Many, if not most, commercial contracts contain a provision commonly referred to as a “force majeure” clause. This is a provision designed to respond to a situation in which performance of a contract, as a result of an unforeseen event beyond the control of the parties, is rendered impossible. Generally, a party would be entitled to terminate the contract without liability or suspend performance of the contract until performance has become possible.
It’s too early to tell whether the ongoing global pandemic is such an event but this will likely be the source of much litigation in the coming months and years. A properly drafted force majeure clause (also known as an ‘impossibility clause’ or an ‘Acts of God’ clause), may allow a party to a contract to terminate the contract because of the impact COVID 19 has on that party’s ability to perform the contract
The rapid spread of COVID 19 has led the government to, amongst other things, ban gatherings of more than 50 people, restrict restaurants to take-out services only, order the closure of all personal-service businesses (hair salons, tattoo shops), impose travel restrictions, and even close the Canadian border.
On March 23, 2020, the City of Vancouver voted to amend bylaws to allow the city to enforce and prosecute non-compliant businesses, including ability to fine non-compliant businesses in the amount of up to $50,000. In Calgary, the City has closed many businesses and also closed all public playgrounds in an effort to prevent the spread of the virus among children. It is anticipated that the governments in all Canadian provinces will force further business closures and/or restriction couple with strict enforcement of these measures.
These measures will undoubtedly have a drastic impact on virtually all businesses. As a result, it is an opportune time for business owners to take a detailed look at their contracts to determine which of them contain force majeure clauses. If contracts do contain such a clause, the specific language of each contract will be key in determining whether the force majeure clause is enforceable for this situation.
If business owners wish to invoke a force majeure clause they will need to notify the other contracting parties. The notice given to all other parties to a contract should contain clear and comprehensive reasons why contractual performance has become impossible. In addition to some suggestions at the end of this blog post, it is recommended that business owners also review their insurance policies to determine the extent to which they may be afforded coverage for business interruption and the impossibility of contractual performance.
If the parties to a contract have included a force majeure clause, the specific language of the contract will govern. In other words, a force majeure provision does not arise as a matter of law; it is purely a matter of contract. With that said, even if a contract does not have a force majeure clause, the contract may still be terminated if the contract has been “frustrated” as that term is used in the common law. The doctrine of frustration and the impact of the BC Frustrated Contract Act will be the subject of a later blog post.
A force majeure clause typically operates to allow a party to immediately terminate a contract without liability or suspend completion of the contract until a later date. While a force majeure clause is a contractual term and may be expressed differently in different contracts, the provision generally contains the following three elements:
- The existence of an unexpected, supervening event;
- The event is beyond the control of the contracting parties (normal business risks, such as increased cost of manufacturing a product, inability to obtain financing, or change in the market, is by itself, insufficient); and
- The event must make performance of the contract impossible, not just more difficult or more expensive.
As usual in matters of contractual interpretation, the onus is on the party seeking to rely on the force majeure clause to demonstrate that the elements required to invoke the clause are satisfied. A typical force majeure clause usually includes events such as “acts of God”, or a broader category of “events beyond the control of the parties”, both of which could well include COVID 19.
Even if COVID 19 is an event contemplated in the clause, it must be demonstrated that the events have made it impossible for a party to perform the contract. The various government restrictions and prohibitions on businesses will undoubtedly be relevant in assessing whether a party’s ability to perform the contract is “impossible”. Whether it is “impossible” to perform the contract would also require an assessment of the nature of the parties’ obligations under the terms of the contract.
Canadian courts tend to interpret the enforceability of force majeure clauses narrowly. Therefore, the party seeking to rely on a force majeure clause must show how each element as required in that clause is fulfilled.
If a force majeure clause is engaged, then the remedies available to the parties to the contract depend on the language of the provision. Some clauses may say that the party seeking to terminate the contract has a duty to mitigate and seek alternative arrangements, or that performance is merely suspended but not ended, while others may allow a complete termination of the contract without liability.
Both parties to a contract have a duty to mitigate any damages that may occur as a result of the termination of the contract. If Party A terminates its contract with Party B by relying on a force majeure clause, Party B must attempt to replace the goods and services it was anticipating would be provided by Party A, even if Party B does not agree that the force majeure clause is applicable. There may be certain circumstances where it is in Party A’s best interest to advise Party B as early as possible that the contract may be terminated even before doing so, in order to give Party B an opportunity to mitigate its damages.
Some practical steps that you and your company should start to take are as follows:
- Review your contracts to determine what types of force majeure clauses exist and what possible remedies would result if the clause is triggered;
- Ensure your business is in compliance with all mandatory government regulations and rules;
- Review your workplace health and safety and abide by any ‘best practices’ set out by the government or applicable trade organizations;
- Assess your potential to provide or obtain alternative materials or labour from different locations;
- Review your current inventory to determine areas of possible risk in the event contracts are terminated;
- Review your insurance coverage for specific projects that may be at risk; and,
- Closely monitor local, provincial, and federal regulations and rules as they are changing rapidly from day-to-day and hour-to-hour.
Whether a force majeure clause will be triggered will depend on the individual contracts and set of circumstances of each case. No two contracts are identical and no two businesses will be impacted by COVID 19 in the same way. Deciding whether to terminate a contract, or deciding what to do if another party cancels its contract with you, is a complicated exercise that can potentially have significant impacts on your business into the future. The lawyers at Whitelaw Twining can analyze your situation, provide you with options, and set out a strategy to help you navigate through the unprecedented impact of COVID 19.
We continue to closely monitor the progressing COVID-19 situation and will provide updates as they are available.