Have Your Contracts Stood Up Against the Pandemic?

Have Your Contracts Stood Up Against the Pandemic?

February 23, 2022

The pandemic continues to wreak havoc on many industries. Whether it is supply chain issues, employee absences, or rental disputes, those relationships are all governed by contracts. Halifax litigation lawyer, John Boyle outlines recent court decisions and how to assess your own contracts.

When assessing your own contract, there are two key considerations:

  1. The specific terms of the contract. In particular, is there a term that captures the circumstances of the pandemic? If so, that term will dictate the result.
  2. If there are no terms addressing the specific situation, did the pandemic radically change the nature of a fundamental contractual obligation? If so, the party will not be required to fulfill the contractual obligation.

The contractual term that usually applies to the consequences of the pandemic is a “force majeure” clause. This clause generally removes certain obligations when natural and unavoidable catastrophes occur that interrupt the expected course of events. Whether the consequences of the pandemic will fall under the protections of this type of clause will depend on the situation.

In Ontario, the Court recently released the decision of Braebury Development Corporation v Gap (Canada) Inc., which dealt with the pandemics impact on a commercial rental relationship. Gap Canada shut down a store located at a property owned by Braebury Development in response to a government mandate. Gap Canada did not pay rent while the restrictions existed. It also only paid partial rent for several months after the mandates ended. The Court ultimately ruled in favour of Braebury Development, holding that despite the impact of the pandemic regulations, Gap Canada was required to pay the full rental arrears.

The force majeure clause in the lease applied to “restrictive governmental laws or regulations”, as well as other reasons “of a like nature” beyond the party’s control. Although the force majeure clause did not specifically refer to “public health measures”, “pandemic”, or a “health emergency”, the Court found that the pandemic restrictions were captured by the clause. Gap Canada’s closure was due to governmental restrictions, regardless of the cause of those restrictions.

Given the force majeure clause applied, it relieved Gap Canada of certain obligations. Unfortunately for Gap Canada through, the clause specifically required that it continue to pay rent. Gap Canada was only relieved of other, unrelated obligations. Accordingly, Gap Canada was obligated to pay the full rental arrears.

If there is no applicable force majeure clause, a contract may still be considered “frustrated”. Frustration can be a full legal defence to a contractual dispute. A contact is only frustrated if completion of the contractual obligation is impossible – not if it is only difficult to complete.

Despite finding that the force majeure clause applied, the Court in Braebury Development went on to find that the doctrine of frustration did not apply for three reasons. First, frustration of contract only applies when a supervening event occurs that the parties did not contemplate. Given that the force majeure clause applied, the parties had contemplated the event. Second, the supervening event must be permanent. The store was only closed for two months, so the Court ruled that the disruption was only a temporary setback. Third, the lease created no obligation for Gap Canada to operate a business at the leased premises. As such, Gap Canada not operating for two months did not “affect the nature, meaning, purpose, effect and consequence of the contract”, which is the key element required for a contract to be considered frustrated.

New City / Safety Mortgage Fund Inc. v Pacific Point Holdings Ltd. is another example of the Court finding that the pandemic did not lead to frustration of contract. In that case, a lender sought to foreclose against a mortgagor. The mortgagor argued that the contract was void because the contract had been frustrated. More specifically, the mortgagor alleged COVID-19 caused their refinancing to collapse, which resulted in its inability to repay the initial loan.

The Court rejected the argument because neither the outbreak of COVID-19 nor the state of emergency frustrated the agreements between the parties. While “the outbreak of COVID-19 may have been an unforeseen event for which there was no provision in the security agreements, it did not fundamentally alter the nature of the parties’ contractual obligations.”

As a further example, the Court in Verigen v Ensemble Travel Ltd. also rejected an argument of frustration in the context of the pandemic. In that case, an employer in the travel industry dismissed an employee as a result of the major downturn in the economy. Typically, an employee is entitled to compensation for a “notice period” if not terminated for cause. The employer argued that its obligation to pay the notice period had been frustrated by the pandemic.

The Court dismissed the employer’s argument because the performance under the contract had merely become more onerous, expensive or less remunerative, rather than impossible. The test for frustration was not met. The Court stated that the “collapse in the travel market goes to [the employer’s] ‘ability to perform’, rather than ‘the nature of the obligation itself.’” The contract was not frustrated because consumer demand had only decreased, not entirely evaporated, and the change in the market was not permanent.

Overall, the critical considerations for how the Court will resolve a contractual dispute are the specific terms of a contract and the extent the pandemic impacts the nature of a party’s contractual obligations. The Courts will only find a contract is frustrated in very specific situations, and so far have largely ruled against pandemic related impacts constituting frustration of contract.

Cox and Palmer’s Commercial Litigation Group is available to assist with any questions regarding contractual breaches, or to further discuss how the pandemic may impact your contracts.

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Cox & Palmer publications are intended to provide information of a general nature only and not legal advice. The information presented is current to the date of publication and may be subject to change following the publication date.