Authors: Jack Finn, Jennifer MacGregor-Greer & James Hsu
The novel coronavirus (COVID-19) has created significant challenges for contracting parties as domestic and international governments impose increasing restrictions on public gatherings and non-essential travel, with various “shelter in place” directions or “state of emergency” declarations expected or already issued depending on the jurisdiction. These restrictions may make the performance of commercial contracts difficult or even impossible.
How can you tell whether non-performance of a contract in these challenging times will be supported at law? There are two legal principles that may apply: (1) Force Majeure, and (2) Frustration of Contract.
Modern commercial agreements often include a provision for so-called “events of force majeure”, which permit a party to suspend, delay, or even terminate its obligations under the contract. As contractual provisions, the language of force majeure clauses will differ from contract to contract. However, an “event of force majeure” is generally understood to be as an event that is unexpected and beyond reasonable human foresight and skill.
Despite the prevalence of these provisions in many commercial contracts, force majeure clauses have been rarely considered by Canadian courts over the course of the last 40 years. In our view, the current circumstances arising from COVID-19 are likely to give rise to new judicial consideration of this remedy.
Since a force majeure clause is a contractual right or remedy agreed to by contracting parties, its applicability and its effect are dependent on the language used in the particular contract. As such, the language of a force majeure clause should be read carefully before a party attempts to invoke its protection. However, in general terms the following principles are key when determining whether a party may suspend, delay or terminate its obligations in reliance on a force majeure clause:
In summary, Canadian courts will be reticent to permit a party to easily evade its contractual obligations by relying on a force majeure clause, and they will apply a high level of scrutiny in determining the applicability and then effects of such a contractual provision. Whether the current coronavirus pandemic (or events or circumstances arising from it; for instance, government directions or the termination of a business) constitutes an event of force majeure will depend on the language of the particular force majeure clause and the actions of the party claiming that contractual protection.
The doctrine of frustration is a common law principle that applies to agreements that do not contain a force majeure clause. The protection afforded by this doctrine has been successfully claimed by parties in a variety of contractual contexts including with respect to obligations under commercial contracts, real estate contracts, and employment contracts.
Under the doctrine of frustration, the courts may fully excuse both parties from their contractual obligations where performance has become impossible and the contract is “frustrated” without fault of either party. In order to rely on this doctrine, the frustrating event must not have been contemplated by the parties or foreseeable at the time of contracting and must occur through no fault of either party.
The doctrine applies when circumstances arise that the parties did not make provision for in the contract and performance of the contract has now become radically different from what was originally undertaken. This is a high threshold and, as with force majeure clauses, generally relies on impossibility of performance.
The courts have found contracts to have been frustrated by events of supervening illegality brought about by government regulation or order on the grounds that such regulation or order made the performance of the contract a fundamentally different thing than what was originally agreed upon by the parties. A type of supervening illegality is a change in the law which is not temporary or trifling and which makes performance of a material term of the agreement illegal. Subsequent changes in the law having a fundamental effect on performance of the contract and supervening illegality are treated as similar but distinct sources of frustration.
An important factor for contracting parties to consider in light of the COVID-19 pandemic is what constitutes the supervening event. Is it the pandemic? Is it an absence of regular customers due to “social distancing” or voluntary quarantining? Or is it the governmental regulations and orders issued in response to the crisis?
There will be a difference between a claim of frustration in reference to a contract to host a 50,000 person event entered into before but to take place after the government restricted gatherings of more than 50 people and a claim of frustration in reference to a commercial lease where a business owner is struggling to see customers come through the door because Canadians are choosing to stay home.
Ultimately, the onus is on the party claiming the doctrine of frustration to establish all the necessary elements. If successful, the result is that all the obligations of both parties are extinguished as of the date of the frustrating event.
Contracting parties seeking to lawfully avoid obligations that have become impossible in the ongoing COVID-19 pandemic need to carefully consider what (if any) remedies they have available under contract (and if the contractual language at issue and their actions to date meet the requirements of the law on force majeure clauses in these circumstances) or if they need to look more broadly to the doctrine of frustration even if such a claim involves meeting a potentially higher threshold.
Please contact us if you require assistance in reviewing a force majeure clause, or are considering the impact of COVID-19 on your contractual obligations.
MEP Corporate Group Contact: Jennifer MacGregor-Greer (Counsel); Phone: 778-331-0281; Email: firstname.lastname@example.org
MEP Employment Group Contact: James Hsu (Associate); Phone: 604-891-1158; Email: email@example.com
MEP Entertainment Group Contact: Jack Finn (Associate); Phone: 778-331-0282; Email: firstname.lastname@example.org
This update is intended as a summary only and should not be regarded or relied upon as advice to any specific client or regarding any specific situation.