Earlier this year, the World Health Organization (WHO) assessed COVID-19 as a pandemic. The rapid spread of COVID-19, combined with the impact of various government responses have caused unprecedented disruptions to business on a global scale, including commercial travel, supply chains, and other commercial operations and relationships. As a result, some companies have asserted that the outbreak constitutes a force majeure event, or gives rise to other legal bases excusing contractual performance.
For companies that are considering issuing a force majeure notice, or those anticipating that their contractual counterparties may do so, we provide answers to key questions on how these types of clauses are treated by Canadian courts (excluding Quebec).
- What is a force majeure clause?
The inclusion of a force majeure clause is common in Canada, particularly in long-term commercial supply contracts. Force majeure clauses define circumstances beyond the parties’ control that can render contractual performance too difficult or even impossible. Where an event, or series of events, triggers a force majeure clause, the party invoking the clause may suspend, defer, or be released from its duties to perform without liability.
- How do Canadian courts interpret force majeure provisions?
The interpretation of the effect of COVID-19 and the application any force majeure clause is a question of contractual interpretation. It will be up to a court to decide the parties’ rights and obligations in the event an impacted party elects to invoke a force majeure clause.
Force majeure litigation is relatively rare and Canadian case law surrounding force majeure provisions in the context of global health concerns is limited. In general, force majeure provisions tend to be narrowly construed in Canada to exclude circumstances that do not clearly fall within the clause, and to exclude events that are not truly beyond the party’s control.
The first step a court will take will be to identify if the outbreak of COVID-19, objectively interpreted, falls into a specified force majeure event. Force majeure clauses typically provide an enumerated list of specific events outside of the contracting parties’ control. Events that are frequently identified in contracts include:
- “Public health emergency”
- “Communicable disease outbreak”
- “Pandemic” or “epidemic”
- “Government administrative action”
- “Failure of upstream suppliers”
- A catch-all such as “Other events beyond the reasonable control of the party”
If the force majeure clause, objectively interpreted, covers the COVID-19 outbreak, the second step will be to consider the following issues:
- Notice periods. Force majeure clauses typically contain written notice provisions. Failure by the impacted party to provide notice within this time period will void the party’s force majeure rights. When proper notice is given within the relevant time frame, the force majeure rights will be deemed to have commenced retroactively from the start of the force majeure event.
- A force majeure clause generally requires that the impacted party establish that the event has affected its performance to the extent required by the language of the contract, which usually requires that the impacted party’s performance be either prevented or hindered or delayed.
- Force majeure clauses also typically include an express duty to mitigate on the part of the impacted party, so far as possible, and remedy the situation in good faith, with due diligence or with all reasonable dispatch.
- What are the consequences of a force majeure clause on contractual performance?
Generally, the initial effect of invoking a force majeure clause is only to delay performance by the impacted party for the duration of the force majeure event. Often, the contract will set out a much longer period before either party has the right to terminate the contract entirely.
- What if a contract does not contain a force majeure clause?
The contract law doctrine of frustration allows for relief from performance in circumstances outside a supplier’s control where a contract does not contain a force majeure clause.
Frustration arises where an event occurs, without the fault of either party, which radically transforms the circumstances governing performance under the contract, and which significantly changes the nature of the parties’ rights or obligations from what they could have reasonably contemplated at the time of contract execution. The doctrine of frustration is flexible and is not restricted to any specific formula.
However, courts have held that frustration may not be invoked simply where performance under a contract has become onerous, expensive, less remunerative or less beneficial.
- What Can Companies do to Address Force Majeure Rights (or Risks) in the face of COVID-19?
- Be proactive and organized. The identification and assessment of any key agreements and your company’s ability to meet its contractual obligations is essential. Review commercial contracts to assess what force majeure rights, remedies and requirements may apply if a party’s operations are disrupted.
- Obtain as much information as possible about any force majeure claim, documenting the timing, the number of impacted people/parts/facilities, and when the event is expected to conclude, as well as any mitigation efforts or efforts to comply with contract terms or to find other means by which to comply
- Understand local regulatory actions and restrictions regarding public policy and public health and monitor new regulatory actions taken in response to COVID-19 to determine if the company must act in a way that affects contractual commitments.
- Manage communications with counterparties, bearing in mind the importance of global coordination of what may be local relationships to ensure a company-wide, consistent approach.
- Consider the effect of a force majeure declaration in one commercial contract across other agreements and legal obligations. For instance, some financial agreements include representations regarding or covenants to provide notice of, material events that could lead to litigation or anticipated loss outside of the ordinary course of business. Such events may also constitute an event of default in related agreements.
A proper assessment of the impact of the COVID-19 outbreak requires a fact-specific analysis of a company’s business and contractual relationships. Management should proactively review with their in-house and outside counsel the rights and obligations provided in the company’s commercial contracts, and under applicable law.
About the Authors:
Matthew J. Latella is Partner at Baker McKenzie, he has over 20 years of experience as a trial lawyer and a track record of success in high-stakes matters, both acting for plaintiffs and defendants. He was seconded to the Firm’s London office, where he focused on multijurisdictional fraud litigation, including ground-breaking asset recovery and enforcement matters
John Pirie leads Baker McKenzie’s Litigation and Government Enforcement Group in Canada. He is a Chambers ranked trial lawyer who acts for clients in complex business disputes, with significant experience in cross-border litigation and arbitration.
Glenn Gibson is a member of Baker McKenzie’s Litigation & Government Enforcement Practice Group in Toronto. She joined the Firm in 2015 as a summer student and completed her articles of clerkship in 2017.