Force Majeure & Frustration: How COVID-19 may affect contracts

DLG Contracts, Corporate / Business

Since the COVID-19 outbreak was declared a pandemic in May 2020 and the virus’ effects have spread through British Columbia, the effects of closures, layoffs, and cancelations are being felt by businesses who need to know what their obligations are. Perhaps you hired a company to renovate your office, or you hired a catering company to provide appetizers at an engagement party in two weeks. At the time of writing, social distancing is being enforced and gatherings are banned, so what are your rights and obligations?

There are two doctrines that may arise in situations such as these:

  1. force majeure; and
  2.  frustration.

Force Majeure

Force majeure is a clause that may be included in contracts. It is, effectively, the ‘acts of god’ clause that will excuse or delay performance of all or part of the contract by one or both parties in the event of some unforeseeable event. Some contracts will have a long list of such events – floods, war, general strikes, et cetera. Some of them may use less specific language such as ‘unforeseeable events beyond the parties’ control’. Whether or not COVID-19 is included would depend on the language of the clause. Words like disease, pandemic, or biological epidemic would probably include it. “Acts of God” itself has not received a lot of treatment by the courts to determine exactly what is and is not included, but the Supreme Court of Canada has loosely described it as “a supervening, sometimes supernatural, event, beyond control of either party, [that] makes performance impossible.”[1]

So, subject to the exact language of each clause, the idea is that it must be something unforeseeable and out of the control of the parties that makes performance of the contract impossible. For many contracts, COVID-19 would likely meet the criteria – unless the contract was entered into after the pandemic was announced, after such time it may be arguable that the parties entered into the contract knowing of the threat and therefor it may not be an unforeseeable ‘act of god’.

In the case of some contracts, a force majeure clause may allow for performance of the contract to be delayed (perhaps in the above example of the office renovations); for others (like the above example of the catered party), the contract may be void. Some force majeure clauses will contain requirements for one or both parties to take action or give notice for the clause to apply. Again, the language of the contract will dictate the specific terms.

It is important to note that force majeure clauses cannot be implied into contracts; they must be expressly written in.[2] Where there is no force majeure clause, the doctrine of frustration may apply.

Frustration

Unlike force majeure, frustration is not something that must be included in the contract for it to apply. Frustration applies through the common law, where the circumstances dictate. As stated by the Supreme Court of Canada, relying on earlier jurisprudence: “Frustration occurs when a situation has arisen for which the parties made no provision in the contract and performance of the contract becomes “a thing radically different from that which was undertaken by the contract””[3] In other words, where the parties entered into the contract and, through no fault their own, an unforeseeable event occurs and as a result the core of the contract is fundamentally altered and can no longer be performed as planned, the contract is frustrated. In such cases, the contract will be void.[4]

If the contract included a clause addressing what to do in the event of a global pandemic, then in our current situation, frustration would likely not apply as the issue was dealt with in the contract. If a person contracted to buy a house and COVID-19 causes an economic downturn that made buying the house no longer financially viable for the buyer, frustration would likely not apply as the core of the contract (the sale of the house) is not altered. In the case of the office renovation, the contract would likely not be frustrated, as the renos could be done at a later date. But in the case of our catered engagement party example, assuming the contract did not speak to a pandemic or contain a force majeure clause, the contract would likely be frustrated as the services contracted for can no longer be provided or received due to this unforeseen event.

As with all contracts, written or oral, the precise terms will depend on the language and nature of each contract.

A personal anecdote

My personal situation that relates to all of this (aside from cancelled flights) is that I pay a monthly fee for membership in a certain club that carries out its activities in a set space – like a gym, or a bowling club, or that Loyal Order of Water Buffalo Lodge that Fred Flintstone belonged to, but it is none of those things. We pre-pay our monthly fees twice a year in January and July. In mid-March the club rightly decided to close due to COVID-19. At this point we have no idea when it will reopen, but we have paid club fees for a space and activities that we can no longer use. We didn’t have a written contract, so there is no force majeure. We certainly did not anticipate or plan for any sort of club closure, so it would seem that the contract is frustrated – at least as it relates to the months that it is closed. It is impossible for me as a member to get what I bargained for. In practical terms, I would be well within my rights to seek a refund of those fees paid during the time the club is closed; or more reasonably I could ask that those fees be applied against a future month when the club is again open. Truthfully, I haven’t done that yet as it is the least of any possible concerns I have surrounding this pandemic, but those are rights that I have. I prefer to remain optimistic that all of this will improve in the near future…and if it doesn’t, and I still don’t receive a refund or credit, I have two years to sue.

[1] Atlantic Paper Stock Ltd. v. St. Anne-Nackawic Pulp and Paper Company Limited, 1975 CanLII 170 (SCC), [1976] 1 SCR 580
Domtar Inc. v Univar Canada Ltd., 2011 BCSC 1776, paras 76-77
[2] Ibid para 78
[3] Naylor Group Inc. v. Ellis-Don Construction Ltd., [2001] 2 S.C.R. 943, 2001 SCC 58, para 53, cited in Wightman Estate v. 2774046 Canada Inc., 2006 BCCA 424, para 25
[4] Wightman Estate v. 2774046 Canada Inc., 2006 BCCA 424, para 28
KBK No. 138 Ventures Ltd. v. Canada Safeway Limited, 2000 BCCA 295, para 13

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