Business Law Newsletter
Force Majeure and Frustration of Contracts: The Impact of COVID-19
In response to the COVID-19 pandemic, businesses and commercial stakeholders are looking at contractual obligations through a new lens. Disruptions to trade and business transactions continue as the impact of the pandemic is widespread. Many contracts include force majeure provisions but does COVID-19 trigger those provisions? In the absence of a force majeure clause, what other remedies are available to parties who cannot perform their contractual obligations? This newsletter addresses those questions and provides guidance for business owners.
What is a force majeure clause?
Many contracts or commercial agreements contain a force majeure clause. These clauses suspend or excuse a party from performance of its obligations under the contract when certain circumstances arise. The Supreme Court of Canada considered force majeure clauses in Atlantic Paper Stock Ltd. v St. Anne-Nackawic Pulp & Paper Co.,  1 SCR 580 [Atlantic Paper], with Justice Dickson stating at para. 4 that such a clause “generally operates to discharge a contracting party when a supervening, sometimes supernatural, event, beyond control of either party, makes performance impossible. The common thread is that of the unexpected, something beyond reasonable human foresight and skill.”
Force majeure is a creature of contract – it must be provided for in the agreement in order for the parties to rely on it. The parties may decide to include a force majeure clause to relieve one or both parties from performance of their respective obligations, particularly where parties are sensitive to the possibility of disruption. The effect of the clause and how it applies will depend on contractual interpretation, in light of its general purpose in excusing performance when a supervening event makes performance impossible. The contract at issue in the Atlantic Paper case including the following provision:
St. Anne warrants and represents that its requirements under this contract shall be approximately 15,000 tons a year, and further warrants that in any one year its requirements for Secondary Fibre shall not be less than 10,000 tons, unless as a result of an act of God, the Queen’s or public enemies, war, the authority of the law, labour unrest or strikes, the destruction of or damage to production facilities, or the nonavailability of markets for pulp or corrugating medium.
How is a force majeure clause invoked?
The party wanting to rely on a force majeure clause has the burden of proof to establish that the clause applies in a particular situation.
The clause will usually provide a list of supervening events that would constitute a reason for one or both parties to excuse themselves from contractual obligations. In the Atlantic Paper case, the listed events were: an act of God, the Queen’s or public enemies, war, the authority of law, labour unrest or strikes, the destruction of or damage to production facilities, or the nonavailablity of markets for pulp or corrugating medium.
The mere occurrence of an event does not automatically excuse performance. A party must also establish that its performance was sufficiently impacted as a result of the event – and could not be avoided by the exercise of due care.
Clauses may include language stipulating the degree of impact on performance. Where the clause is silent on degree of impact, courts typically apply a high threshold and require performance to be virtually impossible.
A clause may also stipulate efforts that must be undertaken to remedy the problem before a party is excused. Unless a clause specifically references negligence, negligent acts rarely excuse performance.
Force majeure clauses are frequently tailored to the specific needs of the contracting parties to address any number of events that may excuse performance which may be unique to their situation.
What is the result if a force majeure clause is invoked?
Once a force majeure clause is invoked, the result will depend on what the contract contemplates. In most cases, it will not allow complete termination of the contract. Instead, the clause may suspend performance for the duration of the event, or only allow termination of the contract if the event persists for a specific duration. The clause may excuse performance of some obligations or allow a party to obtain goods or services from other providers for the duration of the event.
Is the COVID-19 pandemic a supervening event?
Because force majeure clauses contemplate unexpected events beyond the control of the parties, the COVID-19 pandemic would only apply to contracts entered into before the pandemic became a known or foreseeable event. In these cases, the party relying on the clause must then establish that pandemic is within the definition of force majeure contemplated by the contract.
Whether the COVID-19 pandemic meets the definition of a supervening event will depend on the language unique to each contract. Words such as “pandemic”, “outbreak”, or similar terms would likely apply to the COVID-19 pandemic.
Where a government declares a state of emergency, that could meet the definition of phrases such as “government action” or “events beyond the reasonable control of the parties.” The facts specific to each case must still be considered. Timing and declaration of government orders based on the jurisdiction(s) involved, workplace policies, and restrictions on the movement of goods and people could all impact the interpretation of the clause.
In the case of the Atlantic Paper clause referred to previously, the question may be whether a pandemic is an act of God excusing performance; whether an emergency declaration is an act under the authority of law excusing performance; or whether the pandemic has indeed caused the nonavailablility of markets.
Is there any relief for parties to contracts that do not contain a force majeure clause?
Where an agreement does not contain a force majeure clause, a party may have a claim for frustration of contract to excuse it from performance of its obligations. Frustration is a legal doctrine that will discharge both parties from further performance of the contract. It requires a supervening event that so significantly changes the nature of the outstanding contractual rights or obligations from what the parties could reasonably have contemplated at the time the agreement was executed. The doctrine operates to relieve the parties from further performance where is would be unjust to hold the parties to the terms of the contract in the new circumstances.
Establishing frustration of contract is a very high threshold to meet. Courts have clearly established that mere hardship, inconvenience, material loss, or the fact that performance has become more onerous or costly than originally anticipated are insufficient to amount to frustration of contract. The threshold is one of impracticability because of extreme and unreasonable difficulty, expense, injury, or loss involved, as well as situations where performance is strictly impossible.
The impacts of the COVID-19 pandemic continue to evolve. It is a situation unlike any other in recent history. As disruptions to business and restrictions on the movement of people and goods continue, parties may be able to claim that a contract is frustrated.
The COVID-19 pandemic will have an impact on contractual relationships both now and into the future. If you are concerned about events that might excuse performance, do not rely on frustration of contract alone. Ask us for assistance in drafting a force majeure provision for your contract that is tailored to address your unique situation and needs. If you have a concern about whether you are excused from performance of your contract or if a party with whom you have contracted may be excused from performance, we can help you with the interpretation.
Wickwire Holm’s corporate and commercial team produced this newsletter to inform our clients and friends about the law and emerging issues. In preparing and circulating this newsletter, Wickwire Holm is not providing legal or other professional advice. We invite you to reach out to us if you have questions about any issues raised within this newsletter. Contact us at email@example.com or (902)429.4111.