Force Majeure, Frustration of Contract and COVID-19

Force Majeure, Frustration of Contract and COVID-19

In less than a month, the novel coronavirus has led to the cancellation of most sporting events, music festivals and international air travel. The pandemic has led to the disruption of a wide range of supply chains, the closure of thousands of schools, public places and ‘non-essential’ businesses. Most Canadians are being encouraged to stay home as much as possible. Many businesses both locally and globally are finding it difficult or even outright impossible to fulfil their contractual obligations.

Given the drastic and ongoing disruptions caused by COVID-19, many employers may be wondering about their ability to meet their various contractual obligations and if their current circumstances could trigger a frustration of contract or a force majeure clause if they have one.

Below, we explore the differences between frustration of contract and a force majeure clause and consider how each of them may be applicable given the current coronavirus pandemic.

Force Majeure Clause

A force majeure clause is a civil law tool that employers can rely on to exempt them from their contractual obligations in the event of a war, damage to facilities, natural disaster or other extraordinary crises that could fall under the broad category of Acts of God.

In 1975, the Supreme Court of Canada defined an Act of God as “a supervening, sometimes supernatural, event, beyond control of either party, that makes performance impossible.”

As with an event that triggers a frustration of contract, a force majeure must be unexpected and beyond any reasonable control of either party. It is not meant to absolve employers of normal business risks such as economic shifts, as was illustrated in the case of Domtar Inc. v. Univar Canada Ltd. In this case, Univar, a caustic soda supplier for Domtar, invoked a force majeure clause in response to a dramatic rise in the global cost of caustic soda and demanded Domtar to pay a higher price for their supply. Domtar did so, but later successfully sued Univar for reimbursement of their overpayment.

Force majeure clauses can be vague and leave open to interpretation what exactly qualifies as an Act of God. Or, a force majeure clause can be specific and include a detailed list of what circumstances – such as acts of terrorism, war, labour disputes, pandemic etc. – will be considered worthy of contractual annulment. The level of specificity in a force majeure clause can be a benefit or a burden depending on the situation. For example, if you have a highly detailed list of circumstances that constitute a force majeure, and something extraordinary happens outside this list, you may not be covered. However, if something happens that your clause clearly details, you will likely have less difficulty in invoking the clause.

Frustration of Contract

Frustration of contract takes its origins in English common law. The legal doctrine acknowledges that sometimes unexpected things happen that can make it impossible (not just difficult) for an employment contract to be executed.

Frustration of contract recognizes a contract as ending through no fault of either party but rather as the result of unforeseen circumstances beyond anyone’s control.

Frustration of contract arises from extraordinary events or circumstances such as an accident, changes to the law or some sort of Act of God (similar to a force majeure) like an earthquake, hurricane or some other natural disaster – such as a pandemic.

Frustration of contract relieves both parties of their contractual obligations. When a contract has been frustrated it can be terminated without liability to either party, meaning that neither party is entitled to damages.

Frustration of contract is usually pursued when there is no force majeure clause in an employment agreement and is generally more limited in its applications.

Frustration of contract is largely dealt with in the courts on a case-by-case basis. For a more detailed look at frustration of contract, click here.

Can the COVID-19 pandemic trigger frustration of contract or a force majeure clause?

As the disease continues to spread exponentially and lawmakers at every level of government are either urging or outright requiring Canadians to stay home and non-essential businesses to close, not to mention significant disruptions to supply chains and international travel, and it would seem that contractual operations of all kinds are becoming difficult or impossible to fulfil.

If the ongoing COVID-19 pandemic is impacting your ability to fulfil your contractual obligations, contact KCY at LAW to discuss your situation and if you may be able to invoke your force majeure clause or pursue frustration of contract. Call us at 905-639-0999 or click here to book your consultation.