmental policies, recommendations, orders, and directives. Understandably, commercial contractual obligations have become increasingly difficult and uncertain. With each passing day during this health crisis, and with more challenges ahead, the adverse economic impact of COVID-19 continues to unfold. Now more than ever, contracting parties will be examining their contracts in search of relief.

Force Majeure

Many contracts include a “force majeure” clause. These clauses are generally included in contracts to account for circumstances where a party cannot perform the contract due to circumstances beyond its control. Theoretically, a force majeure clause could absolve a non-performing party of liability for its failure to perform contractual obligations as a result of COVID-19, but as always, the precise relief available, if any, will depend on the wording of the force majeure clause and the underlying circumstances.

Some commercial contracts will have a force majeure clause that defines a force majeure event, or even list certain situations that trigger the clause. The most common force majeure events are typically labour disputes and strikes, war, terrorism, and natural disasters, among others. Depending on the contract, “pandemic” or “epidemic” may also be included as a force majeure event, as defined therein.

Conversely, some force majeure clauses are broader or refer to “acts of God” as triggering events. If parties cannot agree if intervening events, such as COVID-19, constitute an act of God, parties may inevitably seek legal recourse. The Supreme Court of Canada has provided some guidance as follows: “[a]n act of God clause or force majeure clause generally operates to discharge a contracting party when a supervening, sometimes supernatural, event, beyond the control of either party, makes performance impossible. The common thread is that of the unexpected, something beyond reasonable human foresight and skill.”[1]

Invoking or Responding to Force Majeure

If one or both of the contracting parties takes the position that a force majeure event has occurred, it is critical to promptly seek legal advice. Invoking or responding to a force majeure notice will have varying contractual implications that will lead to some inevitable considerations:

• Does the force majeure clause suspend some of the contractual obligations or enable a party to terminate the contract?
• Does force majeure clause require that the invoking party take reasonable steps to prevent the occurrence of the force majeure event?
• Does the force majeure clause require mitigation, and if not, does the relying party have to make reasonable efforts to mitigate in any event?
• What is the procedure for invoking the force majeure clause? What are the specific notice requirements?

With respect to the notice requirements, some force majeure clauses contain fairly strict notice obligations. Some may require that notice be provided in writing within a short time frame after becoming aware of the force majeure event. Any party dealing with a potential force majeure event in any capacity should be particularly aware of the contractual notice requirement as it could determine whether or not relief is available.

Contracts Without a Force Majeure Clause

Absent an express contractual provision, force majeure does not otherwise operate as a common law principle. If there are no force majeure clauses included in the contract, parties may have to resort to other common law doctrines to seek relief from their contractual obligations. The applicable common law doctrines with respect to COVID-19 are most likely “frustration” and “impossibility.”

Frustration is a narrow excuse that can be used when, due to unforeseen circumstances (possibly including pandemic), a party’s principal purpose for entering into the contract is destroyed or obviated. Unlike “impossibility,” performance of the contract may still be possible, but a party’s reason for entering into the agreement no longer exists. If the party attempting to be excused from performance of the contract can no longer accomplish its purpose, both parties are aware of the principal purpose of the contract, and a valid supervening event caused the frustration, performance may be excused. In Canada, however, establishing that a contract has been frustrated is an onerous burden and will likely only apply in narrow circumstances, leaving the doctrine of impossibility as the more tenable route to excusing performance due to COVID-19.

Impossibility excuses contractual performance when the obligations of a party become objectively impossible because of an event beyond its control. The key element is objective impossibility: performance will not be excused if it merely becomes financially more difficult, impractical, or unappealing. In the context of COVID-19, government-imposed lockdowns, restrictions, or business closures may render contractual performance impossible for an affected party. If performance of the contract becomes impossible, performance may be excused entirely, rather than suspended.

Caution

Parties who are considering invoking a force majeure contractual provision will not necessarily be relieved from their contractual obligations and such provisions may not address all of the economic hardship resulting from COVID-19. A party’s reliance upon a force majeure clause will only be permitted where the contracting party cannot exercise control over the circumstances related to COVID-19.

A party concerned about being able to meet its contractual obligations due to COVID-19, should review the contract to determine whether there is a force majeure clause that can be relied upon to relieve that party from performing under the contract.  If there is such a clause, the contracting party may wish to consider being proactive about its next steps. In particular, that party should consider whether it has exhausted all options available to it to ensure contractual performance before formally invoking such a clause.  Force majeure clauses are not necessarily the shield parties think they are, and courts do not look kindly on parties who have attempted to assert force majeure while taking no responsibility for their own actions.

Similarly, parties should exercise caution before attempting to formally rely upon the common law doctrines of “frustration” and “impossibility”.

Contact Us

Perley-Robertson, Hill & McDougall LLP/s.r.l. is well-positioned to offer assistance to individuals and businesses that are concerned about the impact of the COVID-19 pandemic on their ongoing contractual obligations.  Please contact the authors of this article directly to discuss further. Please also note that the firm continues to provide regular updates concerning the challenges brought on by COVID-19 in our COVID-19 Resource Centre.

[1] Atlantic Paper Stock Ltd. v. St. Anne-Nackawic Pulp and Paper Company Limited, 1975 CanLII 170 (SCC), [1976] 1 SCR 580