The global coronavirus outbreak is impacting many Canadian businesses. The pandemic and its containment measures have led to supply chain interruptions, workforce disruptions and changes in customer demand, among other issues. As a result, many businesses are reviewing their rights and obligations under commercial agreements in case they or their counterparties are unable to continue with “business as usual”. Options under consideration may include invoking a force majeure clause or looking at the law for general doctrines providing relief.

Force Majeure Clauses

The starting point is the contract. Most commercial contracts include a “force majeure” clause that defines what constitutes a force majeure event, stipulates the consequences for the parties in the event of force majeure, and sets out the procedure for a party seeking to invoke the clause.

Force majeure clauses are typically narrowly interpreted by the courts. Generally speaking, an event of force majeure is an unforeseeable event beyond a party’s control creating a real and substantial problem in terms of performance. The wording of a force majeure clause should be carefully reviewed, particularly with respect to whether the clause defines a force majeure event in a way that includes, or could arguably include, a pandemic or epidemic.

If one or both parties conclude that a force majeure event has occurred, the next step is to determine the contractual implications of a force majeure event. Does the contact provide that a force majeure suspends all or some of the parties’ obligations or that it triggers a right to terminate?  The wording of the clause should also be reviewed to determine the scope of the parties’ obligation to mitigate the effects of the force majeure, though there may be an obligation to make reasonable efforts to mitigate the effects of an event of force majeure, even if it is not expressly indicated in the clause.

Finally, the party seeking to claim a force majeure event should also look at the procedure for doing so that is set out in the contract. A commercial agreement usually requires formal notice and may require a certain degree of cooperation between the parties.

And If the Contract Is Silent?

There is no standalone doctrine of force majeure at common law (which is why force majeure has to be dealt with contractually). However, the “force majeure” defense has been expressly enacted into the Civil Code of Québec (“CCQ”), and to the extent that Quebec law applies, a party may be able to claim force majeure even if it is not dealt with contractually.

Pursuant to Article 1470 of the CCQ, a party may not be liable for damages caused to another party if the first party can prove that the damages result from an event which  is a “superior force” (the Quebec English equivalent of force majeure), unless the first party has expressly provided in the contract that it will be responsible for damages caused by force majeure.  Generally speaking, an event constitutes a superior force if it was:

  • was unforeseeable when the contract was signed;
  • was entirely beyond its control; and
  • made it impossible for the party to perform the relevant contractual obligation.

Frustration and Impossibility

If the contract is not governed by the laws of Quebec, another option that may apply is the common law doctrine of frustration that discharges the parties from further performance of a contract. Broadly speaking, “frustration occurs whenever the law recognizes that without the default of either party a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract” (Davis Contractors Ltd v. Fareham Urban District Council, [1956] AC 696 (HL) at 160). The Supreme Court of Canada has adopted the Davis Contractors definition as the established test in Canada (Naylor Group Inc. v. Ellis-Don Construction Ltd., 2001 SCC 58 at paras. 53-56).

As this definition indicates, the Canadian understanding of frustration may encompass not only events that frustrate the parties’ intentions or purposes but also events that make the fulfillment of contractual obligations impossible, regardless of the parties’ purposes. In some jurisdictions, including the U.S., those additional situations are dealt with under the distinct doctrine of “impossibility”.

Generally speaking, the doctrine of frustration is interpreted narrowly in Canada, with the result that it can be difficult to establish that a contract has been frustrated. One relevant situation in which frustration sometimes applies is employment relationships, where, depending on the jurisdiction, its operation may be affected by employment law statutes or related regulations.

Going Forward: New Contracts

For contracts entered into after the start of the pandemic, it may be difficult to make the case that a force majeure has occurred because the pandemic is now a known event. In this regard, going forward, the parties may wish to carefully craft language or a mechanism respecting the specific allocation of COVID-19 risk.

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.