Following the declaration by the World Health Organization (WHO) that COVID-19 is a pandemic, governments and businesses have been desperately trying to figure out how to address the constantly changing business environment resulting from this virus. The rapid spread of the virus and the ensuing social distancing and self-isolation measures have had a massive impact on the operations of several businesses, leaving many of these businesses unable to perform their contractual duties. This post will address when force majeure clauses can be invoked and main considerations for business owners during this uncertain time.
Force majeure clauses are a common clause found in contracts that excuse or delay performance of the contract when a specified and unforeseeable event or circumstance arises that is beyond the control of the parties. Whether COVID-19 constitutes a force majeure event will likely depend on the language of the clause itself. Some clauses will contain language such as "disease", "epidemic", or "pandemic" which would clearly bring COVID-19 within the definition of a force majeure event. Changes in laws or disruption in a supply chain or disruption of labour may also be considered or included in the force majeure clause.
While, Courts typically interpret force majeure clauses narrowly, it is possible that "any other cause beyond the party's control" or similar language could also bring COVID-19 within the definition of a force majeure event. Demonstrating that a party has suffered a force majeure event is not enough, the party seeking to rely on or invoke the force majeure clause would need to demonstrate:
- that the force majeure event has significantly impacted the performance of the contractual obligation. This generally means showing that the event has rendered the performance impossible; meaning there must be no reasonable alternative method to perform the party's obligations under the contract;
- that the party seeking to invoke the force majeure clause has provided sufficient notice to the other party. The method of notification should be outlined in the contract, but is generally written notice; and
- that the parties have made efforts to mitigate the impact of the force majeure event.
A decline in demand or an inability to sell a product at or above the contract price does not constitute a force majeure. Further, mere difficulty to perform the contract or increased expense to perform the contract, generally does not arise to the level of a force majeure. In order to fall within a force majeure event, the obligations under the contract must be impossible to perform as a result of the event, and the event must be unforeseen at the time the contract was entered.
If the force majeure clause of the contract in question does not apply to the present situation or the contract does not contain a force majeure clause, another avenue to consider would be the doctrine of frustration. Frustration of a contract occurs when an event occurs (without the fault of either party, and for which the contract makes insufficient provision) that significantly changes the nature of the parties' rights and obligations under the contract, that it would be unjust to hold the parties to the contract. The occurrence must not have been reasonably contemplated when entering and executing the contract. In a case of frustration, both parties are excused from further performance of their duties under the contract. Again, similar to a force majeure event, an event that makes performance more onerous will not lead to frustration of the contract.
Determination of whether a force majeure clause is triggered is highly situation specific and will depend on many considerations, including the language of the clause, the nature of the contract and the services performed under the contract. The clause will also generally outline how the contract is to be dealt with in the case of a force majeure event.
As this situation continues to change and evolve, it will be more important than ever to know and understand your rights and responsibilities under a contract, and any obligations to provide notice you may have. For further information, please contact Scott Venturo Rudakoff LLP.
About Mackrell International - Canada - Scott Venturo LLP is a full service business law firm in Calgary, AB and a member of Mackrell International. Mackrell International - Canada is comprised of four independent law firms in Alberta, British Columbia, Ontario and Quebec. Each firm is regionally based and well-connected in our communities, an advantage shared with our clients. With close relations amongst our Canadian member firms, we are committed to working with clients who have legal needs in multiple jurisdictions within Canada.
This article is intended to be an overview and is for informational purposes only.