The COVID-19 Pandemic has unprecedented and wide-spread impact on commercial obligations. Many business relationships are being disrupted or suspended, and many business deals are delayed or completely cancelled. The global lock-down has companies scrutinizing their rights and obligations, and turning to the back pages of their contracts to check if a force majeure provision is in the fine print. In a state of wide-spread emergency, the force majeure clause rears its head and becomes relevant.
Whether the COVID-19 Pandemic will be considered an event of force majeure will depend on the contract terms and the clause itself.
Here is our hit-list of seven things to consider:
1. What is a "force majeure" clause?
A force majeure clause is a contractual term that attempts to deal with the legal impact of extreme, unforeseeable events which are beyond the control of the parties, and which might impact the performance of the contract. The purpose of the clause is to allocate the risk of force majeure events, regardless of whether they are foreseeable. There are many circumstances that are rare or unlikely, and unpreventable, but still common enough to be foreseen as a possible source of disruption, such as a severe storm, or a labour strike. Force majeure clauses allocate risk and relieve the impacted party's performance during the course of the force majeure event.
2. No force majeure provision? It's not the end.
If your contract does not contain a force majeure clause, the courts may still provide a legal remedy based on the doctrine of "frustration". Generally, Canadian courts have not been willing to impose an implied force majeure provision. So the contracting parties would have to consider whether the doctrine of frustration applies. Common law principles recognize frustration of purpose and circumstances beyond a party's control. Keep in mind these two important points:
- First, the Courts will examine closely the circumstances before providing common law relief – if you ask the court to give you relief you didn't bargain for you will need good reason.
- Second, when sophisticated parties ask the courts to redress a gap in their contract, the request will not be looked-upon fondly. In short, if you seek common law relief outside your contract, you'll need to answer hard questions; the hill will be steep.
3. Triggering Events
Contracts with force majeure provisions often define the triggering event: For example, acts of God, tempests, and civil unrest. "Terrorist activities" were added to many lists, after the events of 9/11. Standard force majeure clauses rarely use the terms "pandemic", "lock-down", "epidemic" or "quarantine", although these will certainly be added to the list going forward.
The list in some clauses is open-ended, designed to cover any unexpected event that falls outside the control of the impacted party. Others lists are finite, and specify certain named events.
Check the clause in question to determine how it might apply to the current situation. The current crisis, under many force majeure definitions, would likely be interpreted to trigger the clause and set the path for resolution.
Conceptually, the omnibus "Acts of God" might cover a global pandemic, and more certainly a state of emergency declared by governments at all levels on a global scale fits within many standard definitions, particularly where government action prohibits certain activities from taking place.
4. Foreseeability and Causation
COVID-19 by most accounts is not a foreseeable event. Foreseeable events are most often carved-out and put a stop to the triggering event.
Causation requires the force majeure event to be the cause for non-performance. If a party can perform its contracted obligations in the face of the force majeure event, it must. Even under certainty of economic loss.
The bottom line: if the event is NOT listed in the force majeure clause AND it is foreseeable , the party must perform if it can, even if only in part. If the event IS listed, then parties unambiguously have allocated the risk of that specific force majeure event, in which case foreseeability should not be an issue.
Force majeure provisions are not isolated statements, of course; nor are commercial arrangements. A supplier will agree to deliver to multiple buyers, with different delivery expectations. In the energy sector, the obligation is firm or uninterruptible, for example, with agreed curtailment priorities. A party may continue to perform under one contract, but claim force majeure under another. Or allocate service disproportionately as its contracts permit. Losses then may be suffered disproportionately among common interest parties with disparate contract rights. The collection of interested parties introduces allocation of claims.
The force majeure provision may require notice within some period of days after the event. When the clock starts ticking is the question. Declared states of emergency are fundamental, if framed in the relevant context. A force majeure event under contract with a particular City for example, should be framed by the date the City proclaimed the state of emergency. The event is known, relevant, and date is specific.
Formal notice is a must. Send notice as required by the contract, but not blindly; addresses and contacts change. It is imperative to ensure that notice gets in the right hands.
A party that is seeking to rely on a force majeure clause to escape liability must try and mitigate its own losses. The concept of "clean hands" comes to mind, apropos in our circumstance. Regardless of the strength of your force majeure provision, any party seeking relief from the courts should come with clean-hands, and a record of their steadfast efforts to mitigate the loss claimed. Perhaps this goes without saying, but even a free-ride that's inked will be scrutinized to seek best intent.
If you think you or your business is at risk as a result of the current situation, contact your Field Law advisor to seek advice on your business contracts, and the interpretation of force majeure events for your business.
Want to learn more?
View our "COVID-19: Force Majeure Clauses in Business Agreements" webinar recording.
Learn about force majeure clauses, and why context is important in interpreting how it might apply to your commercial contracts. Presented by Cameron Hughes and Richard Stobbe, this webinar reviews the concept of "frustration" of contracts, triggering events, and notice requirements.
- Force majeure clauses: a quick refresher and some examples
- What is the result of the COVID-19 pandemic and the expected behaviour of contracting parties
- War stories from Canadian case law
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.