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Practical legal advice and COVID-19: Relying on force majeure clauses or the doctrine of frustration

force majeure

Until COVID-19, many business people had not heard about or given much consideration to force majeure clauses in their business contracts. Now, in the light of the COVID-19 outbreak across the globe, both force majeure clauses and the doctrine of frustration have become very relevant and much-discussed topics.

Force majeure

What is a “force majeure clause”? It is a term in a written contract that generally operates to discharge a contracting party when an unexpected event beyond the control of either party makes performance of the contract impossible.

The question for many businesses is whether they can escape their contractual obligations without legal consequence on the basis of a force majeure clause as a result of the COVID-19 outbreak’s affect on their business. Unfortunately, there is no one-size-fits-all answer.

In Canada, and in British Columbia specifically, whether a force majeure clause will allow your business to avoid its contractual obligations to another party is a fact-specific determination that depends upon the specific wording of the particular force majeure clause agreed to in the contract.

Generally, the following factors are considered when determining the applicability and scope of a force majeure clause:

  1. Whether COVID-19 can be considered a triggering event under the particular clause;
  2. The impact of COVID-19 on the party’s ability to perform its contractual obligations; and
  3. The obligations of the parties under the clause, including whether proper notice was given and the party’s duty to mitigate the effect of the force majeure event.

If you are considering whether your business should or could rely upon a force majeure clause, here are some practical tips:

  1. Don’t assume that there is a force majeure clause in your contract. Not all contracts include these clauses.
  2. If there is a force majeure clause in your contract, read it carefully several times.
    • Are there any triggering events in the clause that might allow your business to claim that the COVID-19 circumstances are covered by the clause (e.g. that an “epidemic or quarantine” is a triggering event)? If not, is there a “catch-all” clause that might cover the COVID-19 circumstances affecting your business?
    • Based on the language used in the force majeure clause, have the COVID-19 circumstances created, in commercial terms, a real and substantial problem, one that makes performance commercially unfeasible or impossible? Keep in mind that the inability to pay and a change in financial circumstance do not necessarily mean that performance is impossible.
    • What relief does the force majeure clause provide? Does it allow your business to terminate the contract or something else? For example, does it simply allow late performance?
    • Does the force majeure clause require you to provide notice to the other party to the contract? If so, you need to strictly comply with the terms of the notice provision.
  3. Consider carefully whether there is anything your business could do to mitigate the effect of COVID-19. If you want to rely on the force majeure clause, you will need to show that you took commercially reasonable steps to help limit the losses that the other party to the contract will suffer.
  4. Since force majeure clauses are fact-specific, the other party to the contract may not agree with your interpretation of whether and how the force majeure clause applies in the circumstances. If a party relies on a force majeure clause, and the other party to the contract disagrees about the applicability of the clause, the other party can seek relief through court proceedings or through arbitration proceedings (the type of legal proceeding depends upon the other terms of the contract). When making the decision whether to rely on a force majeure clause, it is best not to ignore the potential time and money cost of these legal proceedings, regardless of whether you expect your interpretation will prove to be the correct one.

Frustration

If the contract does not have a force majeure clause, or the clause does not apply to the circumstances triggered by the COVID-19, all parties to a contract might be excused from performance of the contract based upon the doctrine of frustration. Under the common law doctrine of frustration, a contract is frustrated when:

  1. A qualifying supervening event (one for which the contract makes no provision, which is not the fault of either party, which was not self-induced, and which was not foreseeable) transpires, and
  2. That event results in performance of the contract becoming a thing radically different from that which was undertaken when the parties entered the contract.

However, the second element is a difficult threshold to reach, particularly because it is a well-established legal principle that increased expense or hardship alone does not frustrate a contract.

Further, as with the interpretation of force majeure clauses, if the other party to the contract does not agree that the doctrine of frustration applies, that party can seek relief through arbitration or litigation proceedings.

We also refer you to the article by Pushor Mitchell LLP’s Alfred Kempf: COVID-19 and Frustration of Contracts

Conclusion

We recommend you seek a lawyer’s assistance to determine the likelihood that the force majeure clause in your business contract(s) or the doctrine of frustration will allow you to take the steps you would like to take. In addition, a lawyer can also identify whether there are any other avenues that might be available to help your business through these challenging times.

By Alison Cathcart, Pushor Mitchell LLP

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In addition to our regular guest bloggers, Inside Internal Controls blog published by First Reference, provides occasional guest post opportunities from various subject matter experts on the topics of risk management and best practices in finance and accounting, information technology, environmental issues, corporate governance, sales/marketing and operations, not-for-profits and business related issues in Canada. If you are a subject matter expert and would like to become an occasional blogger, please contact Yosie Saint-Cyr at editor@firstreference.com. If you liked this post and would like to subscribe to Inside Internal Controls blog click here.

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