In the Absence of Force Majeure Clauses, Frustration Pays Off

Last week we examined force majeure clauses within contracts that may relieve a party’s contractual obligations during unforeseen emergencies, often referred to as “Acts of God”. In this article, we will discuss what happens when a force majeure clause is not expressly provided in the contract.

Canadian courts have not implied a force majeure provision in the absence of one, despite the occurrence of a force majeure event. In such circumstances, the doctrine of frustration also known as the doctrine of discharge, may be relied upon to vacate a contract altogether. This equitable remedy accounts for unforeseen events which have irreparably altered the basis of the contract. The doctrine of frustration can be applied broadly to all types of contracts including commercial or employment disputes. The standard to prove frustration is higher than force majeure, and the implications are also different: a force majeure clause will freeze the contractual obligation as it relates to the unforeseen event, whereas, a finding of frustration will effectively end the contract.

Doctrine of Frustration

The Supreme Court of Canada in Naylor Group Inc. v Ellis-Don Construction Ltd., 2001 SCC 58, describes the appropriate use of frustration where: “a situation has arisen for which the parties made no provision in the contract and the performance of the contract becomes ‘a thing radically different from that which was undertaken by the contract.’”

To establish frustration, the relying party must prove that an unforeseen event has radically changed or interrupted the performance of the agreement, making it impossible, or impractical to execute the contract as originally intended. The new event must have been beyond the reasonable contemplation of the parties when they were contracting, and therefore it would be unjust to hold the parties to the agreement under these altered circumstances.

Considerations when applying the doctrine of frustration

• Is there a Force Majeure clause in the contract?
  The doctrine of frustration operates as a last resort, only to be utilized in the absence of a force majeure clause. In other words, parties cannot double dip to rely on both a force majeure clause and the doctrine of frustration, it must be one or the other.

• Was there a supervening event that occurred?
  The event must not have been foreseeable or within the contemplation of either party when the contract was executed. There may also be cases where the non-performance of an integral party to the contract, frustrates the entirety of the agreement.
• Did the event cause a radically different performance of the contract?
  The event must have rendered the performance of the contract substantially different than what the parties initially anticipated. Courts will consider events: that have rendered the performance of the contract impossible; where performance is possible but the purpose of the contract has been undermined; or, where the temporary impossibility has frustrated the contract itself. The courts have established a threshold of a minimum level of radical difference, for example, a task that has simply become more onerous or expensive since it was originally contemplated will not activate the doctrine of frustration.

Successfully establishing frustration terminates the contract from the date of the supervening event. Additionally, Ontario’s Frustrated Contracts Act, R.S.O. 1990, c. F.34 provides for other recourses such as the recovery of past benefits conferred after a contract has been frustrated. The doctrine of frustration is particularly topical in these days of uncertainty when clients are confronting situations that were beyond their contemplation when finalizing their contracts. At this time, it is incumbent on lawyers to be well versed in these contractual defences so damages are well mitigated.

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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:
  1. Was the contract incomplete because of an unexpected event occurring after the date the contract was signed?
  2. Was the change so radical as to strike at the root of the contract?
  3. 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:
  1. Was the event foreseeable?
  2. 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!

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