Canada: Force Majeure In The Covid-19 Era. Can It Save Your Business?

In these unprecedented times of COVID-19, business owners are facing unprecedented hardship and economic losses.

Contractually, how a party defines the parameters of Force Majeure/Act of God will be crucial to the interpretation. Legal consideration is highly recommended before a decision is made to not perform the terms of the contract. Heavy penalties can be granted for failure to live up to contractual obligations. However, if it is a valid Force Majeure event, your company may not be obligated to live up to the agreed upon contract. Similarly, if the party you contracted did not live up to its obligations you may have recourse depending on the wording of the Force Majeure clause.

Similarly a company should consider the insurance implications of a contract. Again, depending on how a company has contracted with its insurer, it may be eligible to receive business interruption benefits during this unprecedented time. This could mean the difference between bankruptcy and the survival of a business in these unchartered waters of COVID-19.

Force Majeure

According to the Black Law's Dictionary Force Majeure is defined as an "event or effect that can neither be anticipated or controlled". It is also referred to as an "Act of God".¹ This contractual term will help define a company's obligations under its contracts and whether a company may be entitled to insurance relief in this difficult time. There is little legislative or case law guidance on obligations for epidemics and potential pandemics. Legal advice should be sought to highlight your risks.

The Court places the burden of providing Force Majeure on the party intending to rely upon it to establish that compliance was impossible and not merely inconvenient or more difficult.²

Where to Begin

The first step is to look at the contract, whether it is a contract with a customer, supplier, vendor, etcetera.

Force Majeure clauses are not mandatory. If it is not included in the contract this would not be a viable defence for cancelling a contract. It may be that the Force Majeure clause will grant more time to fulfill a contractual obligation. It may allow a party to back out of the contractual obligation completely. It may provide relief that is contemplated in the contract. The Courts will look at the specific terms of the specific contracts.³

Once it is established there is a Force Majeure clause, the next step is to determine what types of situations it contemplates. Is it a broad clause? Does it using wording of a health emergency? Does it use wording of a national emergency? Does it include wording of a pandemic?

If the answer is that the contract contemplated a pandemic such as COVID-19, was the failure to complete the contract due to COVID-19? It may be that there were other circumstances such as not having put the necessary infrastructure in place at the outset of the contract, irrespective to the COVID-19 circumstances that would have caused the party to default on the contract. In such cases the Force Majeure clause would not be helpful.

Actions

The type of action taken will be dictated by the terms of the contract. For example, in the case where the contractual terms save the party from its obligations if a legislative authority cancels an event rather than the company itself, the company may wish to work cooperatively with the local authority to have it cancel an event instead of the company itself. This could make the difference between contractual penalties versus a valid cancellation.

Duty to Mitigate

Does the contract require you to mitigate your damages? Were you cancelled on? Did you cancel? Chances are the contract has a duty to mitigate provision, in order to mitigate the damages caused by the cancellation. This will lead to considerations of what steps were taken instead. Could services be provided but at extra costs? Could some money be recouped for example selling inventory in a different way or for a loss?

The Courts have Considered Force Majeure Clauses

The Supreme Court of Canada has considered the issue of Force Majeure in a contract in the case Atlantic PaperStock Ltd. v. St. Anne-Nackawic Pulp & Paper Co...⁴ The Court considered a clause that contained the words "non-availability of markets" and found it generally operates to discharge a contracting party when a supervening, sometimes supernatural, event, beyond control of either party, makes performance impossible. The Court held that in considering such clauses, the common thread is that of the unexpected, something beyond reasonable human foresight and skill. If markets were unavailable, did they become so because of something unexpected happening? Was the change so radical as to strike at the root of the contract? Could the party, through the exercise of reasonable skill, have found markets in which to trade? In this case, the contract contemplated the following to be frustrating events: an act of God, the Queen's or public enemies, war, the authority of the law, labour unrest or strikes, the destruction of or damage to production facilities.⁵ In that case, it was not sufficient for a party to cancel a contract because it could not complete the work profitably. Similarly, a closed or declining market is not sufficient to trigger the clause.⁶

The Ontario Court has found that the Force Majeure clause can be triggered due to unforeseen humidity and a heatwave.⁷ The province wide black out in 2003 was also considered a Force Majeure by the Court.⁸

The Ontario Court has found, however that the Force Majeure clause was not triggered where there was a dramatic drop in real estate values.⁹ In this instance, a party was still required to complete the unconditional agreement of purchase and sale. Similarly the volatility of financing rates is not considered a Force Majeure.¹⁰ Similarly a failure of a courier company to deliver a package on time was not considered a Force Majeure.¹¹

The Courts do not appear to regard changes in economic or market circumstances itself as a Force Majeure. It is not focussed on profitability per se. The Courts require a higher threshold to be met of something unforeseeable in order to trigger the Force Majeure clause. Before relying on a Force Majeure clause, get legal advice to help determine if it is likely enforceable.

Is There Insurance Available to Help With Losses?

Once contractual obligations are considered, you should determine whether your insurance coverage can help compensate for losses. Many businesses carry business interruption coverage. Again, like with contracts between parties, the specific terms of the insurance policy will specify the coverages and exclusions. You should obtain legal advice to help determine whether you have coverage available to you. Courts tend to interpret insurance contracts more broadly so you may be found to have coverage under your insurance policy for COVID-19 losses.

Conclusion

In this COVID-19 era, many businesses face economic difficulties. Looking to your contracts will help the business determine if it has any recourse in its contracts for additional time, or the ability to cancel part or all of a contract. The wording of the contracts will be important. Legal advice is necessary to help guide that decision. Getting it wrong can have expensive consequences so be aware of the risks. Also at this time, consider whether you have any insurance coverage that could be triggered by COVID-19.

Footnotes

1 Black's Law Dictionary, 11th ed, sub verbo "force majeure".

2 Evan Bolla, "Force Majeure and Insurance Considerations for COVID-19 Cancellations" (18 March 2020), Risk Management Magazine, online: http://www.rmmagazine.com/2020/03/18/force-majeure-and-insurance-considerations-for-covid-19-cancellations/ .

3 Ibid.

4 Atlantic PaperStock Ltd. v. St. Anne-Nackawic Pulp & Paper Co., 1976 1 SCR 580.

5 Ibid at para 4.

6 Ibid at para 6.

7 CAW-Canada, Local 252 v. Maksteel, 2012 CarswellOnt 6790 at para 26 (Ont Arb).

8 Partnership for Public Lands v. Ontario (Director, Ministry of the Environment), 2003 CarswellOnt 5130 at para 12 (Ont Environmental Review Trib).

9 Holst v. Singh, 2018 ONSC 4220 at para 6.

10 Tom Jones & Sons Ltd. v. R., 1981 CarswellOnt 680 at para 15 (Ont HC).

11 Iannuzzi v. Ontario (Ministry of the Environment), 2009 CarswellOnt 7555 at para 32 (Ont Environmental Review Trib), citing Miller v. Ontario (Director, Ministry of the Environment) (2008), 36 CELR (3d) 305 (Ont Environmental Review Trib).

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.