Without a doubt, Canada is facing a significant slowdown due to the novel coronavirus or COVID-19. Businesses have shut down, international supply chains have been disrupted, international travel has slowed, and borders have closed. The pandemic has had, and will continue to have, unprecedented effects on the global economy. Ultimately, this will leave many individuals and businesses unable to follow through with all of their contractual obligations.
Below describes how force majeure clauses and the doctrine of frustration may relieve you from your obligations.
What is Force Majeure?
Force majeure clauses consider circumstances that are out of a party’s control and ultimately, inhibit it from following through with their contract. Essentially, a force majeure clause absolves the liability of the non-performing party if it’s unable to perform its contractual obligations. However, its effect depends on the precise language used in the contract. Some clauses will opt to provide a detailed list of potential circumstances, while others remain vague.
The implementation of force majeure clauses requires an “act of God” event to occur. The Supreme Court of Canada defines an “act of God” as a “supervening, sometimes supernatural, event, beyond control of either party, [which] makes performance impossible.” As such, these events must be unexpected and beyond the affected party’s foresight.
Does a Force Majeure Clause Apply to COVID-19?
The easiest way to determine whether a force majeure clause applies to COVID-19 is if it explicitly uses terminology like pandemic or communicable disease. Otherwise, the party claiming the benefits of a force majeure clause must prove that the language used in the contract encompasses COVID-19 as a valid trigger.
It’s quite difficult to determine how courts will assess force majeure clauses. This is because COVID-19’s impact is continuously changing. The event may seem unforeseeable and outside one’s control; however, the party must also prove that its contractual obligations are impossible to perform. The last bit of the criteria is generally significantly more difficult to address. Remember that onerous doesn’t equate to impossible.
Courts may assess the impossibility of performing an obligation by comparing the impact of COVID-19 in a global context.
In most cases, the party seeking the benefits of force majeure contracts must meet the following requirements.
- The party must take reasonable measures to prevent the event from occurring. In the context of COVID-19, this may mean increasing sanitation, working remotely, seeking advice from health officials, etc. Furthermore, the party is responsible for keeping up-to-date with any changes to addressing the COVID-19 pandemic.
- The need for mitigation generally arises if the force majeure event only makes impossible part of the contractual obligation. Therefore, the party must mitigate the losses as a result of COVID-19. In turn, this could include seeking alternate methods of complying with their contract.
- If the force majeure clause contains strict notice obligations, the party seeking its benefits must pay close attention to these timelines.
What is Frustration?
In the event that no force majeure clause is present, some may resort to the doctrine of frustration. Frustration refers to when the performance of the contract becomes “a thing radically different from that which was undertaken by the contract.” In other words, the contract is impossible to follow-through with. Therefore, the party must prove that it is no longer just to bind them to the contract due to the circumstances that have arisen. Similar to force majeure, a frustrated contract must demonstrate that:
- The event was unforeseeable, and
- The event was not the fault of either party.
Understandably, navigating through your business contracts may be challenging. Perhaps the language may be confusing or maybe you don’t quite know what you’re looking for. Seeking help and advice from a lawyer may be advantageous when determining whether you’re still responsible for performing your contractual obligations.