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Force Majeure Clauses and the Doctrine of Frustration: Flattening the Liability Curve
As both provincial and federal governments across Canada continue to impose restrictions on business and travel in an attempt to curtail the spread of COVID-19, parties to contracts, especially service or sale of goods contracts, may find it increasingly more challenging to complete their contractual obligations. In this context, it may be useful to review the legal concepts of force majeure and the common law doctrine of frustration to consider how each may apply in certain contractual relationships to excuse, suspend or limit contractual obligations or limit liability during the pandemic.
What is a Force Majeure clause?
A force majeure clause, sometimes referred to as an act of God clause, generally operates to suspend the contractual obligations of a contracting party upon occurrence of an unexpected supervening event, meaning something beyond reasonable human foresight and skill i.e. a “force majeure event”. Furthermore, the performance of the contractual obligation must have become legally or physically impossible due to the force majeure event.
While force majeure clauses are drafted and included in contracts in different forms, the key is to determine whether the specific event, such as the prevailing pandemic, is captured under the wording of the clause as a “force majeure event”. With that said, courts in Canada have construed force majeure clauses narrowly in the past. As a result, a party relying on a force majeure clause due to COVID-19 should review the provision carefully to determine if the prevailing pandemic is covered under the scope of the provision.
Some other key requirements of typical force majeure clauses include:
- Best Efforts: Ensuring that the party relying on the force majeure clause was not negligent or in wilful default of its contractual obligations and made its best effort to meet its contractual obligations;
- Duty to Mitigate: Ensuring that the party relying on the force majeure clause took steps to mitigate the specific event or its consequences;
- Notice: Procedural requirements with respect to prompt notification of the occurrence of force majeure event to the other party.
Typically, provided the requirements of the force majeure clause are satisfied, the party relying on the clause is able to excuse or suspend performance of its obligations for up to a specified period.
What is frustration of a contract?
Where a contract does not include a force majeure clause or the force majeure clause does not apply for any reason, a party may look towards the common law doctrine of frustration in certain circumstances to limit its contractual obligations.
The common law doctrine of frustration allows parties to terminate a contract where an event occurs which renders performance of a contractual obligation incapable of being performed as its performance would render it a thing radically different from what was anticipated under the contract. The doctrine is based on the premise that it would be unjust to hold any party accountable for their obligations under the contract in unforeseen circumstances. For example, a contract to supply raw materials to a restaurant may be frustrated by an order of the federal or provincial government to close down all non-essential businesses.
Like force majeure clauses, the frustration doctrine is often narrowly applied by the Canadian courts. As a result, the frustration doctrine will not operate where the supervening event was not beyond contemplation of the parties – even if performance would be unreasonably harsh or onerous in the changed circumstances. While there certainly exists a strong argument that the rapid spread of COVID-19 and a pandemic of this scale could not have been contemplated by any party, contracts entered into recently or after the declaration of pandemic will likely not be able to rely on the doctrine of frustration.
Whether relying on the force majeure clause or the doctrine of frustration, COVID-19 is set to make a significant impact on contractual relationships in the short, medium and long term. Parties, however, may find it useful to explore some of the contractual and common law aids available to them to determine their liabilities and obligations and assist in flattening the liability curve.
For further queries in respect of any contractual matters, including, effect of a force majeure clause or the application of the doctrine of frustration, contact Mohammad Ali Raza and David Reid, partners in the Business Group of Cox & Palmer’s Halifax Office.
This article was written with contributions by Drew Ritchie, an articled clerk at Cox & Palmer.