The COVID-19 emergency, and resulting measures put in place by governments across Canada, will make it difficult for some companies to fulfill existing contractual obligations.
The purpose of this bulletin is to outline some of the relief that may be available to defaulting parties. Specifically, we will address force majeure clauses, frustration of contracts, and relief from forfeiture in common law jurisdictions in Canada (not Quebec), with a focus for discussion on Alberta and B.C.
We will use a few hypothetical situations to help illustrate the legal principles. Our application of the law to these scenarios should not be relied on as legal advice. The options and strategy in relation to any given contract will be fact- and contract-specific.
Scenario #1: WasherCo manufactures washing machines. It supplies washing machines for sale in B.C. and Alberta by RetailerCo an appliance retailer with multiple stores. The parties' contract stipulates that WasherCo will supply a minimum of 10,000 units per month. WasherCo's supply of a key component for manufacture has dried up due to the COVID-19 crisis in China and the U.S. It cannot supply more than 2000 units a month to RetailerCo for the next three months and may not be able to supply any after that.
The contract contains the following clause:
Performance will be excused, and the parties shall not be liable for any failure to perform under this Agreement, when (1) such performance is prevented or delayed by any cause or condition of force majeure. The term "force majeure" means any contingency beyond the reasonable control of Supplier or Customer (such as war or hostilities, Acts of God, accident, fire, explosion, public protest, breakage of equipment, governmental actions or legislation, or labour difficulties such as strikes) that interfere with the Supplier's production, supply, transportation or consumption practice or with the Customer's ability to operate its retail outlets. A party will be excused from performance only for so long as the force majeure condition continues. A party affected by a force majeure condition shall notify the other party with 7 days of the existence of the condition
In a related clause, the parties have agreed to the amount of $100,000 as liquidated damages, in the event that WasherCo cannot supply the requisite number of machines to RetailerCo in a given month. This clause is expressly subject to the force majeure clause.
Scenario #2: RestaurantCo operates a fine-dining restaurant in Vancouver. In light of directives from the public health authorities, it has had to close its doors. It cannot realistically provide take-out or delivery service (as still permitted). Its lease with LandlordCo does not include a force majeure clause. RestaurantCo expects that it will not be able to pay its rent going forward and is concerned about the consequences of breaching the lease.
Force Majeure Clauses
Commercial parties may choose to include terms in their contracts that provide relief for a party who is unable to perform its obligations due to events outside its control. These clauses are often referred to as "force majeure" clauses. Such clauses may relieve a party entirely from performance obligations, but more often operate to suspend performance obligations or extend deadlines for performance.
It is up to the parties to a commercial contract to define what will constitute a force majeure event, how such an event is to be triggered and the consequences of it being triggered. The clause set out in Scenario #1 above is simply an example; there are many variations used in commercial practice, with varying degrees of detail.
Interpretation of a given contract, and the force majeure clause in it, will depend on the wording of the clause and the factual matrix underlying the contract.
There are some general principles, however, that a party considering invoking a force majeure clause should keep in mind.
- The burden of proof is on the party
seeking to rely on the force majeure clause. That party must prove
- the occurrence of one of the events listed in the clause, or an event that could fit within the general description of force majeure if one is provided, such as "any event beyond the party's reasonable control". So-called basket or catch-all clauses of this type that precede or follow a list of force majeure events can expand the possible types of triggering events.
- that he or she has been prevented, hindered or delayed from performance by reason of that event. Note that the choice of verb or verbs matters. For example, "prevent" will be construed more strictly than "hinder", typically requiring the party invoking the force majeure clause to prove that performance was physically or legally impossible.
- that his or her non-performance was due to circumstances beyond his or her control. Force majeure clauses usually contain language to this effect, although courts may imply this requirement in any event. A party will not usually be able to rely upon a force majeure clause to excuse its own acts or failure to act.
- that there were no reasonable steps that he or she could have taken to avoid or mitigate the event or its consequences.
- Economic or market conditions generally will not be construed as appropriate grounds for invoking a force majeure clause that does not expressly enumerate such conditions as constituting force majeure.
- Where appropriate, in the face of an ambiguity, courts may construe the clause against the drafter (contra proferentem).
- The effect of a triggering event will usually be stipulated in the contract; most often it is a suspension or relaxation of performance rather than a termination of the contract.
- Courts may impose obligations on the party being excused from performance to take reasonable steps to mitigate the effects of the force majeure event (the clause may well include such an express obligation).
- If the force majeure clause contains a notice requirement, that requirement may be construed as a condition precedent, failure to comply with which may disentitle the party from relying on the force majeure event. Giving notice within the stipulated time period and in the form required can therefore be critical.
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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.