In 1974, B.C. passed what is now the Frustrated Contract Act (FCA), to resolve uncertainty left when a contract was deemed frustrated (where performance has become impossible or radically different due to supervening events). Since then, the FCA has received little judicial consideration. It has been called “badly drafted and haphazard”. Most practitioners are unaware, or vaguely aware, that it even exists. Many commercial contracts do not account for it at all.
Enter COVID-19. Suddenly, many businesses are re-considering their contracts for force majeure clauses and, in the absence of those clauses, assessing whether they could rely on the doctrine of frustration of contract. In the current climate, the FCA could have a dramatic effect on your legal position. The following is a brief primer.
Does the FCA apply?
The FCA applies automatically wherever a contract is deemed frustrated and where the contract does not provide for the consequences of frustration. So, unless your contract deals expressly with the rights of the parties on frustration of the contract, the FCA likely applies.
What are the effects of the FCA?
The FCA is aimed at establishing the rights of parties where a contract is partially performed when it becomes frustrated. It provides that:
- If the court can sever part of the contract which has been fully performed from the remainder, it will do so;
- A party who has done something in fulfillment of the contract is entitled to restitution;
- Importantly, it does not matter whether or not the other party actually received the benefit;
- All obligations which should have been but were not performed prior to the frustrating event come to an end (but claims for consequential loss survive);
- Where the party making restitution suffers a loss in value of the benefit due to the frustrating event, the loss is apportioned equally between the parties; and
- A claim for restitution can include only reasonable expenditures and cannot take into account any loss of profits or insurance money received because of the frustrating events.
Party A contracted to buy 100 widgets from Party B, to be delivered on March 10. Only 10 widgets were delivered on March 10, with a promise of the remainder coming later. On March 20, Party B claimed that COVID-19 would prevent them from completing the delivery. Party A had difficulty reselling the 10 widgets due to COVID-19, and sold them at half price. Party B had incurred significant expenses in manufacturing the remaining 90 widgets.
Assuming the court accepted that the contract was frustrated, Party A would be liable to pay Party B for the 10 widgets delivered, as that part of the contract could be severed. However, if Party A could argue that the obligation could not be severed from the contract generally, it would be able to reduce the amount payable for the 10 widgets to 50% (the court would apportion the loss of value of the products 50/50).
Party B’s obligation to deliver the remaining 90 would end. However, Party B would be entitled to claim reasonable expenditures incurred in the construction of the remaining 90 widgets, even though Party A never received the products.
This is rough justice and could cause significant prejudice. For example, suppose that Party A had spent $100,000 in expectation of receiving the goods, and Party B had spent $100,000 in building them. Party B, as the defaulting party, would be entitled to receive all its reasonable expenditures as restitution. Party A’s loss, however, would be apportioned 50% between the parties.
Despite neither party being at fault, this would leave Party A paying $150,000 and Party B paying $50,000.
Is there a way out of the FCA?
The FCA provides that it does not apply to any contract which makes provision for the consequences of frustration. The FCA also provides that the restitution is not payable where there is a custom (between the parties or in the industry) or implied term that the party performing should bear any risks.
If the FCA does not apply, parties can still make a claim for restitution in unjust enrichment. The key differences between that claim and a claim under the FCA are that (1) the defendant must have actually received the benefit, and (2) there is no equal apportionment of losses suffered by the defendant.
How have the courts considered the FCA?
The FCA has seen little judicial attention. The following points can however be taken from the jurisprudence:
- A party may escape a claim under the FCA if it can show that the other party did not provide even partial performance (British Columbia v. Cressey Development Corp., 1992 CanLII 8564 (B.C.S.C.));
- A party required to pay restitution may be able to offset its own expenses paid in expectation of receiving contractual performance, which will be apportioned equally between the parties (Cassidy v. Canada Publishing Corp., 1989 CarswellBC 1669 (S.C.));
- It is undetermined whether common law defences to a restitution claim (such as change of position) apply to a claim under the FCA (BP Exploration Co. (Libya) Ltd. v. Hunt (No 2),  2 A.C. 352 (H.L.), an English case on similar legislation); and
- Interest may or may not be payable on any payments being repaid, and will depend on what the money was to be used for (Cressey Development).
The above is a brief and superficial overview of the FCA, but it shows some of the risks and potential unfairness in the statutory position. It is likely that the FCA will feature heavily in litigation in the next few years and that the courts will define and refine the effect of the Act.
Many parties, however, are likely to find themselves caught by these provisions unexpectedly. If you have any questions about the FCA in the time of COVID-19, or wish to discuss any matter in this post, please contact any member of our Litigation Group.
Catherine is a member of the Research and Opinions Group. She has experience in conducting research and drafting legal opinions on a broad spectrum of topics, including insurance policy interpretation, tort law principles ...
Tom is a commercial litigator, with particular experience in complex corporate disputes.
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