The COVID-19 Pandemic has had devastating consequences both around the world and here at home. The measures taken here at home to prevent the spread of COVID-19 have greatly impacted certain people’s ability to fulfil contractual obligations.
But what options does one have when one is unable to fulfil one’s contractual obligations due to the COVID-19 Pandemic. Contractual obligations arise from the terms within the contract and clauses such as force majeure clause or Common Law doctrines such as the Doctrine of Frustration might provide relief in cases where one cannot fulfil one’s contractual obligations.
Force Majeure Clauses
The concept of force majeure refers to when contractual obligations cannot be fully executed or adhered to because of extraordinary or extreme circumstances, often referred to as “acts of God”.
Whether or not the COVID-19 Pandemic will constitute force majeure will depend on the wording of the force majeure clause, the nature of the party’s contractual obligations, and the actual impact of COVID-19 on the contractual obligations.
Before claiming force majeure, a party has a duty to mitigate if there is a commercially reasonable manner to do so (Atcor Ltd v Continental Energy Marketing Ltd., 1996 ABCA 40, at para 30) Additionally, the event which a party claims is force majeure, must be an event which the parties could not have foreseen (Atlantic Paper Stock Ltd v St. Anne Nackawic Pulp & Paper Co (1975), [1976] 1 SCR 580, 56 DLR (3d) 409 (SCC) [Atlantic Paper].
Canadian courts are unlikely to find an implied force majeure clause where no express clause was included in the contract. Moreover, force majeure clauses are likely to be constructed strictly (Atcor Ltd v Continental Energy Marketing Ltd (1994), 161 AR 81, 23 Alta LR (3d) 433 (AB QB), at para 8 citing Atlantic Paper). This means that if a contract does not contain a force majeure clause or the wording of the clause is insufficient to include the COVID-19 Pandemic, a party who is unable to fulfil his contractual obligations will need to rely on other doctrines, such as the Doctrine of Frustration, to avoid being in breach of his contract.
Doctrine of Frustration
The Doctrine of Frustration applies where “a situation has arisen for which the parties made no provision in the contract and the performance of the contract becomes ‘a thing radically different from that which was undertaken by the contract.’ ” (Naylor Group Inc. v Ellis-Don Construction Ltd., 2001 SCC 58, at para 53).
A party who wishes to rely on the Doctrine of Frustration has the burden of showing that:
1. A supervening event has occurred, through no fault of either party, and that the event was not contemplated by the parties and was not foreseeable at the time the contract was formed;
2. There is no contractual provision which deals with the supervening event, including a force majeure clause as parties are meant to rely on either force majeure or the Doctrine of Frustration, but not both;
3. The event has rendered the performance of the contract substantively different from what was intended when the parties entered into the contract (Bang v Sebastian, 2018 ONSC 6226, at para 27). This can include cases:
a. Where the event has made the performance of the contractual obligations impossible;
b. Where the performance of the contractual obligations is still possible, but the event has undermined the purpose for which the parties entered into the contract; or
c. Where the event has made the performance of the contractual obligations temporarily impossible to the point of frustrating the purpose of the contract. (McLean v City of Miramichi, 2011 NBCA 80, at para 24).
While the Doctrine of Frustration is meant to be a flexible doctrine, it is worth noting that the Doctrine of Frustration requires that the supervening event be one that was not foreseeable at the time the contract was formed. Given that health authorities have warned of the possibility of secondary and tertiary waves of COVID-19, parties entering into contracts now may not be able to rely on the Doctrine of Frustration if the COVID-19 Pandemic subsequently impedes the performance of the contractual obligations.
In the same vein, any parties entering into new contracts will want to ensure that any force majeure clause contains not only sufficient wording to cover pandemics, governmental orders, interruptions to supply lines, and industrial disruptions, but also to deal with any issues of the foreseeability of further business interruptions because of any secondary or tertiary waves of COVID- 19.
If you have any questions about force majeure clauses or the Doctrine of Frustration, please contact your lawyer at Stillman LLP.
By Sara Boulet
Note: This article provides general commentary and is in no way intended to replace the need to consult with a legal professional concerning the specific circumstances of your situation. This article should not be construed or relied upon as legal advice.
