COVID And Your Contract

Force majeure

You may have heard of so-called “Act of God” clauses as they relate to contracts. These provisions are more formally known as force majeure clauses. You may have such a clause in a contract and wonder whether it is applicable during the COVID-19 pandemic.

The Supreme Court of Canada described a force majeure clause as one that:

… 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.¹

The use of these clauses provides a broad risk allocation tool to contracting parties.² Parties can define the types of “events” or “risks” that could render the performance of their obligations under a contract inconvenient or too costly during an “unprecedented” event such as COVID. ³

To rely on a force majeure clause, one or more of the following conditions must apply:

1. the specified event is beyond the control of the claiming parties;
2. the event prevents or delays, in whole or in part, the performance of the contract;
3. the event makes performance of the contract imprudent, substantially more difficult or substantially more expensive;
4. the event was not due to the fault or negligence of the claiming party; and
5. the claiming party has exercised reasonable diligence to overcome or remove the specified force majeure event.⁴

A contract invoking a force majeure clause does not necessarily come to an end. Rather, the obligations of the contracting parties may be put on “hold” or modified during the specified event. Whether or not your force majeure clause “covers” COVID-19 is entirely fact and contract-specific.⁵ As such, having your lawyer review the contract is prudent, especially during these tumultuous times.

Frustration

What if your contract does not have a force majeure clause? The common law doctrine of frustration, like force majeure clauses, also deals with situations beyond the control of the contracting parties. However, frustration is not broad and flexible, and its application as a defense is difficult.

The doctrine of frustration can be described as involving:

… an unforeseen change to the circumstances underlying the contract, through no fault of the parties, that renders the contract incapable of performance. The change of circumstances must be fundamental in nature, such that it goes to the root of the contract. It is not enough that performance has become more difficult; performance must be impossible. The destruction of the subject of the contract can amount to frustration, but not if the risk of destruction has been allocated in the contract to one of the parties, and not necessarily if the subject of the contract can be replaced …

A contract is only frustrated when it becomes incapable of performance, not just because performance might be more onerous, more costly, or different from what was anticipated.⁶

Where frustration of contract is found, the contract will come to an end: the parties are no longer obliged to perform their contractual obligations. As with force majeure clauses, the applicability of the doctrine of frustration will depend on the particular facts of your situation.

Most, if not all businesses have been affected in some way by COVID-19. If you are unable to perform contractual obligations because of COVID, please have a lawyer review your contract. You could have a force majeure clause that anticipated an unforeseen event like COVID-19, possibly excusing you from your obligations during this unprecedented time. If your contract did not include a force majeure clause, it is still advisable to seek legal advice. Though difficult, depending on your specific circumstances, the doctrine of frustration could apply. In that case, your contract would end.

As always, our lawyers are here to advise you on your specific needs. Our firm remains dedicated to providing legal advice to our clients in the face of COVID-19.

¹ Atlantic Paperstock Ltd. v St. Anne-Nackawic Pulp & Paper Co., [1976] 1 SCR 580 at 583.
² “Force majeure Clauses in Construction Contracts”, Lowell A. Westersund, Q.C., Lexology, 13 March 2008.
³ Ibid.
⁴ Ibid.
⁵ “Unprecedent force majeure”, CBA National/ABC National, The Canadian Bar Association, 20 March 2020.
⁶ Fishman v Wilderness Ridge at Stewart Creek Inc., 2010 ABCA 345 at 5-6.