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COVID-19, Force Majeure Clauses and Frustration of Contract

As of today, medical authorities estimate that over 300,000 people have been infected with the novel coronavirus, COVID-19.  As a result of the need for social distancing, some businesses have had to close their doors, while many other businesses have slowed, even while their operations continue. Given the resulting economic uncertainty, people are understandably less inclined to buy; businesses have less money to pay rent to their landlords and salaries to their employees; and landlords and other businesses have less money to make mortgage payments to their lenders.  Stores cannot pay for merchandise.  It may not be anyone’s fault, but people are going to lose money.  A storm of litigation is brewing and the winners or losers of those lawsuits may depend on whether the contracts between these parties have a force majeure clause and whether it will be applied in respect of our present situation.  Alternatively, it may depend on whether a litigant can prove that circumstances beyond a party’s control frustrated their ability to comply with their contractual obligations.

This blog is intended to provide a brief overview of force majeure clauses and the equitable principle of frustration of contract and their potential applicability to the COVID-19 pandemic.

What is a Force Majeure Clause?

Many commercial agreements contain a provision that allows parties to be released from their contractual obligations and responsibilities in the event of serious unforeseen circumstances. These provisions are often referred to as “force majeure” clauses. The Supreme Court of Canada described the operation of a force majeure clause as follows:

An act of God clause or force majeure 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.1

A force majeure clause often includes a laundry list of events that would fall under the purview of an “event beyond the control of either party”. For example, in Tom Jones & Sons Ltd. v. R.2 the force majeure clause at issue in that case commenced upon any of the following events:

If by reason of strikes, lockouts, governmental restriction, acts of God, non-availability of labour or materials, unavoidable casualty, civil commotion, war, fire, hindering subsurface condition existing on the site, extreme weather conditions […] or, any other cause beyond the control.3

Does COVID-19 Trigger Force Majeure Clauses?

The answer is a definitive “maybe”.  At the outset, force majeure clauses are drafted differently from contract to contract.  As a result, the express language contained in such a clause will greatly impact its interpretation and potential application.  Similarly, even if such a clause could potentially apply, the clause itself may limit the scope of what terms of the contract a party will be relieved from.

The events surrounding COVID-19 intuitively suggest that they could fall within the Supreme Court’s definition of a force majeure clauseThe fact that it is being described as a “pandemic” by the World Health Organization and its global impact would suggest that such clauses may be applicable, but again, each clause is unique and will turn on its own specific wording.  These terms would have to be reviewed carefully to assess whether such a clause could be relied upon.

As an example, if we again turn to the language contained in the force majeure clause in Tom Jones, it makes no express reference to terms such as “pandemic”, “epidemic”, or “disease” as being a basis upon which the clause could apply.  On the other hand, given that various levels of government in Canada have disseminated various directives, ordered businesses and borders to close, and declared various states of emergency,4 it may be argued that these actions fall under the auspices of the term “governmental restriction”.

Again, an assessment of these clauses must be conducted on a case-by-case basis as the specific wording of the clause could be the determining factor.

Can a COVID-19 Related Economic Downturn Trigger a Force Majeure Clause?

Assuming that a force majeure clause does not contain a specific term or phrase that would be triggered by COVID-19, clients may query as to whether the related economic-downturn that has followed in the wake of COVID-19 could prompt parties to rely upon a force majeure clause to vitiate their contractual obligations.

Generally speaking, courts have held that force majeure clauses may not be resorted to where circumstances affect the profitability of a contract or the ease with which a party’s obligations can be performed.  For example, in Domtar Inc. v. Univar Canada Ltd.,5 the defendant sought to rely on a force majeure clause when sudden market changes made it more expensive to supply caustic soda at the contract price. The clause in question read as follows:

The term “force majeure” means any contingency beyond the reasonable control of Supplier or Customer (for example, war or hostilities, Acts of God, accident, fire, explosion, public protest, breakage of equipment, governmental actions or legislation, or labour difficulties) which interferes with Supplier’s or Customer’s production, supply, transportation or consumption practices.6

The Court held the force majeure clause would not apply to a contract simply because it became more expensive due to market changes.7

Similarly, In the case of Tandrin Aviation Holdings Ltd. v. Aero Toy Store LLC,8 the defendant claimed it was unable to accept delivery of an executive jet aircraft that was the subject of the contract because of the “unanticipated, unforeseeable and cataclysmic downward spiral of the world’s financial markets”. The Court disagreed, observing that “it is well established [ … ] that a change in economic/market circumstances, affecting the profitability of a contract or the ease with which the parties’ obligations can be performed, is not regarded as being a force majeure event”.9

In conclusion, courts have been skeptical of allowing a change in market circumstances to trigger a force majeure clause.

Frustration of Contract

If a contract does not contain a force majeure clause, or the clause is of no assistance because of its terms, a party may, in very limited circumstances, be able to argue that it is relieved from its contractual obligations by claiming the contract is “frustrated.”

Frustration occurs when an event, through no fault of either party, creates a new circumstance which has the effect of making the contract impossible to fulfill. In such situations, both parties are discharged from further performance of their obligations under the contract.10 The parties are relieved of their obligations because to force performance despite the new and changed circumstances would be to order the party to do something fundamentally different from what the parties originally bargained for.11

COVID-19 and Frustration

The threshold required for frustration is a very high one. In order to rely on it, a party must show that the original reason for entering into the transaction was completely destroyed by a supervening event.

Generally, as in the case of force majeure clauses, courts have not accepted economic disruption or falling markets to constitute an event that would frustrate a contract. For example, the case of Forest Hill Homes v. Ou12 involved a home that was to be purchased from, and built by, the plaintiff. The parties agreed to the purchase in November of 2016, but the closing date was not until 2019. At the date of closing the plaintiff was ready to close, but the defendant took the position that the contract had been frustrated due to the “drastic and unforeseeable drop in the real estate market”, which made it impossible for them to close.13

The judge concluded that there is nothing about changes in the market that amounts to an unforeseen event which would trigger frustration and that, even if there were, it was incumbent upon the buyer to adduce real estate market evidence in support thereof.14

Conclusion

Parties who may seek to rely on a force majeure clause should have a legal professional carefully review the precise language of the clause to determine whether it may cover the intervening event and to determine the scope of relief that may be available under the contract, even if the clause could potentially apply.

Similarly, in the event a party is unable to perform a contract, legal advice should be sought to assess the strengths of a claim that a contract has been frustrated.

On a practical basis, given the current COVID-19 circumstances, the existence of a force majeure clause (even if there are arguments both for and against its applicability) may facilitate an approach to the other contracting parties to see if they are prepared to renegotiate a mutually-agreeable outcome before litigation could arise from the application of such a clause.

 

Footnotes
  1.   Atlantic Paper Stock Ltd. v. St. Anne-Nackawic Pulp & Paper Co., 1 S.C.R. 580 at para. 4 (Atlantic Paper).
     
  2.   Tom Jones & Sons Ltd. v. R. 31 O.R. (2d) 649, (H.C.) (Tom Jones).
     
  3.   Tom Jones & Sons Ltd. v. R. 31 O.R. (2d) 649, (H.C.) at para. 13.
     
  4.   “Ontario Enacts Declaration of Emergency to Protect the Public. Ontario News Room, March 17, 2020; “Coronavirus: Canada to bar entry for most foreigners. BBC, March 16, 2020; Nunavut declares state of public health emergency.” CBC News, March 18, 2020; “Alberta declared a public health emergency over COVID-19.” CTV News, March 17, 2020.
     
  5.   Domtar Inc. v. Univar Canada Ltd., 2011 BCSC 1776.
     
  6.   Domtar Inc. v. Univar Canada Ltd., 2011 BCSC 1776 at para. 75.
     
  7.   Domtar Inc. v. Univar Canada Ltd., 2011 BCSC 1776 at para. 92.
     
  8.   Tandrin Aviation Holdings Ltd. v. Aero Toy Store LLC, (2010) EWHC 40 (Cmm) (Tandrin).
     
  9.   Tandrin Aviation Holdings Ltd. v. Aero Toy Store LLC, (2010) EWHC 40 (Cmm) at para. 30.
     
  10.   Naylor Group Inc. v. Ellis-Don Construction Ltd., 2011 SCC 58.
     
  11.   Naylor Group Inc. v. Ellis-Don Construction Ltd., 2011 SCC 58 at para. 55.
     
  12.   Forest Hill Homes v. Ou, 2019 ONSC 4332 (Forest Hill). For other examples see: Bang v. Sebastian, 2018 ONSC 6226; Paradise Homes North West Inc. v. Sidhu, 2019 ONSC 1600.
     
  13.   Forest Hill Homes v. Ou, 2019 ONSC 4332 at para. 5.
     
  14.   Forest Hill Homes v. Ou, 2019 ONSC 4332 at paras. 5-6
     

Bradley Phillips and Robert Alfieri

The authors of this blog are Bradley Phillips and Robert Alfieri. Brad is a partner at Wagner Sidlofsky LLP. Robert is a member of the firm’s Estate and Commercial Litigation Groups.

This blog is not intended to serve as a comprehensive treatment of the topic. It is not meant to be legal advice. Every case turns on its specific facts and it would be a mistake for the reader of this blog to conclude how it might impact on the reader’s case. Nothing replaces retaining a qualified, competent lawyer, well versed in this niche area of practice and getting some good legal advice.
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