COVID-19 and Commercial Contracts
Updated: May 29, 2020
Tumultuous times such as these highlight the most important things in our lives – our families, our friends and our health. We strongly encourage you to stay safe and follow the guidelines of our local government and the World Health Organization (www.who.int).
WHAT YOU NEED TO KNOW ABOUT FORCE MAJEURE, FRUSTRATION OF CONTRACT AND COVID-19
As we all navigate the growing uncertainty caused by the current outbreak of COVID-19, some businesses are beginning to review long-term commercial agreements currently in force and consider the applicability of force majeure or the common law principle of frustration of contract in an effort to mitigate any impacts on their business.
WHAT IS FORCE MAJEURE?
A force majeure clause is provision in a contract that excuses one or both of the parties from fulfilling obligations when certain unforeseen circumstances arise that are not reasonably within the parties control and make performance of the contract effectively impossible. A force majeure clause typically includes a list of specific triggering events such as war, blockades, riots or natural disasters such as earthquakes; force majeure clauses can be drafted to include epidemics.
Notwithstanding the World Health Organization’s recent declaration that the COVID-19 outbreak is a pandemic, successfully applying a force majeure clause as a result of COVID-19 will depend on a number of different factors, including the language of the clause, the nature of the contract, the particular industry involved, the type of services that can no longer be performed and the local circumstances surrounding the extraordinary event.
Canadian courts have traditionally set a high threshold for the application of a force majeure clause. The Supreme Court of Canada has previously held that the extraordinary event must “strike at the root of the contract.”
COVID-19 AND YOUR COMMERCIAL CONTRACTS
A question businesses must consider is whether COVID-19, or some other circumstance(s) that arises from the pandemic, is the sole cause of preventing the performance of the contract and it is critical for businesses to remember that, in spite of the challenges they face in dealing with the COVID-19 pandemic, they still have a duty to perform under contracts and a duty to mitigate any damages caused by a breach of contract.
FRUSTRATION MAY BE ANOTHER OPTION
A business currently bound to a contract that does not contain a force majeure clause or contains a force majeure that is not applicable to COVID-19 may consider the common law doctrine of frustration. Frustration of contract occurs when, through no fault of either party, an unforeseen event renders the contract impossible to perform. Unlike a force majeure clause, which generally provides options of temporary deferral or suspension of contractual obligations, frustration generally terminates the contract. As a result, Canadian courts set an even higher threshold for frustration than they do for force majeure.
If you have any questions or would like to speak to us about exploring your options, please get in touch.
Call us at (604) 736 9791, or email Alex Robertson.
Disclaimer: This article is not intended to serve as, or should be construed as legal advice, and is only to provide general information. No portion or use of this article will establish a lawyer-client relationship with the author or any related party. Should you require legal advice for your particular situation, please get in touch with us.