Carscallen Blog

Force Majeure: Non-performance of contracts due to COVID-19

Posted by Carscallen LLP on Mar 26, 2020 12:04:51 PM

Written by John M. Davidson and Theresa M. Nolan

The COVID-19 pandemic (the “Pandemic”) has disrupted economies, international and domestic trade, and business across the world and locally in both Canada and Alberta.

Business owners faced with this devastating Pandemic must now deal with unforeseen issues such as supply chain disruption, the mandated closure of non-essential services, lay-offs, key employees in quarantine, breaches of financial covenants given to their lenders/banks, an inability to pay rent to their landlords, and mandated closures of public spaces and restrictions on public gatherings, just to name a few.

Due to the Pandemic, many business owners will also find themselves unable to perform some or all of their contractual obligations. If you’re a business owner faced with this situation, you may find contractual relief in what’s commonly known as a “force majeure” clause.

what is force majeure?

In the common law parts of Canada (i.e. the Canadian Provinces other than Quebec), force majeure (“FM”) is a contractual provision that allows for the non-performance of contractual obligations due to the occurrence of an unforeseen, extraordinary event that results in preventing a party to the contract from performing its obligations under the contract.

The principle of FM is that no party to an agreement should be held to perform its obligations to the extent that performance is prevented by certain extreme circumstances outside that party's control. Any party affected by continuing FM events will not be required to perform, or be liable for the failure to perform, its obligations as a result of those events.

Each FM clause will be dependent on and governed by the specific wording contained in the contract:

  • To define what types of events are considered to be a FM event (“FM Event”) under that contract; and
  • To enumerate what the occurrence of a FM Event allows the party invoking the FM to do/not do under the contract.

The main considerations when reviewing a FM clause in a contract are:

  • Whether the event(s) in question satisfy the definition of a FM Event under the contract;
  • Whether the potential FM Event has impacted the invoking party’s ability to perform its obligations under the contract;
  • Whether the invoking party has sufficiently mitigated its losses resulting from the FM Event; and
  • Whether the invoking party has complied with the notice requirements and/or any other requirements contained in the FM provision.

It is important to note that the occurrence of a FM Event is not enough to justify non-performance of the obligation by the invoking party. The invoking party must also establish that the occurrence of the FM Event impacted/interrupted/interfered/prevented its ability to perform its obligations under the contract. The invoking party must also demonstrate that it has taken all reasonable steps to avoid/minimize/mitigate its losses as a result of the FM Event.

Is the COVID-19 PANDEMIC a FM Event?

The Pandemic has been declared a state of emergency in Alberta (and multiple other provinces), as of March 17, 2020. Likewise, the municipalities of Edmonton and Calgary also declared the Pandemic a state of emergency on March 20 and March 15, respectively, and the World Health Organization declared a pandemic on March 11, 2020.

Whether the Pandemic will be considered a FM Event under a contract is a fact-specific exercise that should be conducted on a case-by-case basis by a qualified business lawyer. Businesses with contractual interpretation questions or those looking for advice regarding the potential non-performance of obligations under a contract may contact our corporate and commercial transactions team  for assistance in determining the specific FM clause contained in their contracts.

Nonetheless, if a FM clause contains terminology such as “pandemic”, “epidemic”, “disease”,  “public health emergency”, “communicable disease outbreak”, or “state of emergency”, the Outbreak should satisfy the first consideration, being whether the events in question meet the definition of a FM Event.

However, the invoking party must also still satisfy the other FM considerations in order to rely on the Pandemic as a FM Event justifying non-performance under its contract.

Regarding the second factor of whether the FM Event has impacted or affected the invoking party’s ability to perform its obligations, the language can range from requiring the invoking party to demonstrate that performance was “prevented” as a result of the FM event, to demonstrating that performance was “hindered” or “delayed”. Again, this is a case-by-case exercise depending on the specific language contained in each FM provision.   

Another factor that varies from contract to contract is what remedy will be available to the party invoking a FM Event. Most FM provisions will delay or suspend a party’s obligation to perform under the contract for a certain period of time, but some FM provisions will result in a termination of the contract.

Carscallen LLP’s Corporate and commercial transactions expertise

We understand that the rapid emergence of COVID-19 means that many businesses are dealing with a myriad of legal issues. Please contact us if you have any legal questions about your contractual obligations in connection with COVID-19, or any other business or contract law matters. Our lawyers routinely work remotely and will continue to do so during this time. We remain available to provide legal advice and guidance to clients for all issues that may arise during the Outbreak.

For more updates related to COVID-19, please visit our resources page and follow us on LinkedIn.

As this is an ongoing situation of a global nature, the information provided herein is current as of the publishing date of this blog.

Visit COVID-19 Page

 

 

*This update is intended for general information only on the subject matter and is not to be taken as legal advice.

 

Topics: Covid-19, Corporate & Commercial Transactions

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