Businesses across several industries are facing slowdowns, or complete shutdowns, in light of the emergency orders issued by the federal and provincial governments due to the current health pandemic. As a result, many businesses may find themselves in the position of not being able to fulfil contracts they entered into before this all began. Because of this, it is expected that in the case of contract litigation owing to an unfulfilled contract obligation, many parties may turn to a little-used clause that can be found in several contracts but is rarely given much notice.
What is a “Force Majeure” Clause?
A force majeure clause, or Act of God clause, considers the obligations of the parties to a contract if a catastrophic event, beyond the parties’ control, were to occur and prevent one or more parties from fulfilling their obligations. In some cases, these clauses will set out specific events that may disrupt the performance of the contract, and in other cases, the clause is more open-ended. In specific clauses, it is unlikely that a pandemic such as COVID-19 would have been contemplated at the time the contract was created, so such a clause would be less likely to apply to the current circumstance. However, in an open-ended force majeure clause, it could be argued that the health crisis is an unforeseen event that created such upheaval, it became impossible to perform all or part of one’s responsibilities.
If successfully argued, a force majeure clause may not necessarily excuse a party from fulfilling ALL duties under a contract. This type of clause is rarely used, and so in cases where it applies, it will likely be given a narrow application. If a portion of the contract can still be carried out, a party would be unlikely to escape liability for that portion.
In order to successfully demonstrate that a party should escape liability for certain responsibilities, they will have to demonstrate that the event (in this case, the coronavirus pandemic) was outside the knowledge and control of both contracting parties at the time the contract was executed. Further, they will need to demonstrate that the circumstances make performance of the contract impossible, and not just more onerous.
Frustration of Contract
For contracts that don’t contain a force majeure clause, there is still a chance that a party can point to the extenuating circumstances of COVID-19 as a way to avoid liability if the circumstances interfere with performance. Like force majeure clauses, the frustration of a contract also requires a party to demonstrate that the situation at hand made it impossible to fulfil their obligations. Similarly, the circumstances must have been beyond the contemplation of the parties when the contract was signed. Timing will play a key role here. If the contract was created after worldwide reports of the virus began, it is unlikely that the pandemic will be considered outside of either party’s contemplation. However, if the contract began six months prior, there is a higher chance of success.
As with a force majeure clause, courts are reluctant to allow a party to repudiate, set aside or completely escape liability under a contract in all but the most extreme circumstances. This is owing to the fact that it can have a major negative impact on the other party involved. The factors will be weighed by the courts on a case-by-case basis, with specific circumstances playing a significant role.
In any case, a party seeking to avoid liability for breach of contract owing to challenges presented by COVID-19 faces a long road ahead of them, but it is likely courts will be seeing a significant increase in this argument over the next several months. We will continue to watch breach of contract actions when the courts resume regular services and update readers on this issue as necessary.
Contact GLG LLP for Experienced Contract Dispute Litigation Advocacy
Contact GLG LLP in downtown Toronto for assistance with litigation relating to breach of contract or other contract disputes. The firm’s litigators provide efficient and skilled trial advocacy for a range of legal issues and will look to settle your matter quickly and efficiently. Call the firm at 416-272-7557 or contact them online to schedule a confidential consultation.