If you are facing a potential disruption to your business as a result of COVID-19, a force majeure clause may apply.
Further to our COVID-19 and Excusing Non-Performance of Contractual Obligations blog post, here are some frequently asked questions about force majeure clauses to help you navigate your contracts.
What is force majeure?
A Force majeure clause, or an "Act of God" clause, is a provision often found in contracts that deals with what occurs when certain triggering events makes performance of contractual obligations impossible. Common triggering events include various natural disasters, fires, epidemics and other public health emergencies, terrorism and public disorder, wars and armed conflict, and labour disruptions.
The Supreme Court of Canada has considered acts of God or force majeure clauses and has specified:
An act of God clause or force majeure clause [...] generally operates to discharge a contracting party when a supervening, sometimes supernatural, event, beyond control of either party, makes performance impossible. The common thread is that of the unexpected, something beyond reasonable human foresight and skill.1
What if my force majeure clause does not specifically include pandemics/epidemics?
If a pandemic and/or epidemic is not specifically listed, courts are generally unwilling to interpret force majeure clauses broadly to include unspecified events. That stated, it may be possible to draw analogous grounds from similar events and extend the meaning of force majeure to apply. For example, the impact of COVID-19 could, arguably, be captured by a clause that incorporates "lawful authority" or "governmental action" in the case of a quarantine or, more broadly, "civil disruption or unrest". This is, however, a far less certain approach than relying on an express reference.
Aside from express reference, many force majeure clauses are open-ended, and include a catch-all category of events, such as those "beyond a party's reasonable control", which could be interpreted to include the COVID-19 epidemic depending upon the context. Specific analysis should be done for each contract to determine if a force majeure applies.
What can a force majeure clause do?
A force majeure clause provides direction regarding the contracting parties' obligations to each other in the event that the contract cannot be performed. Depending how the clause is written, it can excuse non-performance of contractual obligations and address issues related to compensation and time for performance during the period of force majeure. Typically, these clauses are drafted in a way that does not entitle the performing party to additional compensation.
Often, a force majeure clause can provide the option to terminate the contract in the event of a sustained force majeure event.
Are all force majeure clauses the same?
No. There are many different wordings seen in force majeure clauses, making careful consideration of the particular clause necessary, in light of the contract more generally and the specific factual circumstances. Should you have a question about your specific force majeure clause, please do not hesitate to contact us.
Can both parties to the contract claim relief under a force majeure?
Generally, a party is only excused from performing its obligations that are made impossible due to the triggering event. Some clauses are reciprocal and excuse both parties from performing their obligations, while others are drafted to only excuse performance by the supplier of goods and/or services.
If the obligations are not impeded by the force majeure event, performance of those obligations generally must continue, irrespective of the force majeure event, subject of course to the specific wording of the clause. Economic hardship is often specifically excluded as an event of force majeure.
Are there other alternatives to a force majeure clause?
Often, many contracts will include the right for the buyer of the goods and/or services a general right to suspend a contract at its option or in specific circumstances.
However, these contracts will typically require the buyer of the goods and/or services to pay additional compensation resulting from the suspension.
What if I do not have a force majeure clause in my contract?
When there is no force majeure clause, the legal doctrine of frustration of contracts may apply.
What is required for a contract to be "frustrated"?
The doctrine of frustrated contracts is similar to the force majeure, except it applies either as a result of the common law (past legal decisions) and certain legislation, for example, in Saskatchewan, the Frustrated Contracts Act.
For a contract to be "frustrated", the performance of the contract must be "a thing radically different from that which was undertaken by the contract". Whether frustration applies is highly fact specific and needs to be analyzed for each case.
What are the consequences of a "frustrated contract"?
A frustrated contract will generally result in the contract becoming unenforceable. Most often, this will have the effect of terminating the contract. Whether a contract is frustrated and the consequences are highly fact-specific.
Can I force the contractor to show up and perform their contractual obligations?
No. There is generally no ability to force a contractor to perform the contract, other than the general ability to sue for damages. A force majeure clause deals with the financial and contractual consequences that may arise if a contractor fails to appear. A force majeure clause will address the fallout of a failure to perform contractual obligations, it will not force the performance of them.
Is mitigation required, and what is the scope of mitigation?
Often a force majeure clause will contain an express obligation for the non-performing party to overcome and work around the force majeure to the extent possible. This could include continuing to perform other obligations not affected by the force majeure.
Can other responsibilities supervene contract obligations?
In the current environment, other supervening responsibilities, such as compliance with emergency orders or obligations as an employer to keep employees safe, may override contractual considerations. As noted above, these types of orders may well be caught by other express events in the force majeure clause itself, such as "governmental action".
Conclusion
Force majeure clauses require analysis to determine if and how they apply in a specific situation. If you are facing a potential disruption to your business as a result of COVID-19 and have any questions about how a force majeure clause might apply or if one of your contracts may be frustrated, please contact us. In times like these, it is crucial for parties to contracts to approach issues with a practical and proactive lens wherever possible. We prepared to assist you in finding a practical and business oriented solution to your challenges.
Footnote
1 Atlantic Paper Stock Ltd. v St. Anne-Nackawic Pulp & Paper Co., 1 S.C.R. 580 at para 4.
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.
