Mechanisms for Relief from Contractual Obligations in the Realm of COVID-19

The novel coronavirus (“COVID-19”) has directly impacted society as a whole. But what really is COVID-19? It is a member of the coronavirus family of viruses. When virologists first studied this class of viruses, they used microscopy to view these viruses. The viruses appeared to have a faint halo, which advanced microscopy techniques later determined to be small spike-like protrusions from the virus’ surface. Due to these characteristics, coronaviruses take their namesake from the halo – reminiscent of the sun’s atmosphere, also known as the corona. The “19” represents the year this particular virus strain emerged.

After several months of this global pandemic, the number of infections and deaths continue to persist and the chance of a second wave in Canada remains probable. Add to that the global economy has been devastated. The expectation is that these adverse impacts will continue.

The economy is built on contracts. The continued disruptions in the supply chain, increasing unemployment rates, business solvency issues, and travel restrictions means many individuals and businesses are in difficult positions. They no longer require the services or goods they contracted for, they are financially unable to pay to fulfill some contractual obligations, or they can no longer perform the terms of the contract. How can an individual or business seek relief from their agreed upon contractual obligations in these circumstances?

Doctrine of Frustration

The doctrine of frustration is a longstanding common law legal principle. It allows a party to a contract to no longer be bound by their contractual obligations due to a notable change in circumstances – through no fault of their own – which makes performance of the contract impossible. Unlike force majeure clauses (discussed below), frustration could potentially be available to any contract.

Frustration is relied upon when the contract does not say how to deal with a supervening event – an event which causes the contract to become something radically different from what the parties contemplated when they agreed on the exchange of promises. The Supreme Court of Canada has confirmed that the threshold for finding a contract to be frustrated is very high. The event must not merely cause hardship to a party. The event must be more in line with a party being completely unable to perform the contract.

In order to rely on frustration, the supervening event must be:

1. unforeseeable at the time the contract was entered into by the parties; and
2. no fault of the parties.

The supervening event must be truly unforeseeable. Courts will likely find that an economic downturn or financial hardship is not enough to reach the threshold of frustration, as these events are foreseeable. The COVID-19 global pandemic is likely an unforeseeable event, which is beyond the control of the parties to the contract. The last global pandemic, the Spanish Flu of 1918, occurred over 100 years ago. Parties likely did not think about a pandemic when they entered into the contract, and they cannot reasonably control it.

Provincial public health emergencies have restricted individuals and businesses. Some regular activities are now illegal, such as hosting a large gathering. Courts have said that if the law changes after the contract is created that makes performing the contract now illegal, the contract has been frustrated. This principle likely applies to many contracts in the realm of COVID-19, such as a contract for renting a venue for a previously planned large gathering.

As the threshold for frustration is high, affected parties to a contract must take all mitigation measures and try to perform the contract in light of the intervening event. In the context of COVID-19, it is possible that a court may find some contracts could still go ahead with some changes. For example, a wedding could potentially proceed by following the government’s mandatory health guidelines and physical distancing requirements. A court may find that although the parties cannot perform the contract exactly as expected, the changes would make performing the contract still possible. This would not satisfy the high threshold of frustration.

Whether or not the performance of the contract is truly impossible and whether frustration applies is a very fact specific determination. It requires a detailed review of the circumstances and contractual obligations of the parties. Even in light of the high threshold, it is likely that many non-performing parties will be able to successfully avoid liability for failing to perform their contractual obligations due to the pandemic. The non-performing party would have to refund money or return deposits.

Force Majeure Clauses

A force majeure clause is a contractual provision that relieves a party of their contractual obligations in the event that performing the contract becomes impossible due to an intervening circumstance beyond the control of the non-performing party. While frustration can apply to all contracts, a force majeure clause only applies if it is written in the contract.

A force majeure clause allows for the parties of a contract to expressly mitigate uncertainty. This clause allows a non-performing party to rely upon intervening circumstances that may not rise to the threshold required for frustration. A force majeure clause is a creature of contract and does not exist independently at common law. Each clause must be specifically interpreted.

Force majeure clauses allow the non-performing party to escape liability or be entitled to relief for their failure to perform their obligations due to a “force majeure” event. The parties can say what circumstances fall within the scope of a force majeure event. Often the clause will list events that trigger the relief.

Some force majeure clauses do not explicitly say what events are a force majeure event. Other clauses may simply refer to “acts of God”. The Supreme Court of Canada has indicated that an “act of God” means an event that is intervening and beyond the control of the party. In these situations, the contracting party must argue as to whether an event causing a party’s failure to perform falls under the provision.

In addition, the parties agree what relief applies when the clause is triggered. Relief could include relief from liability, entitlement to claim any increased costs as a result of the delay, or extension of time to complete obligations.

As seen with frustration, the operation of a force majeure clause requires the intervening event to be unexpected and make performing the contract impossible or impractical. The clause may place additional obligations on the non-performer, such as requiring them to take steps to mitigate the event or prevent the event from occurring, and to comply with specific notice obligations.

For a party seeking to rely upon a force majeure clause due to COVID-19, the clause must have language sufficient to capture a global pandemic. The party must also abide by all notice conditions in the clause. The non-performing party must show that COVID-19 has made performing their contractual obligations impossible or wholly impractical. They must also show that the event was not self-inflicted, but was in fact beyond their reasonable control and expectation.

A court will likely find that the COVID-19 global pandemic is an intervening event that neither party anticipated. However, whether a force majeure clause applies will likely depend on the factual circumstances. Does the language of the specific clause sufficiently capture the event? Is performing the contractual obligations truly impossible?

Conclusion

The unprecedented global COVID-19 pandemic has created many challenges. The situation is too new for us to already have clear direction from the court. As such, parties who find themselves in a situation in which performing their contractual obligations may no longer be possible due to COVID-19 must carefully review their contracts to assess their rights and obligations. When frustration of contract or a force majeure clause apply, a party will likely be entitled to relief (such as a refund) due to the non-performance of the contract.

This article was originally written for and published by LawNow

This post is meant to provide information only and is not intended to provide legal advice. Although every effort has been made to provide current and accurate information, changes to the law may cause the information in this post to be outdated.