COVID-19 is currently impacting nearly every aspect of our daily lives, from who we can see to where we can go and what we can do. Businesses are also beginning to feel the effects, with closures and reductions on services already happening. But is it possible that COVID-19 will also have an impact on our legal relationships? Some are speculating that the current pandemic could trigger “force majeure” clauses in many contracts, which will have a significant impact on the parties’ rights and obligations.
What is a “Force Majeure” Clause?
A force majeure clause is included in a contract in case an unforeseen event occurs, making it impossible for one or more parties to carry out their obligations under the contract. This clause is usually contemplated with respect to what are often referred to as “acts of God”, such as earthquakes or hurricanes. Could the same clause be applied to the situation we’re currently finding ourselves in?
In some cases, rather than tearing up the contract altogether, the parties may agree to extend deadlines for completion of obligations in the hope that the situation will change, allowing the contract to operate largely as originally intended, with some modified terms.
Some force majeure clauses specifically mention epidemics or pandemics in the list of events that could trigger the clause. In those cases, COVID-19 would certainly qualify as a triggering event. But what about contracts that aren’t as specific?
Enforcing a “Force Majeure” Clause for COVID-19
The availability of this clause as a means to repudiate, avoid penalities or extend deadlines under a contract will largely be dependent on the language in the clause itself. If the clause is specific about the types of events that could lead to enforcement of the clause and is not open-ended in any way, this may be a barrier to enforcing the clause due to the pandemic. However, if the language is somewhat vague and leaves the type of event open to interpretation, it may be enforceable. Of course, if the contract specifically considers the possibility of a pandemic or epidemic, COVID-19 would fall within that, as mentioned above.
Timing is also a factor. For contracts signed before the virus became a known threat, it is more likely to be included as a triggering event. However, if the contract was entered into after the virus was commonly known, it may no longer be considered an event that could not be foreseen by the parties.
Any party seeking to enforce their rights under a force majeure clause must be able to demonstrate that:
- the event that occurred was outside the knowledge and control of the contracting parties; and
- the event that occurred makes complying with one’s obligations under the contract impossible.
Courts in Ontario generally have a high standard when interpreting these clauses in a contract dispute, and so a party must be able to clearly demonstrate the factors impacting their ability to carry out their obligations as set out in the contract. In the absence of such a clause, it may be possible to raise the issue of the frustration of contract, however, the application of this doctrine is considerably more limited and is often used in an employment context.
The Outcome of Enforcing a “Force Majeure” Clause
When a party is successful in triggering the force majeure clause under a contract, several options are available with respect to the outcome. The option chosen will largely depend on the terms of the contract in question as well as the impact of the unforeseen event. If the event poses a temporary and calculable obstacle, deadlines may be extended or certain work may be deemed no longer required. However, in situations where the triggering event is much bigger or longer-lasting, it may result in a repudiation of the contract as a whole.
The current situation with COVID-19 is unpredictable and disruptive to nearly every aspect of doing business across the globe. It remains to be seen whether “force majeure” clauses will be commonly enforceed as a result of the pandemic, but given the extent and scale of the interruption, as well as the unpredictability as to how long the interruption will last, it seems feasible that this clause will be employed in more than a few instances.
At Baker & Company, we are both everyday trusted advisors and problem solvers. Our team of skilled and experienced litigation lawyers are cherry-picked for their ability to analyze cases, counsel clients, and examine and present evidence at trial. Our litigation team has dealt with all kinds of contract disputes in courts across Ontario and has significant experience at both the trial and appellate levels. Call us at 416-777-0100 or contact us online for a consultation.