For parties who entered into commercial contracts prior to 2020, the impact of COVID-19 was unknown. Even in the first few weeks of 2020, it was unforeseeable that this outbreak would wreak havoc upon the world to this stupendous degree. Consequently, there are many uncertainties surrounding the contractual obligations of businesses. Fortunately, contract law provides us with some tools that may help parties accommodate for unexpected barriers to contractual performance.
The Doctrine of Frustration
Frustration of contract occurs when something unanticipated happens after entering the contract that makes its performance impossible. It is not enough to claim that the contract has become more expensive or difficult to perform. The party claiming frustration must demonstrate that the purpose of the agreement has been completely undermined by an unforeseeable event, and it would be unjust for the party to continue their contractual obligations. It is important to remember that the doctrine of frustration applies only if neither party is responsible for the interrupting event; the party responsible will bear the burden of the loss or resulting damages.
Although it may be that the doctrine of frustration can aid parties facing difficult obligations amidst COVID-19, it is still uncertain if pandemics are considered capable of frustrating contracts. Courts today seldom use the doctrine to avoid helping contracting parties caught in a bad bargain searching for an escape route. Additionally, courts expect contracting parties to be accountable by making provisions to guard against unanticipated barriers to contractual obligations.
Even if frustration is successfully invoked, its consequences are often inflexible, resulting in termination of contract irrespective of the wishes of the parties. However, with the novel coronavirus affecting businesses and individuals in decimating ways, the courts may consider a pandemic as sufficiently capable of frustrating a contract.
Force majeure clause
Alternatively, contracting parties can protect themselves by including or excluding a force majeure clause within written agreements. A force majeure clause is used to address the perceived pitfalls of the common law doctrine of frustration.
A force majeure clause is meant to avoid liability for failure of performance where a party cannot meet their contractual obligations due to circumstances beyond their control, but which would otherwise fail to satisfy the rigid requirements of frustration. Similar to a frustrated contract, a force majeure clause acts to absolve the non-performing party of liability for its failure to meet contractual obligations due to unforeseen circumstances. The clause will typically include a list of events that the parties deem appropriate to warrant a change in one or both parties’ obligations. A force majeure clause should be drafted carefully so as to make clear what events will trigger its application, and the available remedies.
Will the COVID-19 pandemic trigger a force majeure clause?
For COVID-19 to constitute as a force majeure, it is important for the language of the clause in question to explicitly capture a pandemic event (Atcor Ltd v Continental Energy Marketing Ltd (1996)). Specific wording such as “pandemic”, “communicable disease” or “public health emergency” contained within the list of force majeure events will almost certainly include COVID-19. If a force majeure clause fails to include such explicit terminology, but rather it includes broad terms such as “Act of God”, “plague”, or “circumstances beyond a party’s reasonable control”, the party seeking relief will have to prove that these broad terms ought to be interpreted to include an event such as COVID-19.
Contractual impossibility and unforeseeability of triggering event
To successfully invoke a force majeure clause or argue frustration, the claimant must demonstrate two things:
(1) the event must have made contractual obligations impossible. Specifically, contractual obligations cannot be merely more difficult or onerous because of the pandemic. For instance, if a party receives federal aid during the pandemic, a force majeure clause or claim of frustration may not be successfully invoked for failure to pay rent. Consideration of all the relevant facts will be important to determine the possibility of contractual performance.
(2) the event was beyond the reasonable foresight and skill of the parties at the time they entered the contract. The parties’ own actions or inactions must not have resulted in the event.
Have you taken steps to mitigate damages?
As a final barrier, those seeking to rely upon COVID-19 as a force majeure event or to claim frustration of contract must also exhaust their obligations to avoid and mitigate the foreseeable impacts of the pandemic. Some contracts will explicitly outline the appropriate mitigation efforts that the relying party must exhaust. Even if the contract makes no such recommendations, courts will be more reluctant to recognize COVID-19 as a triggering event where the impacts to the relying party were reasonably avoidable. Thus, given that the federal government has introduced emergency benefits for tenants, landlords, and laid-off individuals, applying for such revenue can be regarded as a step to mitigating damages. A failure to seek this additional support from the government might be regarded unfavourably upon a claimant, given that non-performance may have been avoided.
What should you take away?
Moving forward, it is imperative for contracting parties to consider implementing a thorough force majeure clause listing triggering events and appropriate remedies, to avoid litigation. The COVID-19 pandemic highlights the importance of carefully drafting contracts with an eye to the future; as we have now all learned that the future is far from predictable.
Disclaimer: The information in this article is provided as general introductory information and shall not be relied upon as legal advice.
Contact our Toronto commercial and corporate lawyer at Cactus Law for a free consultation.
