The COVID-19 pandemic, and the government actions it has elicited, has caused sudden business interruption across numerous industries throughout Canada and the Globe. Commercial actors have found themselves unable to perform their contractual obligations, or have seen their customers or suppliers unable to perform the contractual obligations owed to them. The transportation industry has not been immune to these problems. Unfortunately, these problems may persist for an indefinite period of time. It is not surprising, then, that increasingly more commercial actors in the transportation industry may turn to their contracts in search of provisions that excuse performance without destroying the contractual relationship itself.
Force Majeure clauses may be the answer to these concerns for many transportation businesses. These clauses, if invoked properly, allow parties to escape an obligation to perform a contract, in whole or in part, to the extent that the failure to perform is due to certain circumstances outside the party’s control. Force Majeure clauses generally enumerate Force Majeure events such as an “act of God” or other events outside the contracting parties’ control. Superficially, the COVID-19 pandemic, and the consequent government responses, appear to satisfy this provision such to excuse contractual performance. However, a transportation business cannot simply refuse to perform its contractual obligations and make a vague reference to COVID-19. A more considered approach is required.
Any party seeking to invoke a Force Majeure clause needs to carefully read the language of the clause as it appears in the relevant contract and then consider the following questions:
- How does the contract define Force Majeure?
- What performance does the Force Majeure apply to?
- What requirements, if any, must be satisfied before a party invokes the Force Majeure?
If the Force Majeure clause specifically enumerates “pandemic” or “epidemic” or “quarantine” or “government restriction” then it is very likely that COVID-19 will be considered a Force Majeure event. However, even in the absence of such precise language, it is still likely that the COVID-19 pandemic and associated consequences will be considered a Force Majeure if the provision contains “act of God” wordings or generally defines Force Majeure events as those being unforeseeable events beyond each parties’ control.
The next question is whether the COVID-19 related event is causally linked to the contractual obligation that cannot be performed. A party cannot escape performing a contractual obligation that is unaffected by the business disruption caused by COVID-19. Further, some Force Majeure provisions are specifically worded so as to excuse performance from specific obligations under the contract, while others may excuse performance of any obligation more generally. In addition, transportation companies should carefully consider whether COVID-19 related disruptions have rendered performance of the contractual obligation practically impossible. A party cannot invoke the clause merely because contractual performance has become more difficult or less commercially advantageous.
Finally, if a transportation business elects to invoke the Force Majeure clause they must do so in accordance with the requirements spelled out within the Force Majeure clause itself. Many such clauses contain notice provisions that may require written notice within specified timeframes. The clause may also require the breaching party to make “reasonable” or “best” efforts to perform the contract. In such cases, companies should document their efforts to perform the contract or written reasons as to why it is impossible to perform the contract. Similarly, a breaching party will likely have to show that they acted reasonably during the outbreak of the COVID-19 pandemic to mitigate its effects on performance of the contract.
Some transportation companies running into contractual performance problems might not have a written contract in place, which means they have no Force Majeure clause to invoke. Such companies may still be able to escape contractual performance without penalty. If a party can show that there has been a change of circumstances such that the contractual obligation from which it seeks to be excused has been frustrated, or has become practicably impossible to perform, a court may excuse that party from performing the contractual obligation where the change in circumstances was unforeseeable.
While the recent spread of the COVID-19 pandemic may have been unforeseeable, transportation businesses should be aware of potential difficulties with invoking Force Majeure clauses due to the COVID-19 pandemic going forward. If, for example, the spread of Coronavirus abates for some time only to re-emerge in the near future – with all of the associated government responses we have seen in the last several weeks – then it could reasonably be argued that the circumstances bringing about the business disruption were foreseeable to the party seeking to invoke the clause. In such circumstances, a transportation provider may be unable to successfully invoke the Force Majeure clause. This applies doubly to transportation business without written contracts to rely on.
If you have any questions about contractual performance problems arising out the COVID-19 pandemic, Whitelaw Twining’s Transportation Group would be happy to assist you.