Contracts in the Time of COVID-19: Relying on Force Majeure Clauses
In response to the global pandemic of COVID-19, on March 17, 2020, Premier Doug Ford declared a state of emergency in Ontario, effectively banning people from most public spaces and outlawing events of over 50 people. The Federal Government also advised civilians to take extreme precautions by isolating themselves. As the world hinges on the rapidly changing news and national directives, we see a broad sweep of closures across many businesses. The unprecedented impact of this health crisis has permeated throughout almost every industry, leaving clients and lawyers to navigate unfamiliar territories. Clients now want to know how to protect themselves from contractual obligations that they or their vendors are unable to fulfill.
Force Majeure clauses
The principle of Force Majeure, also referred to as “acts of God”, may provide protection for extraordinary or unforeseen circumstances such as COVID-19. The Supreme Court of Canada defines this as follows:
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, Atlantic Paper Stock Ltd. v. St. Anne-Nackawic Pulp & Paper Co., 1 S.C.R. 580 at para. 4 [Atlantic Paper].
Parties wishing to rely on this clause have the burden of establishing that the Force Majeure event has prevented the fulfillment of the contract. However, to rely on this provision, the contract must of course, contain the clause. Even then, that is only the start of the inquiry.
Considerations when evoking the Force Majeure provision
- Is the clause explicit enough to encompass events like COVID-19?
Absent words such as “pandemic”, “health emergency”, “disease” and “national emergency” stated within the clause, courts may refuse to classify COVID-19 as a Force Majeure event. It is important to draft such clauses comprehensively.
- Did COVID-19 really cause the non-performance of the contract?
The party relying on this clause must prove the event was one beyond their control. At this stage of the inquiry, in Atlantic Paper the court asked the following questions:
- Was the contract incomplete because of an unexpected event occurring after the date the contract was signed?
- Was the change so radical as to strike at the root of the contract?
- Were there alternative avenues available to complete the contract?
- What lead up to the need to evoke a Force Majeure clause?
The courts may assess whether the Force Majeure event predated the contract, or if the clause was relied upon as a scapegoat for other negligence or unsound business decision. If the client contributed to the failure to perform the contract, the use of this clause may be jeopardized. A court may ask:
- Was the event foreseeable?
- Was performance impossible?
- What steps to mitigate the damage were taken?
Some contracts require a minimum level of effort to mitigate the damage before being able to rely on this clause. The duty to mitigate has a standard of commercial reasonableness.
If a court finds that the Force Majeure is valid, each party may be excused from their contractual obligations, or be entitled to a relief contemplated by the contract itself.
Many legal professionals disregard the importance of this clause because of its infrequent use. However, this epidemic serves as reminder that it is a lawyer’s duty to anticipate the unexpected and protect their client against it. A well-crafted contract should include an explicit Force Majeure clause, broad enough to encompass all unforeseen events; and in addition, contain the specific relief sought, should it occur. Think worst case scenario, and work backwards to the contract!