By Anna Naud
The question of whether the existence of the novel COVID-19 pandemic, or a government’s mandate to close events, will trigger a force majeure clause in a contract is one of critical importance to businesses at this time.
The first questions to ask are: Does the relevant contract contain a force majeure clause? And, if so, does appropriate language exist within the clause?
A force majeure clause is commonly included in contracts to protect parties from repercussions caused by the inability to fulfill contractual obligations due to extraordinary or extreme events. These events are often referred to as “acts of God”. When a force majeure clause has been included in a contract, and a force majeure event actually does occur and prevents performance, the expectation is that the party or parties facing inability as a result will be relieved of all or some portion of their delivery obligations under the contract and from all or some portion of liability for damages arising from delay or default occurring in the performance of its contractual obligations.
Force majeure clauses often contain examples of what will or will not constitute a force majeure event, such as hurricanes, war, strikes, lockouts, etc. Therefore, the first step for any party that is currently unable to fulfill its obligations under a contract is to review the relevant contract to determine whether a force majeure event that fits within the terms of the contract has (or is) occurring. Whether COVID-19 or a ‘lock-out’ qualifies as a force majeure event is a question of contractual interpretation that parties might dispute.
The second question to ask is: Has the alleged forced majeure event actually caused, or will it cause, the non-performance or delay in question?
Relevant case law emphasizes that the relevant event must have made performance impossible. Economic or market conditions that, for example, make it more difficult to fulfill the terms of a contract – but not impossible – have not been found by courts to constitute force majeure events.
Finally, what actions are permissible under the contract before the contract can be cancelled or damages begin to accrue?
If the analysis concludes that a force majeure event is existing or has existed, and is/has actually caused non-performance or delay, the extent of relief set out in the contract must be considered. Many force majeure clauses permit a limited period of delay before damages can be claimed. In other words, it may be possible to adapt to the current reality while still fulfilling the terms of the contract.
The burden of proof will rest on the party seeking to rely on the force majeure provision. It is highly recommend that legal counsel be sought to assist with interpreting a contract and conducting a risk assessment to determine whether or not a contract’s force majeure clause will provide any protection to a defaulting party.
Doctrine of Frustration
If no force majeure clause exists within the relevant contract, it may be possible for the general doctrine of frustration to be applied. This common law doctrine involves the occurrence of an unforeseen event that causes a radical change in a party’s ability to perform the terms of the contract. The radical change is generally one that makes performance under existing circumstances impossible or impractical or frustrates the original purpose of the agreement. The onus would be on the party alleging frustration of the contract to prove these elements. The result of a successful frustration claim is that the contract is deemed frustrated and all obligations are extinguished as of the date of the supervening event. Certain Canadian provinces have enacted legislation to govern the administration of contracts that have been found by a court to be frustrated (for example, the Ontario Frustrated Contracts Act). The question of whether frustration is actually applicable to a given scenario is fact-dependent. Again, we highly recommend seeking legal advice to determine the likelihood of the applicability of the doctrine of frustration to a particular situation.
The leading case on force majeure in Canada is a 1975 Supreme Court decision (Atlantic Paper Stock Ltd. v St. Anne Nackawic Pulp & Paper Co.). Since then, no Canadian Supreme Court cases have revisited the matter in depth and Canadian case law specifically dealing with force majeure clauses or the doctrine of frustration and global health concerns or governmental ‘lock-downs’ is extremely sparse. There is no doubt, however, that more cases will arise as a result of the current reality. These are complicated areas of law with nuances from the case law; businesses should not be making judgment calls on these issues without the benefit of legal counsel.
This is an opportunity for businesses to proactively assess their current contracts to determine the existence and applicability of force majeure clauses and, if necessary, modify contract templates and precedents to add protective language. We would be happy to assist organizations with such assessments and amendments.
About the Author
Anna Naud (Mason Bennett Johncox Professional Corporation; email@example.com) is an experienced corporate/commercial lawyer, working with national and provincial for-profit corporations, not-for-profit corporations, and registered Canadian charities of all sizes and in a variety of industries. Anna advises on day-to-day legal corporate, commercial, and governance matters, as well as on transactional matters such as mergers, integrations, acquisitions, reorganizations, and financings.
This article originally appeared on the CSAE Blog on April 23, 2020.