The phrase, “unprecedented times” has been used in the media with increasing frequency these days. It’s hard to find a better way to describe the state of business, day-to-day life and society in general. We find ourselves, indeed, in times that none of us have ever lived through before, adjusting to a new reality in which “self-quarantine” and “physical distancing” have become the norm.
While the government has pressed the pause button on many of the activities that we have all come to know as our daily routine, the legal implications of governmental orders and edicts to stay at home can be a source of mystery to individuals and businesses. One of the big questions arising out of the COVID-19 pandemic is whether the current circumstances operate to excuse parties from performing contracts that they have entered into. Force majeure clauses may provide some guidance.
Force majeure is a phrase that is used to describe events that are disruptive and unexpected and which may operate to excuse contractual performance. Force majeure clauses allow a party to a contract to be excused from performing that contract where extreme circumstances exist that are out of either party’s control which make performing the contract impossible. Since the right to rely on force majeure arises from the contract, the party seeking to rely on force majeure has the onus of proving that the circumstances fit within the specific language of the force majeure clause.
Circumstances that are typically found in force majeure clauses include war, acts of terrorism and natural disasters. Often, these events are referred to as “acts of God”, with the common theme being that such events are unexpected and out of either party’s control. As the Supreme Court of Canada held in Atlantic Paper Stock Ltd. v. St. Anne-Nackawic Pulp and Paper Company Limited, [1976] 1 S.C.R. 580, “[t]he common thread is that of the unexpected, something beyond reasonable human foresight and skill”.
Determining whether a specific event or set of circumstances operates to trigger a force majeure clause requires a review and interpretation of the clause at issue. If the clause is drafted narrowly such that force majeure is only triggered if the specific events listed in the clause exist, then no other circumstances will allow the parties to rely on that clause. On the other hand, where the clause is drafted more broadly, the exercise of interpreting the contract will require closer attention to be paid to the language of the agreement and a consideration of whether the unexpected event would qualify as a force majeure condition.
Since force majeure is a creature of contract, the Canadian courts will not allow the parties to rely on force majeure to excuse performance where such a clause does not exist in a contract or where the event is not among those contemplated in the clause, even in situations such as today’s where COVID-19 was unforeseen and beyond reasonable human foresight and skill. What happens if the circumstances make performance of a contract impossible?
Frustration of contract relieves parties from their obligations by bringing the contract to an end where a situation arises that the parties did not address in the contract and which makes performing the contract “radically different” from what the parties undertook to do. In other words, where the event affects the very purpose of the agreement and prevents the parties from performing the contract as intended, the contract is frustrated.
The analysis is fact-specific but, broadly speaking, there are two elements to frustration of contract: (1) there must be a disruptive event (an event which is permanent, not temporary) for which the contract makes no provision, is not the fault of either party, was not self-induced, and was unforeseeable; and (2) the supervening event caused a radical change in the nature of a fundamental contractual obligation, rendering performance of the contract something totally different than what was contracted for.
For example, in KBK No. 138 Ventures Ltd. v. Canada Safeway Limited, 2000 BCCA 295, a buyer entered into a contract to buy property for the express purpose of constructing a new mixed-use commercial and residential development. Before construction had begun, the municipality amended its bylaws which prevented the development from being built. In that case, the British Columbia Court of Appeal found that, because the specific purpose of the contract was to allow the buyer to construct the development, the municipality’s change of bylaws meant that the contract could not be performed as intended. Therefore, the contract was frustrated. In upholding the decision of the trial judge to order the return of the buyer’s deposit, the court held, at paragraph 26 of the decision:
…there is an intervening event and change of circumstances so fundamental as to be regarded as striking at the root of the agreement and as entirely beyond what was contemplated by the parties when they entered into the agreement. The Director's application "radically altered" the contract between the parties within the meaning of the test set out in Davis Contractors and the above cases. The change in zoning and the consequent reduction in FSR from 3.22 to 0.3, which meant a change in the allowable buildable square footage from 231,800 square feet to 30,230 square feet, did not amount to a mere inconvenience but, rather, transformed the contract into something totally different than what the parties intended.
Where a contract has been frustrated, the contract is terminated and both parties are relieved from further performance. There is no option to continue to keep the contract alive and to excuse one or both parties from performing one aspect of the contract.
The next steps depend on whether performance of a contract has been excused as a result of force majeure or the contract has been frustrated. Because the outcome is very different in each circumstance – in one, the contract will continue and, in the other, it will end – the next steps are situation-specific. For contracts where force majeure has been triggered, performance of the contract will continue when the force majeure event ends. Where a contract has been frustrated, the British Columbia Frustrated Contract Act, R.S.B.C. 1996, c. 166, operates to adjust the parties’ rights and liabilities for the portion of the contract that has already been performed. You should seek legal advice if you find yourself in a situation where you think that performance of your contract has been impacted by COVID-19 or any other unanticipated event.
For more information about force majeure or frustration of contract, please contact one of our team of civil litigators.
