The novel coronavirus (COVID-19) continues to impact the lives of millions of Canadians and millions more around the world. Governments and communities worldwide have responded to this global health emergency by restricting travel and large public gatherings. Schools, restaurants and other businesses have been shutting their doors in response to contain the spread of the virus. In an effort to further curb the spread of COVID-19, many employees have been asked to work from home, further compounding the operations of businesses worldwide. Businesses and contractors may find themselves in a position where their ability to fulfill or perform a contract is hindered or rendered out right impossible due to the growing concerns and instability caused by COVID-19.
In these uncertain economic times, it is important that business owners and contractors understand their contractual rights and obligations especially if they find themselves in a situation where fulfilling a contract becomes difficult or impossible. Business owners and contractors should carefully review their contracts to determine whether any relief is available under the contract, such as relying on a force majeure clause, or whether any other relief from the performance of their contractual obligations is available.
A force majeure clause is often included in a contract to excuse performance by one or more parties to that contract on the occurrence of an event that is outside the contracting party’s control. Invoking the force majeure clause can potentially absolve a party from liability from performance of at least some of its contractual obligations under the agreement. A force majeure event typically refers to a circumstance beyond the control of one or more parties to a contract that causes performance of the contract to be frustrated or impossible to perform. Such clauses can specify any number of these types of events and can include acts of God, riots, civil strife, acts of terrorism, labour strikes, natural disasters and epidemics.
Whether a party can claim relief from contractual performance will depend on the wording of the force majeure clause as courts are known to interpret these clauses narrowly. A force majeure clause may not expressly cover the events unfolding due to COVID-19, and it is important that the wording of the provision be carefully reviewed. Additionally, a party cannot rely on a force majeure clause to excuse its own conduct and may have an obligation to find alternative means to fulfill its contractual obligations even if it would cause delays or economic hardship to do so.
The Doctrine of Frustration
While it goes without saying that a party cannot rely on a force majeure clause if the contract does not contain one, this does not mean that a contracting party is without options in the event they find themselves unable to fulfill their contractual obligations and a force majeure clause is absent from the contract. A party to a contract may be relieved of its obligations and corresponding liability by relying on the common law doctrine of frustration. In order to rely on the doctrine of frustration, a party must show that an unforeseen event occurred that caused a material or radical change in performance of a party’s ability to fulfill its contractual obligations through no fault of either party to the contract. As with a force majeure event, the material or radical change is generally one that makes performance under existing circumstances impossible, impractical or frustrates the original purpose of the contract.
In Saskatchewan, the doctrine of frustration has been codified under The Frustrated Contracts Act. In order to invoke the legislation a party must either show that the common law doctrine of frustration applies or the contract is one for the sale of specific goods and the goods under the sales contract have perished through no fault of the buyer or seller prior to risk being transferred to the buyer. In these circumstances parties may be relived from fulfilling their obligations under the contract.
The Frustrated Contracts Act will not apply to all types of contracts. Contracts of insurance, certain contracts for the carriage of goods by sea, and contracts entered into prior to March 28, 1994 are not covered under The Frustrated Contracts Act. These excluded contracts may be covered under separate legislation or the general principles surrounding the doctrine of frustration.
The reliance on force majeure clauses or the doctrine of frustration will become much more prevalent while we navigate our way through the effects the global health emergency caused by COVID-19 will bear on our lives, our communities and the world. Each situation will need to be independently reviewed to assess whether a force majeure provision can be relied upon, provided the contract contains such a provision, or if a party can claim a remedy under the more general doctrine of frustration. It is important to note that not all situations will arise to a level where a contract has been frustrated or impossible to perform. Lengthy delays or incurring unforeseen economic hardships may not be a cause to claim frustration or rely on a force majeure provision. It is strongly encouraged that you seek legal advice to assess whether invoking a force majeure clause or the doctrine of frustration is an available remedy in the event you find yourself in a situation where you are unable to complete or perform a contract due to events outside of your control, including the impact COVID-19 is having on the global economy.
For more information, please contact:
Marinko J. Jelovic