On March 11th, 2020, the World Health Organization declared the outbreak of COVID-19 (aka Coronavirus) a pandemic. On March 20th, 2020, the Government of Manitoba declared a state of emergency and many businesses were forced to either close or restructure their operations. The many consequences of these events include either: (a) preventing parties from completing previous contractual obligations; or (b) making previous contractual obligations difficult to achieve. One of the many questions surrounding this pandemic is whether a party will be obligated to carry out its obligations under a contract. The answer? It depends.
Some written contracts include clauses that allow parties to be excused from their contractual obligations in the event that certain events occur that are beyond their control and make it impossible for them to perform their obligations. These are often referred to as “force majeure” clauses. Whether a party will be relieved depends upon the following:
(a) The language of the force majeure clause itself. Does it specifically refer to a pandemic or virus? If no, is there other language that can be relied upon to argue that the parties contemplated an event such as COVID-19? One example of this is language that includes “an act of God” that prevents one of the parties from performing its obligations. As stated by the Supreme Court of Canada, “An act of God clause or force majeure clause … generally operates to discharge a contracting party when a supervening, sometimes supernatural, event, beyond control of either party, makes performance impossible”.
(b) Is the contract now impossible to perform or is not as convenient to perform? If there were problems that pre-dated the execution or the emergence of COVID-19, and the clause is being relied upon to excuse other business issues, this will make relying on the force majeure more challenging and likely unsuccessful. The contract needs to be impossible to complete and not just less convenient.
(c) Was the event foreseeable? If the contract was entered into recently a court could find that it became reasonably likely that the pandemic would affect the parties and cannot now be relied upon as a reason for not fulfilling the contractual obligations.
In conclusion, whether an event qualifies under a force majeure clause depends on the language of the force majeure clause, the facts and circumstances surrounding the case (including if it was foreseeable) and whether or not it is now impossible for the party to complete the contract. There is also an obligation on parties seeking to rely on COVID-19 as a force majeure to make reasonable efforts to avoid and mitigate any losses that may occur due to the impacts of the pandemic.
If the contract doesn’t include a force majeure clause, it may be still possible for a party to argue that there is frustration of contract. Frustration of contract is available when an event occurs without the fault of either party to a contract which so significantly changes what the parties bargained for, and what they reasonably could not have contemplated, that it would be patently unfair to hold them accountable for their obligations. In this case, both parties are discharged from their obligations to perform. To rely on this doctrine, there is a high threshold that must be met and it is significantly more challenging to rely upon than a well drafted force majeure clause.
If you find yourself in a situation where you’re facing challenges meeting your obligations under any contracts, please reach out to me at 204-988-0328 or email@example.com or any member of Taylor McCaffrey’s Business Law Group and we can help guide you through possible solutions.
Ryan Turner is a partner in Taylor McCaffrey’s Business Law Group.
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