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Force Majeure and Frustration, in the Context of COVID-19

COVID-19 | March 27, 2020

Force Majeure refers to a superior or irresistible force or an event or effect that cannot be reasonably anticipated or controlled.  In the legal context in British Columbia, it generally refers to clauses in contracts that can, under certain conditions be invoked to relieve a contracting party from its obligation to perform the contract.

The authority for invoking Force Majeure to provide relief from performance comes from the contract (except in Quebec).  The contract must contain a force majeure clause which specifies a type of event capable of encompassing the COVID-19 outbreak, or such other occurrence as the party invoking force majeure seeks to rely on. It is important to note that there is no generic definition of what constitutes force majeure in common law. It is a matter of contractual interpretation in each case. The defaulting party must prove that:

  1. one of the events or occurrences referred to in the force majeure clause has occurred;
  2. the invoking party has been prevented, hindered or delayed from performance by that event;
  3. The invoking party’s non-performance was due to circumstances outside of its control; and
  4. there were no reasonable steps that the invoking party could have taken to avoid or mitigate against the event.

For a force majeure clause to engage, there are often different thresholds drafted in: for example in some contracts performance has to have been rendered impossible, whereas others, performance need only be hindered or delayed.  Similarly, a downturn in economic conditions (even if caused by an event like COVID-19) will generally not constitute force majeure.  However, government interference or anything referring to illness, pandemic or epidemic may be included as part of the force majeure clauses.

Some force majeure clauses will suspend party’s performance of the contractual obligation, others allow for termination of the contract, usually if the event persists for a certain period of time.

Frustration

If the force majeure clause does not cover an event such as the COVID-19 outbreak (or there is no force majeure clause at all), it may be worth considering the question of whether the contract has been or is likely to have been frustrated.  A contract will terminate automatically when a frustrating event occurs, i.e., one which is: (1) unexpected; (2) beyond the parties’ control; and (3) makes performance impossible or radically different from that which the parties contemplated at the time of entering into the contract. The frustrating event must “significantly change the nature of the outstanding contractual rights or obligations.”  Following the 2003 SARS epidemic, the Hong Kong District Court held that a 10-day period in which a property was uninhabited did not frustrate the tenancy agreement, which had a two-year term.

Mitigation

Wherever losses are likely to be incurred, contractual parties have a duty to mitigate damages.  Force majeure and frustration are last resorts which will not be applied if parties have not exhausted the options available to them to perform their obligations under the contract.  A party must show that there were no commercially reasonable alternatives that would have mitigated the impact of the event on the other party.

Approach 

Step 1: Does the contract have a force majeure clause that could cover COVID-19?

Step 2: Is there causal link between the force majeure/frustrating event and non-performance of contractual obligations?  Do those contractual obligations go to the heart of the contract?

Step 3: Have all reasonable commercial steps been taken to mitigate the loss?

Step 4: Review the contract for any notice provisions.  Ensure any notices given or received comply with the contract and contain an adequate level of detail.

 


© Peter Loewen, Linley Welwood LLP

The contents do not constitute legal advice, and any reader should seek legal advice as the application to their circumstances.


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