COVID-19 and Excusing Non-Performance of Contractual Obligations

With the COVID-19 virus wreaking havoc on numerous industries, supply chains and the overall economy, it is important to consider the bases upon which a party might be excused from its contractual obligations in the face of extraordinary events like pandemics.

The two primary sources are force majeure clauses and the doctrine of frustration of contract. The considerations discussed below apply generally but for more specific insight into project management agreements, please see our blog post highlighting the “Five Provisions to Consider in your Project Agreements”.

Force Majeure (“FM”) Clauses

FM provisions excuse a party from performance of contractual obligations when certain extraordinary events prevent one party from performing its contractual obligations. The analysis of whether a FM clause is properly invoked is multi-faceted. The key considerations are (a) whether the event in question triggers the application of the FM provision, (b) has the event sufficiently impacted performance of contractual obligations, (c) has everything reasonably been done to mitigate the impact of the event and (d) have all conditions for reliance on the FM provision, such as notice, been complied with.

Triggering Event

The scope of any FM provision is dependent on its definition in the particular contract it appears. Specific triggering events may be listed and could explicitly include pandemics. If the list is not closed and includes a catch-all provision for triggering or qualifying events, a pandemic could still trigger the provision even if not specifically listed as a qualifying event. The nature of the pandemic would need to be assessed in light of the overall intent and wording of the provision to determine if it constitutes a triggering event.

Courts are generally reluctant to excuse non-performance of contractual obligations. “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.” See Atlantic Paper Stock Ltd. v. St. Anne-Nackawic Pulp and Paper, [1976] 1 SCR 580.

Impossibility of Performance

FM provisions function as a tool to allocate business risk and offer protections where an extraordinary event impairs the ability of a party to meet its contractual obligations. The required level of impairment remains dependent on the actual wording of the FM clause. However, most FM clauses are worded such that a substantial or complete level of impairment is needed before a FM clause can be invoked. A party would not be likely to rely on a FM clause merely where an obligation becomes more expensive to perform rather than practically impossible. For example, see Jack v. Morehouse, 2014 YKSC 56, “it is clear from the evidence that Mr.Morehouse’s injuries did not make performance impossible, and thus did not engage the Act of God clause.”

Mitigation and Diligence

There is a close connection between determining true impossibility of performance and assessing whether the party relying on the FM clause could have reasonably managed the problems caused by the event. Where a party could have met a contractual deadline if it “exercised more diligence” then it will be unable to rely on a FM clause. See Wal-Mart Canada Corp. v. Gerard Developments Ltd., 2010 ABCA 149 at para 17. Relatedly, the Courts will assess if the party could have mitigated or avoided the problems caused by the extraordinary event. If reasonable steps could have been taken to avoid or at least limit the impact, the necessary element of an unforeseeable extraordinary event is arguably lacking.

Conditions of the FM Clause

In keeping with the general approach to narrowly interpret FM clauses, the Courts will require compliance of any notice obligations set out within the FM clause. The wording of a particular FM clause may give the party invoking the provision some leeway but generally speaking, strict compliance is the norm. The FM clause may require certain documentation showing the steps taken and the impossibility of performance. Such documentation, whether it be formally required by the contract or not, will likely be necessary as a matter of evidentiary proof by the Courts to meet the burden and onus of the party invoking the FM clause.

Frustration

Frustration of contract is a doctrine that exists at common law and has been codified in legislation in certain provinces (see for ex. The Frustrated Contracts Act, SS, 1994, c. F-22.2). This doctrine operates whether or not a FM clause exists within a contract. As with FM clauses, the Courts have generally been reluctant to excuse parties to a contract from their contractual obligations barring extreme circumstances.

The principles regarding the doctrine of frustration overlap somewhat with the analysis pertaining to FM clauses. As summarized in Kreway v Kreway, 2016 SKQB 115:

  1. A contract becomes frustrated if it is incapable of being performed because the performance is radically different from the obligations that were undertaken in the contract;
  2. The frustrating event must have occurred after the formation of the contract and not have been foreseen;
  3. The frustrating event cannot be self-induced;
  4. There is a distinction between complete fruitlessness and mere inconvenience;
  5. The disruption must be permanent or protracted, not temporary or transient;
  6. The change must totally affect the nature, meaning, purpose, effect and consequences of the contract;
  7. If there was a mistaken assumption about a current or future event the unexpected event must be so far outside of the range of the risks allocated by the contract that it undermines its very substance; and
  8. From a policy perspective, the values favouring non-enforcement must outweigh those favouring enforcement of the contract.

The change in circumstances (or “supervening event”) must make performance of the contract “a thing radically different from that which was undertaken by the contract” (Naylor Group v Ellis-Don, 2001 SCC 58 and PS International v Palimar 2017 SKCA 78). The change in circumstances must “totally affect the nature, meaning, purpose, effect and consequences of the Contract,” JGL Commodities Ltd. v Puddell Farms Ltd., 2018 SKQB 345.

The analysis will be highly fact-specific and dependent on the nature of the contract and the changed circumstances said to impact contractual performance. Assuming it has a sufficient duration,  a pandemic such as COVID-19 could theoretically qualify as a supervening event. The remaining analysis will depend on the particular facts and contractual obligation in play.

Note: This article is of a general nature only and is not exhaustive of all possible legal rights or remedies. In addition, laws may change over time and should be interpreted only in the context of particular circumstances such that these materials are not intended to be relied upon or taken as legal advice or opinion. Readers should consult a legal professional for specific advice in any particular situation.