The Impact of COVID-19 on Contractual Obligations: Force Majeure and Frustration of Contract
By Sean O’Donnell
These blog posts are meant to provide educational content and are not to be taken as legal advice.
What is a force majeure clause? A force majeure clause is “a contractual term by which one (or both) of the parties is entitled to cancel the contract or is excused from performance or is entitled to suspend performance […] upon the happening of a specified event or events beyond [his or her control]”. In other words, it excuses non-performance of a contractual obligation upon the occurrence of a specified, yet unforeseeable (or at least unpredictable) event or circumstance that is beyond the parties’ control, but which would not rise to the level of frustration (discussed further below). Viewed in this light, a force majeure clause can serve to allocate risk in a contract.
The impact of COVID-19 relative to force majeure clauses depends, to a large extent, on the exact wording of the clause itself. Force majeure clauses are to be interpreted narrowly, with close attention to the specific language used in the impugned clause.
There are four key factors that determine whether a party can rely on a force majeure clause relative to COVID-19, including:
- Whether COVID-19 falls within the scope of the force majeure clause;
- Whether COVID-19 has sufficiently impacted an obligation of the relying party;
- Whether the relying party has taken sufficient steps to avoid and mitigate COVID-19’s impact; and
- Whether additional contractual conditions are met.
A typical force majeure clause may state that the parties will not be liable for failure to perform their contractual obligations due to an event of “force majeure”, without providing details or specific events that would give rise to its applicability; instead, leaving it to the parties to argue what events fit the definition. On the other hand, some force majeure clauses will provide a non-exhaustive list of events that fall within the scope of a circumstance beyond the control of the parties. Such common examples will often include acts of war, terrorism, strikes, pandemics, or adverse weather conditions.
Applicability of Force Majeure Clauses in the wake of COVID-19
First, whether COVID-19 is considered a force majeure event under a contract depends on the clause’s specific wording within that contract, bearing in mind its narrowly construed interpretation. Therefore, if a force majeure clause is subject to some level of ambiguity, it is possible, even likely, that it may not apply to the current pandemic.
If, however, a force majeure clause is drafted to include wording such as “epidemic”, “pandemic”, “illness”, “quarantine”, or “disease”, it is more likely for COVID-19 to be captured by such language, and thus protected from non-performance. Further, and depending on the evolving spread of COVID-19, phrases such as “Acts of God” could be included within the scope of a force majeure provision.
Second, for a force majeure clause to adequately apply to the event and/or circumstance, the clause will often set out the threshold of interference relative to a contractual obligation that must exist prior to the clause being triggered. Typical phrases will often include language such as “renders impossible”, “substantially hinders” or “prevents”. Whether or not COVID-19 meets the requisite threshold of impact will depend on the factual circumstances surrounding each issue, the specific wording involved, and the particular obligation the party relying on the provision hopes to excuse. Courts are hesitant to give effect to a force majeure clause if the impact simply renders an obligation more expensive, or less convenient.
In today’s context of COVID-19, it is not enough for a party to simply claim force majeure without the pandemic having an “actual and direct” impact on the party’s ability to perform the contractual obligation. Indirect impacts of COVID-19, including minor supply issues, price fluctuations, and shortage of staff will be considered less likely to have a direct and actual impact on the party’s ability to perform the contract.
Third, parties seeking to rely on a force majeure clause in the wake of COVID-19 must turn their attention to avoid and mitigate ‘foreseeable’ impacts. Parties should not be quick to invoke a force majeure clause if the impacts of COVID-19 were reasonably avoidable in the specific factual scenario. Similar to the requisite threshold of impact mentioned above, some contracts will outline the requisite level of mitigation efforts required by a party relying on the clause. If the clause is silent as to obligations to mitigate and avoid foreseeable impacts, the courts will nevertheless apply common law principles and determine, in the factual scenario at issue, whether the party could have reasonably avoided and/or mitigated some, or perhaps, all the potential risk due to COVID-19.
Fourth, it should be noted that many force majeure provisions contain strict notice requirements. Therefore, if a party intends to rely on a force majeure clause, the requisite notice periods in the contract should be reviewed closely and followed strictly. Typically, these provisions will require that written notice within a specified number of days of the event at issue be given. Failure to adhere to these timelines can cause a party to be barred from exercising a force majeure clause.
Even in cases where no formal written notice is required, parties relying on a force majeure clause would be well served if they thoroughly document the impacts COVID-19 has had on their ability to perform the obligations of the contract. The purpose behind this is to serve as proof in the event of a dispute later down the road in a court proceeding.
Assuming COVID-19 is a force majeure event within the confines of a specified contract, the party seeking to rely on it must satisfy two things: (1) that COVID-19 has rendered the performance of their contractual obligations impossible; and (2) that COVID-19 and its relative consequences were beyond the reasonable foresight and skill of the parties at the time they entered into the contract. A court will not accept a party’s reliance on a force majeure clause due to its own actions or inaction, which, as a result, led to the force majeure event at issue. It is by no means a straightforward application of yesterdays principles in today’s circumstances. Instead, the conditions of today, and how they evolve in the months to come will matter greatly in the interpretation and applicability of force majeure clauses.
Where there is no Force Majeure provision: The Doctrine of Frustration
In the absence of a force majeure clause, and albeit in very limited circumstances, a party may be relieved from its obligations by claiming their respective contract is “frustrated”. In the employment context, the doctrine of frustration “is not to be invoked as the dissolvent of a contract”. The doctrine of frustration has a longstanding history in Canadian common law, with the Supreme Court of Canada stipulating that frustration is available when a supervening event has occurred without the fault of either party, and for which the parties did not allocate risk in the contract, but which causes performance of the contract to become “a thing radically different” from what the parties had in mind when entering the contract. In an employment scenario, for something to frustrate the contract of employment, it must strike at the contract’s root and be “unexpected, something beyond reasonable human foresight and skill”. Further, the discharging condition must be limited to an event over which the defendant exercises no control. Canadian jurists have used these criteria to make the threshold of frustration extremely high for an employer, thereby avoiding claims by discharged employees. How then will these criteria and common law principles be applied in the era of COVID-19?
Over the past few weeks, the risk to an employee’s health in performing their day-to-day working duties has increased exponentially. Such risk has led many employees who are not able to work remotely to refuse to perform work due to unsafe and/or dangerous working conditions, as permitted under the Occupational Health and Safety Act (the “OHSA”). Employers should respond carefully and cautiously in their response to claims of this nature. Additionally, various employers have argued that in the wake of COVID-19, their contracts with their employees are considered “frustrated”, thereby disentitling employees to applicable severance and termination pay otherwise required. This is an on-going issue, and one that is going to be played out in courtrooms across this country. Courts are likely to take a balanced approach when it comes to employee and employer’s interests.
Pre-COVID-19, mere economic loss, non-availability of markets, or a lack of profitability on the employers part would not frustrate the contract of employment. In the current climate, however, of COVID-19, less is clear relative to the frustration of employment agreements. While large shifts in the law are as rare as this pandemic itself, time will tell as to how the courts will treat the doctrine of frustration considering this unforeseen and unprecedented circumstance. Nevertheless, the onus remains on the employer to prove the contract is frustrated, which, as previously mentioned, is a very high threshold to meet. On the other hand, COVID-19 has led to dramatic and unprecedented government-imposed restrictions, including the closure of all non-essential businesses in the province of Ontario. With these new measures in place, and the impact of COVID-19 evolving rapidly, it remains possible (albeit unlikely) for the doctrine of frustration to be invoked, even altered to correspond with the times.
Businesses and employers should review their contracts in detail to assess the unique ways COVID-19 is impacting their contractual relationships. If considering invoking a force majeure clause or the doctrine of frustration, parties ought to consider their overriding duty to perform contracts in good faith. Therefore, this endeavour should be met with a great deal of caution and proceeded with under the advice of a lawyer. Parties should also consider the long-term impacts of relying on a force majeure clause and the overall relationship between the contracting parties. Accordingly, and in the months and years to come, Canadian courts will be forced to wrestle with the principles of force majeure and frustration of contract in a post-COVID-19 climate, determining how, if it all, these principles should be modified to reflect the times.
To help navigate the rapid changes of COVID-19, please contact SJO Legal for a consultation to ensure you are receiving the most up to date information and advice.