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March 20, 2020

Force Majeure and frustration in commercial contracts, leases and supply agreements

The global response to COVID-19 pandemic is impeding performance of contractual agreements. This is a summary of the relevant law, starting with a quick review of the basics.

Force Majeure: A Brief Q&A

Q: Where is this language in the contract?

A: In the majority of commercial agreements and leases, the force majeure provision will be labeled as such. It might be labeled “Act(s) of God” or “Vis Major”. Language governing delay in performance or default might also speak to force majeure.

Q: The contract has no force majeure language. Can it be implied or assumed?

A: Very likely not, as explained in our note below.

Q: The force majeure clause says nothing about a pandemic. What to do?

A: Epidemics and pandemics could be classed as “biological agents,” which is sometimes found in a force majeure clause, but generally the clause will not speak to pandemics, and if it does, the contract will not typically have guidance on how widespread the emergency must be for it to be classified as a pandemic. The fact of the WHO declaration of a global pandemic is helpful in this respect.

Even without specifically referencing pandemics, any mention in the force majeure language of labour shortages, supply chain interruptions, or unspecified events of general and exceptional disruption beyond the control of the party (i.e. language such as “…and any other Act of God”) could potentially be relied on.

Q: The force majeure language is specific and doesn’t include any of those things. Where else can one look?

A: Look to delay provisions as mentioned above, material adverse event or change provisions, limitations of liability, exclusions, provisions dealing with timeliness in any way, price adjustment or recalculation, or alternative forms of performance.

Q: Must declaration of a force majeure event be notified to the other parties?

A: Most probably yes. If the force majeure language does not require this, check the notice provisions of the contract. Adhere to the notice provisions strictly, as non-adherence could void the declaration of force majeure.

Q: What should happen following a force majeure declaration?

A: If the other party disputes that there has been a force majeure event, the dispute will be determined based on the contractual wording of the applicable clause. Canadian common-law jurisdiction courts determine force majeure clauses strictly (although the question of a pandemic has not yet been considered in the case law).

Typically, force majeure provisions will permit either delayed performance, part performance, or termination.

Q: What should one consider before declaring force majeure?

A: Aside from commercial and reputational matters, consider how a dispute will be resolved under the contract and whether you’re prepared for that process to begin. Consult any insurance policies you have that relate to your performance obligations, as they might impact your ability to declare force majeure. Consider whether you are performing the same obligation for another contractor, which could be evidence that the declaration of force majeure is illegitimate. Consider negotiating with your contractual counterparty whether the contract can be varied to account for the pandemic, and how you can mitigate the consequences of non-performance. Keep documentary evidence of the disruption in your ability to perform.

If you are the paying party, it is unlikely that force majeure will assist you. If you provide labour as part of your contract, the order of a public authority to stay at home, or illness itself, could well be considered force majeure.

Force Majeure in Detail

What it is

A force majeure clause may excuse a party’s nonperformance under a contract when truly extraordinary events prevent that party from fulfilling its contractual obligations. The party seeking to rely on a force majeure clause must first establish a true force majeure event (pursuant to the terms of the contract) and prove that it has effectively prevented the party from fulfilling its obligations under the contract.

What it isn’t: a review of key authority

While case law discussing the key principles of force majeure is limited, some leading examples of how Canadian courts have approached this issue are found below. A key takeaway is that force majeure cases are highly fact specific and will essentially boil down to the specific contractual language used.

In Atlantic Paper Stock Ltd. v St. Anne-Nackawic Pulp & Paper Co. the defendant argued it was unable to fulfil its contractual obligation to buy waste paper from the plaintiff because of the non-availability of markets. The contract contained a clause which specifically mentioned the non-availability of markets for waste paper products as an event which could excuse the defendant’s obligation to purchase the waste paper.

The Supreme Court of Canada explained that:

“An act of God clause or force majeure clause, and it is within such a clause that the words "non-availability of markets" are found, 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.”

Because the defendant in that case had effectively priced themselves out of the market  based on their own business practices, the Supreme Court held that this was something within their control and that therefore they could not rely on force majeure to escape their obligations.

In Wal-Mart Canada Corp./Cie Wal-Mart du Canada v Gerard Developments Ltd. the appellant failed to meet certain deadlines and argued that their failure to do so was a result of force majeure in the form of delayed closing dates, time required to obtain approvals, municipal policy decisions and a failure to receive information on time. The Alberta Court of Appeal held that the clause does not apply to ordinary business risks, or to re-allocate contracted business risks. The court also held that the force majeure clause doesn’t excuse a failure of due diligence.

Note also Atcor Ltd. v Continental Energy Marketing Ltd. where a supply contract contained a clause absolving the parties of their obligations in the event of a force majeure, which included breakages to pipelines and materials and repairs unless they could have been overcome by due diligence. When the supplier failed to make deliveries because of breakdowns and repairs the other party sued. The supplier relied on the force majeure clause.

The Alberta Court of Appeal held that the true purpose of a force majeure clause is to deal with the effect of a force majeure event, not merely the occurrence of the event, and the supplier would have had to show that the occurrence of the breakdowns and repairs truly made performance impracticable or unreasonable.

In summary, the basic factors that determine whether a party can rely on a force majeure clause can be distilled to this:

  1. Whether the event falls clearly within the scope of the force majeure clause;
  2. Whether the event has sufficiently impacted the obligations of the relying party in that it has rendered performance impossible;
  3. Whether the relying party has taken sufficient steps to avoid and mitigate the impact of the force majeure event; and
  4. Whether any other contractual conditions, such as the requirement to notify of a force majeure event, are met.

When the contract is silent on force majeure

No Canadian court (excluding Quebec) has actually implied a force majeure provision in common law. Absent an explicit force majeure provision, a party will likely not be able to rely on force majeure in order to escape liability for inability to hold up their end of an agreement in the face of extenuating circumstances.

The Doctrine of Frustration

What it is

The related concept of frustration might allow parties to escape contractual liability where an unforeseen event causes a radical change in performance of a contract for the relying party. The party relying on frustration will have the onus of showing that performance is impossible or impractical or that the radical change frustrates the original purpose of the agreement. The threshold for establishing frustration at common law is generally a high one compared to force majeure.

A party seeking to rely on frustration must establish the following elements:

  1. A supervening event similar to what would be considered a force majeure event;
  2. That the event was never contemplated by the parties, and there is no contractual provision which covers it (in which case it would likely fall under force majeure – i.e. it is either force majeure or frustration); and
  3. That the supervening event renders the performance of the contract radically different than what the parties had bargained for.

The Frustrated Contracts Act (Manitoba)

The discharge of contractual obligations under the doctrine of frustration is subject to frustrated contracts legislation, which in Manitoba comes in the form of The Frustrated Contracts Act (the “Act”).

The Act applies to any contract made in Manitoba that has becomes impossible to perform, or been otherwise frustrated, and the parties have thus become discharged of their obligations.

The Act excludes contracts for the carriage of goods by sea, insurance contracts, and contracts for the sale of goods where the goods have perished at the time the contract is  made or where the goods perish before risk passes to the buyer.

Under the Act, certain values may remain recoverable by parties to contracts that have otherwise been frustrated and discharged:

  • Sums paid in pursuance of a contract before the parties were discharged may be recoverable;
  • Sums payable cease to be payable;
  • if a party to whom sums were paid or payable incurred expenses in connection with the performance of the contract, the court may allow that party to retain or recover the sums paid or payable up to the value of the expenses;
  • if either party has obtained a valuable benefit (or had a benefit conferred on a third party) other than a payment of money, the court may allow the other party to recover the value of the benefit;
  • parts of the contract that were performed prior to discharge or performed save for payment in respect of that part of the contract, can be severed from the frustrated part of the contract.

COVID-19: Specific Considerations

  1. Does the specific language of the force majeure clause, or related clauses governing delay or timeliness of performance, supervening events, default, or part performance, address pandemics, epidemics, or generalized “acts of God” beyond the party’s control and not attributable to the conduct of the opposing party?
  2. Is the pandemic, or the public response to it (including orders of civil authorities) rendering performance impossible?
  3. Did the party seeking to rely on force majeure do anything to mitigate the loss – permit staff to work from home, take sanitary measures, relocate to other premises, purchase technology, part perform?
  4. Is it a recent contract? The COVID-19 pandemic, while undoubtedly a dynamic situation, has been newsworthy for all of 2020. The event giving rise to impossibility of performance must have been beyond the scope of foreseeable risk.

We are available.

Fillmore Riley’s business law practice can assist with contract renegotiation and interpretation. We remain available. The key contact is Jody Langhan

Resource posted on March 20, 2020, with a report from Brendan Forrest.

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