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COVID-19: Impact On Contractual Obligations – Coronavirus (COVID-19) – Canada – Mondaq News Alerts


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Canada is facing an unprecedented slowdown as a result of the
novel coronavirus (Covid-19). Schools and businesses are shutting
down, borders have closed, and global supply chains have been
disrupted. As the nation prepares for Covid-19 and its down-stream
effects, questions have arisen as to ongoing contractual
obligations of businesses in times of unforeseen and wide-ranging
economic disruption.

In this article, we consider the application of force majeure
clauses in contracts and the common law doctrine of frustration.
These are legal avenues a business may be able to rely upon in the
event it finds itself in a situation where it is no longer able to
comply with its contractual obligations.

Force Majeure

Many commercial contracts contain a “force majeure”
clause, which suspends a party’s contractual obligations when
an unforeseen event, beyond the control of either contracting
party, prevents a party from fulfilling the terms of the contract.
A party’s ability to claim relief under such a clause depends
on the terms of the contract and, in particular, the wording of the
Force Majeure clause.

These clauses are often drafted to list specific events that
qualify as force majeure events (e.g. acts of war, famine, floods,
earthquakes, and acts of terrorism), which may be followed by
general “catch-all” wording to capture unlisted events
that would fall within the concept. The clause may also explicitly
exclude instances, such as a market downturn or lack of funds, as
events not falling within the scope of force majeure.

The common theme amongst force majeure clauses is that they
provide relief to a party that is not able to perform its
obligations due to unexpected intervening events. While Covid-19
was certainly unexpected, the application of a force majeure clause
is not so clear cut — generally speaking, the affected party
would have to demonstrate that:

  1. Covid-19, or its knock on effects, is
    captured by the force majeure clause;
  2. the impact of Covid-19 was
    unavoidable and beyond the control of the affected party; and
  3. such impact prevents the affected
    party from performing its obligations under the contract.

Canadian courts have set a high bar in enforcing force majeure
clauses, to the point where a party must demonstrate that it would
be impossible to perform its obligations under contract as a result
of an intervening event. A contract that has become
commercially impractical, inconvenient, or expensive to perform as
a result of Covid-19 would unlikely surpass the threshold required
for relief under a force majeure clause.

The availability of relief is highly context specific and may
differ depending on the language of the contract and the unique way
Covid-19 impacted the business. If the threshold is met, the relief
available to the affected party would flow in accordance with the
terms of the contract, which may include: (i) the requirement of
notice to be given; (ii) a grace period in which some or all of the
obligations are suspended until the circumstances can be dealt with
or revert to normal; and (iii) a point at which the obligations are
terminated, or an option to terminate is made available, if the
circumstances persist for a certain period of time.

Frustration

The legal doctrine of frustration may be available to parties
whether or not a force majeure clause has been drafted within the
contract. Simply put, frustration occurs when an unforeseeable
intervening event, through no fault of either party, so
significantly changes the core of the contract that it would be
unjust to hold the parties accountable to the strict contractual
terms in light of the new circumstances. Unlike the operation of a
force majeure clause, a successful claim of frustration ends the
relationship between the contracting parties rather than suspending
the contractual obligations.

The doctrine of frustration is flexible and may, depending on
the circumstances, take into consideration a variety of factors,
including: (i) whether performance of strict contractual terms has
been made impossible; and (ii) whether the underlying purpose of
the contract has been destroyed by the intervening event.
Notwithstanding the flexible nature of frustration, an affected
party faces a heavy burden to prove all elements of the doctrine in
order to obtain the equitable relief.

Frustration applies in circumstances where the parties have not
contractually allocated the risk of the offending event. In cases
where such allocation has been agreed to, which may be included
within the terms of a force majeure clause, courts will have little
reason to impose another allocation through the doctrine of
frustration.

Mitigation

Parties to a contract will be obligated to mitigate any losses
as a result of Covid-19 despite there being, at first glance, the
availability of a force majeure clause or the doctrine of
frustration. This means that parties should continue to seek
alternate methods of complying with their contractual obligations.
This is especially prudent as the availability of relief under a
force majeure clause or the doctrine of frustration will not be
certain until it has been settled through court or an alternate
dispute resolution process.

Final Words

As the impact of Covid-19 continues to cause closures, delays,
and confusion, businesses must prepare a plan to navigate this
storm by examining their contractual obligations, identifying risk,
and considering contingencies. Only by doing so can businesses
appropriately position themselves and build resilience in times of
such far reaching economic uncertainty.

That being said, the sobering reality of Covid-19 is that it
presents a new and unique challenge that all businesses are facing.
The uncertain and ever changing fallout of Covid-19, compounded by
an already uncertain legal system, represents a daunting obstacle
course to those that seek to protect their business. Tempering
strict legal principles with pragmatism may be the wisest option in
the face of Covid-19. Simply put, seeking a mutually agreeable
resolution for contractual issues caused by Covid-19 is likely the
most practical way of establishing certainty in an increasingly
uncertain landscape.

To summarize, the key steps to take at this time are:

  1. review your contracts for force
    majeure clauses;
  2. take whatever steps are available to
    mitigate losses and seek alternative methods of performing your
    obligations;
  3. if your contract contains a force
    majeure clause and you are unable to perform your obligations,
    review and follow the contractual process of triggering the force
    majeure clause. This may involve the delivery of notice to a listed
    address;
  4. if your contract does not contain a
    force majeure clause, consider whether the doctrine of frustration
    applies;
  5. document how Covid-19 or the knock on
    effects impact your ability to perform. If a dispute arises, you
    want to be prepared with detailed evidence; and

if you choose to negotiate with a contract counterparty, be
careful that you do not undermine your ability to subsequently rely
on a force majeure clause or claim frustration. You should, if
possible, reserve your right to claim all legal rights and
remedies.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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