Copyright 2009, Blake, Cassels & Graydon LLP
Originally published in Blakes Bulletin on Business, May 2009
Does a severe downturn in the economy constitute an event of force majeure? If you can no longer get financing because banks do not have the money to lend, can you claim force majeure because events are beyond your control? Even Donald Trump is attempting to claim that a "once-in-a-century credit tsunami" is enough to establish an event of force majeure that would allow him to avoid a $40-million personal guarantee related to unit sales for the Trump International Hotel in Chicago. If the contract allows it, parties are generally relieved from their contractual obligations as a result of force majeure events beyond their reasonable control. But do Canadian courts support such a claim when it comes to economic events beyond their control? Not surprisingly, it depends almost entirely on the actual drafting of the contract provisions.
Express Economic Force Majeure
While "economic force majeure", or force majeure based on the state of the economy or relevant markets, is not widely addressed by the courts, judicial commentary has not ruled out its potential application. In situations where the force majeure clause in a contract expressly provides for a specific economic contingency or loss which has occurred (such as a direct reference to material or adverse changes in market conditions), the courts have accepted this as an event of force majeure. The requirements to establish such an event were enunciated by the Supreme Court of Canada in Atlantic Paper Stock Ltd. v. Anne-Nackawic Pulp & Paper Company Limited (Atlantic Paper):
- one of the events referenced in the force majeure clause has occurred;
- the force majeure event was beyond the control of either party, it was "unexpected" and "beyond reasonable foresight and skill";
- the event prevented, hindered, or delayed the party seeking to rely upon the clause from performing its contractual obligations; and
- there were no reasonable steps that could have been taken to avoid or mitigate the event or its consequences.
Beyond the Control of Either Party
The issue of control is a central determination in the court's application of an express economic reference in a force majeure clause to the facts before it. The force majeure clause will not be construed to cover events brought about by a party's negligence or willful default. This was a central consideration in the Supreme Court's rejection of a claim to economic force majeure in Atlantic Paper in spite of an express reference in the contract to the "non-availability of markets" as a grounds for establishing force majeure. The court's ruling was, however, directed by the factual determination that the "non-availability of markets" was caused by poor marketing and ill-informed business planning, actions specifically within the claimant's control.
In West Fraser Mills Ltd. v. Crown Zellerbach Canada Ltd., the British Columbia Court of Appeal was asked to apply an "economic clause" (construed to be a force majeure clause) which specifically referenced "market conditions" as an event that would excuse performance under the contract. It was found that the decline in sales volume experienced by Crown Zellerbach was due to an industry-wide decline. Therefore they had no control over the market forces and could rely upon the "economic clause".
Prevented, Hindered or Delayed
A causal link between the decrease in demand and the inability to perform under the contract must also be established. In order to demonstrate "prevention" of performance, there must be evidence that the party was legally or physically prevented from performing, not merely that performance was made more difficult or unprofitable. Claiming that necessary financing was unobtainable because interest rates had suddenly jumped, for example, will not be considered to have prevented or made it impossible for financing to be obtained; the much higher interest rate merely makes financing unprofitable or uneconomic (Tom Jones & Sons Ltd. and the Queen (ON H.C.J.)). A determination of whether a party was effectively "prevented" will, however, be interpreted in light of the particular contract. For example, the case of Atcor Ltd. v. Continental Energy Marketing Ltd. (AB C.A.) (Atcor) suggests that the burden on the party invoking force majeure is not impossibility of performance and that "commercial reasonableness" of performance is an appropriate factor for the courts to consider.
In order to establish force majeure, evidence would further need to establish the impossibility of avoiding or mitigating the effects of the alleged force majeure event. In situations of an economic force majeure, the courts have modified "impossibility of avoiding" to require the demonstration that there was no "commercially reasonable alternative" open to the party seeking relief from the contractual obligations. For example, in a situation where a supplier in a chain of suppliers is "prevented" from performance by reason of a force majeure, it has been held that they are not liable under the contract even though they could have mitigated a force majeure event by purchasing the deliverable elsewhere and, in so doing, fulfilled the contract. It has also been held, however, that force majeure will not excuse a bad bargain – where the party's reliance upon force majeure would be to relieve it of contractual obligation simply because it could not operate at a profit.
The party must also demonstrate that conditions have radically changed from what they were at the time the contract was entered into. This speaks not only to the magnitude of the force majeure event itself but also to its foreseeability. The Atcor case provides some guidance on "reasonable" expectations in this regard. Here the court suggested that the event need not be a catastrophe or "act of God", but just something not present in sound business calculations, which amounted, in the court's determination, to a list of events for which insurance is not available at a reasonable cost. As such, the force majeure economic
event must be shown to be beyond the general volatility of the market and to be such an unprecedented, sudden and extreme loss or impediment that it could not be seen to be a normal (case- and industry-specific) risk that would be allocated through the contract.
There has yet to be a Canadian decision where the court decided the issue on the basis of an economic force majeure, absent an express provision for economic events in the force majeure clause itself. Notwithstanding the foregoing, the depth of the current economic downturn and the impact it is having on business in Canada could see an increase in interest in the force majeure clause and the effect of its inclusion in a contract.
For a claim of economic force majeure to be successful, the affected party will need to demonstrate that the impact of changes in the economy were beyond its control, the economic change prevented contractual performance, it had no reasonable ability to mitigate and the economic change was not reasonably foreseeable. More importantly, the party attempting to rely on force majeure will have to demonstrate that the terms of the contract allow it. To say the least, the burden is high, but in these economic times perhaps there is a greater chance of success for a claim of economic force majeure.
The success or failure of such a claim will depend primarily on the terms of the contract. Counsel are well advised to consider boilerplate force majeure clauses very carefully.
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.