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Force Majeure vs. Frustration of Contracts in the Time of COVID-19
Posted in Contracts

On February 18, we published an article on force majeure in the context of COVID-19[1]. In this second article, we will compare force majeure with the common law doctrine of frustration, another option for excusing non-performance of contractual obligations[2].  

Frustration vs. Force Majeure

In common law, a contract may be discharged or set aside on the ground of frustration where an unforeseen event renders the contract physically or commercially impossible to fulfill.[3] Unlike force majeure, which must be included in a contract to be invoked, frustration needs not be referred to or included in a contract and can potentially be invoked by any party.

Note, however, that a force majeure clause, if it exists, would displace the doctrine of frustration for any event that falls within the scope of the force majeure clause. Nonetheless, one may still argue frustration for any event that falls outside of the scope of the force majeure clause. Thus, even if a contract includes a force majeure clause, a court may still find frustration to be applicable, though never simultaneously applicable to the same event.

Threshold for Invoking Frustration

Since frustration may potentially be invoked by any party, the threshold that a party has to meet is high. In fact, the practice of including force majeure clauses is directly related to the high threshold for invoking frustration, because contractual clauses let parties customize the threshold and other elements.

As noted above, a contract may be frustrated where, due to a supervening event, its performance becomes substantially different from the original obligations assumed by the parties.

A supervening event is an event that occurs:

(a) after the formation of the contract;

(b) for which the contract makes no provision; and

(c) which is not the fault of either party, not self-induced, and not foreseeable.

A supervening event must also substantially change the nature of the contractual rights and obligations which the parties could reasonably have contemplated at the time of execution, so that at least one of the following is true:

  • performance of the contract has become impossible;
  • the contract is now totally different from what the parties intended;
  • a fundamental contractual term has become incapable of being performed;
  • new circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract; or
  • the supervening event has totally affected the nature, meaning, purpose, effect and consequence of the contract in so far as it concerns either or both parties.

Furthermore, the differences between the contracts before and after the supervening event must:

(a) be permanent, not temporary or transient;

(b) not be mere inconvenience, but fruitlessness; and

(c) not be merely expenses or onerousness.

Where frustration is established, both parties are discharged from further performance. Both B.C. and Alberta (as well as most Canadian jurisdictions) have frustrated contracts legislation, which does not purport to define frustration, but instead operates to mitigate the effect of the common law by providing a system of rules to define the positions of the parties to a contract that has been prematurely brought to an end by the application of the common law doctrine of frustration[4].

Effects of a Finding of Frustration vs. Force Majeure

Under common law, a finding of frustration will discharge all parties from any further performance of their obligations under a contract and leave them in the position that they were in at the time of the frustrating event.[5] This blunt all-or-nothing approach is often softened by reasonable adjustments. For instance, partial performance that is already rendered, if it is of value to the recipient, may be compensable; likewise, partial payment that is already made, if it is a part of the payment for the final price, may be recovered. However, compared to a force majeure clause, frustration remains rather inflexible because a party has no choice over it and generally cannot apply frustration to only certain parts of the contract or portions of the contract’s duration. As such, frustration will not be of much help if parties are interested in keeping a continuing business relationship.

In the Context of COVID-19

With respect to COVID-19, for individuals and businesses that wish to rely on frustration, the main hurdle to overcome would be the ability to demonstrate that the changes to the nature of contractual obligations are permanent, and not just temporary or transient. Most effects of the COVID-19 such as illness, quarantine, travel restrictions, shuttering of businesses and schools, or working from home, seem temporary. However, if time is of the essence for the performance of a fundamental term in a contract, and such performance is utterly prevented by the pandemic, the parties may have a case.

It is also no mean feat to demonstrate that the impact of COVID-19 on the contract rises above inconvenience, expenses and onerousness. The performance of the contract has to become impossible or radically different. The most obvious example might be when a party has died from COVID-19, and the main purpose of the contract relates to personal rights and obligations of the deceased party. 

Summary

In summary, there are three main differences between frustration of contract and force majeure. First, frustration can be invoked by any party to a contract without being referred to in the contract, while force majeure must be included in a contract to be invoked. Second, a party generally has to meet a higher threshold to rely on frustration than on force majeure. Lastly, while a finding of frustration automatically results in the discharge of all parties from their obligations, force majeure offers the flexibility for parties to fashion the responses as they see fit.

These differences may explain why so far there has been no reported Canadian case involving frustration in the context of a pandemic. Nevertheless, it is beneficial for impacted individuals and businesses to know their legal options, which, if for nothing else, may at least aid them in their negotiation over contractual modifications.

[1] See link here.

[2] For a more detailed discussion on frustration and related topics, please see our article posted here.

[3] Naylor Group Inc v Ellis-Don Construction Ltd, 2001 SCC 58, at para 53-55.

[4] To learn more about the Frustrated Contract Act (BC), please see our article posted here.

[5] Naylor Group, supra note 1.

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