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Force Majeure, Frustration, and COVID-19: When Contracts Can't Be Fulfilled

May 8th, 2020
Nital S. Gosai
B.A. Hons, L.L.B., Founding Partner

With so many businesses being affected by the current COVID-19 pandemic, it is important to understand your contractual obligations, but more importantly, your rights. With the amount of disruption to business operations, including supply chains and international travel, more and more businesses are unlikely to be able to fulfill their obligations. So, what happens if you cannot keep your end of your contractual relationship? We’re going to take a look at whether or not your contract can work for you instead of against you, with the inclusion of a force majeure clause. 

What is a Force Majeure Clause?  

Put simply, a force majeure clause is a provision in a contract that is put in place in order to allow a party to suspend or terminate the performance of its obligations under the contract. Having said this, a force majeure clause cannot be turned to for any old reason – this provision only applies when circumstances beyond the party’s control arise, making it impossible to fulfill their obligations. 

Here are some things to consider when trying to enforce or resist a force majeure clause: 

Understanding a Force Majeure Clause

Whether you are looking to enforce or resist a force majeure clause, it is important to make sure that you thoroughly read and understand the contract. Your contract may already include obligations the non-performing party must adhere to, in order to rely on the force majeure clause at all. In this case, contracts may require the non-performing party to stick to strict notice requirements and provide supporting documentation. The contract may also require that the non-performing party take steps in order to minimize possible damages to the other party due to their non-performance.  

Whether or not the contract specifically states it, the courts will consider the steps that the non-performing party took to reasonably prepare for the event that caused them to turn to the force majeure clause in the first place. They will then decide whether damages in any capacity could have been reasonably prevented.  

What if My Contract Does Not Include a Force Majeure Clause?

If the COVID-19 pandemic has made it impossible for you to keep up your end of the bargain and your contract does not include a force majeure clause, you may still be able to rely on the doctrine of frustration.  

The doctrine of frustration is a legal remedy, which is relied upon when events outside of the control of either party changes the purpose of the contract. The event may make the contract different than what the parties had originally intended, or just make it impossible for the parties to complete the contract at all. In Ontario, the courts will decide whether the doctrine of frustration can be used by considering the following: 

  1. The Event:This legal remedy will be considered in cases where an event has occurred that neither party to the contract could have controlled or would have reasonably contemplated. The event needs to be directly linked to the parties’ inability to perform the contract the way it was intended, which then frustrates the original purpose of the contract. 
  2. No Force Majeure Clause: The contract cannot include a force majeure clause. It also cannot include any similar provision suggesting that unforeseen events had already been considered, which would prevent either party from being able to complete the contract. If such a provision does exist, the courts will rely on that clause and the doctrine of frustration will not apply. 
  3. The Purpose of the Contract: The frustrating event must make it impossible for one or both parties to perform the contract OR the frustrating event must significantly change the purpose of the contract from what the parties originally intended.  

If your contract does not include a force majeure clause, or you are simply unclear on how to move forward, it is always a good idea to discuss your options and obligations with your lawyer. We are here to help if you are a party to an agreement that the COVID-19 pandemic has made impossible to perform, is now substantially different than what you had originally intended, or have any additional issue regarding force majeure. Gosai Law can help navigate your options and advise you on how to best proceed moving forward.  

While our physical office location is currently closed, we continue to advocate for you remotely. Please feel free to reach out to us at info@gosailaw.com or by contacting our phone line at (905) 595-2225 for more information. 

Other COVID-19 Questions:

What does the reopening of businesses mean for you?
Could the business interruption clause in my contract help me?
What duty of care do I owe my employees?

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