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The Effect of COVID-19 on Contractual Obligations Set to Take Place Later in 2020
Posted in Contracts

Canada’s federal and provincial governments have been taking significant steps to limit the spread of the novel coronavirus, COVID-19. Due to the various federal and provincial emergency orders implemented in response to COVID-19, certain businesses may not be able to fulfill their contractual obligations with various parties such as suppliers, purchasers, and investors. One of the most common questions arising from this recent development is what to do about contractual obligations set to take place later in 2020 which may be affected by COVID-19. This article examines relevant case law, but not the specific statutes, regulations or orders enforcing social distancing. Please see our firm’s other postings for more information, and seek legal advice on your own specific situation.

Overview: Inability to Fulfill Contractual Performance Obligations Due to COVID-19

A party’s approach to fulfilling its contractual obligations in light of COVID-19 will differ depending on the circumstances. There are three important factors that a party should consider when such party is contemplating informing the other party(ies) that it is unable to fulfill its contractual obligations because of COVID-19:

  1. First, what does the contract state regarding non-performance of contractual obligations? Is there a force majeure clause in the contract?
  2. Second, when is the performance of contractual obligations scheduled to occur?
  3. Third, to what degree is the current pandemic affecting the party’s ability to fulfill its contractual obligations?

Contracts often include force majeure clauses that relieve one party from fulfilling a contract or part of a contract when certain events transpire. If a contract does not contain such a clause, there are other methods of legal recourse, such as a doctrine referred to as “frustration.”

If a party has contractual obligations set to be performed later in 2020, for reasons set out below, it must meet certain requirements when invoking either force majeure or frustration in advance of the date on which such party is set to perform its contractual obligations. Due to the high threshold for successfully invoking such remedies and the unprecedented and rapidly-changing nature of the challenges presented by COVID-19, unless it is certain that a party cannot perform its obligations set to take place later in 2020, we recommend that a party anticipating difficulties in performing its contractual obligations to only invoke one of these doctrines after using its reasonable efforts to coordinate with the other party(ies) to resolve the difficulties presented by COVID-19.

Force Majeure Clauses

Commercial parties may choose to include a force majeure clause in their contracts to provide relief for a party that is unable to perform its obligations due to events outside its control (such events are often called force majeure). Such clauses may relieve a party entirely from performing its obligations under a contract, but more often such clauses operate to suspend performance of obligations or extend deadlines for performance. It is up to the parties to define what will constitute a force majeure event, how the force majeure clause is to be triggered, and the consequences of such clause being triggered.

If a party wishes to rely on a force majeure clause based on the recent developments around COVID-19, such party must prove the following:

  1. that the COVID-19 pandemic or related governmental, commercial or other disruptions fit within one of the categories of force majeure events listed in the clause (such as “epidemics” or “quarantines”), or that COVID-19 fits within the general description of force majeure in the clause (often, such clauses provide descriptions of force majeure as “an event beyond the party’s reasonable control”);[1]
  2. if COVID-19 does qualify as a force majeure event under the clause, that such party has been prevented, hindered or delayed from performance of its obligations;
  3. that the non-performance of such party’s obligations is due to circumstances beyond its control – courts generally will not allow a party to rely upon a force majeure clause to excuse such party’s own acts or failure to act; and
  4. if COVID-19 does qualify as a force majeure event under the clause, that there were no reasonable steps that such party could have taken to avoid or mitigate the developments around COVID-19 or its consequences. For instance, a party expecting to invoke force majeure due to COVID-19 should provide advance notice to the other party(ies) to explain how COVID-19 may affect its ability to fulfill its contractual obligations.

If a party to a contract wishes to invoke a force majeure clause in anticipation of its inability to fulfill its contractual obligations set to be fulfilled later in 2020 or next year, such party should ensure that the event relating to COVID-19 (in respect of which such party is seeking to invoke the force majeure clause) will certainly prevent, hinder or delay such party from performing its obligations later this year or next year.

For instance, if a party had entered into a contract to organize a convention set to take place at the beginning of 2021, as of the date of this blog, it is unclear whether such party may invoke British Columbia’s ban on public gatherings as a force majeure event preventing, hindering or delaying such party’s performance of its obligations. In the Restart Plan published by the Government of British Columbia on May 6, 2020, the British Columbia government has stated that the allowance of activities requiring large gatherings will be conditional on “at least one of: wide vaccination; ‘community’ immunity; [and] broad successful treatments”. Given the foregoing pronouncement, it is unclear to the parties as to whether the government’s current ban on public gatherings will prevent, hinder or delay the convention organizer from fulfilling its obligations in early 2021. Consequently, it may be advisable for the convention organizer to either (i) wait until it becomes certain that the ban on public gatherings will not be lifted by the beginning of 2021 to invoke the force majeure clause, or (ii) coordinate with the other party(ies) to explore options outside of the contract to mitigate the effect of COVID-19 on the party’s performance of its obligations.

Doctrine of Frustration

If a contract does not contain a force majeure clause, one might consider invoking the doctrine of frustration to have the contract set aside or discharged. We note that if a party’s rights and obligations are already governed by a force majeure clause, the doctrine of frustration will not apply and such party must rely on the force majeure clause.[2]

The party seeking to invoke the doctrine of frustration has to meet a high threshold of proof.  A court will only consider a contract “frustrated” when performance of the contract has become impossible, illegal or radically different from that initially contemplated by the parties (as opposed to it becoming merely more expensive or onerous for a party to perform its obligations under the contract). There is Canadian case law indicating that “impossibility” of performance can encompass impracticability because of extreme and unreasonable difficulty, expense, injury, or loss involved.  Depending on the situation surrounding the contract in question, a party may be able to claim that the disruptions brought by COVID-19 constitute such “impossibility” of performance.  

We note that a party claiming frustration of a contract cannot rely on a temporary or transient event. For instance, courts have stated that a ten-day strike or a suspension of two or three days from work are not events frustrating the performance of a contract. 

When determining whether COVID-19 is sufficiently disruptive to give rise to contractual frustration, a court is likely to examine whether the interruption brought on by COVID-19 effectively brings an end to the contract in question, such that it is not reasonable for the parties to resume their obligations under the contract.

Using an extreme example, if an entertainer is scheduled to perform at an event in November 2020, but dies from contracting COVID-19 in May of 2020, the entertainer’s estate and heirs (who would take the place of the entertainer in the entertainer’s contract in respect of the event) would most likely be able to successfully invoke the doctrine of frustration, since a court would most likely find that the death of the singer is an interruption that effectively brings an end to the contract. However, as noted in the above section on force majeure clauses, there are other types of contracts under which a party would not be able to establish that an event relating to COVID-19 would certainly make it impossible or impracticable for that party to perform its obligations set to take place later in 2020 or in early 2021. Such party should wait until it can establish impossibility or impracticability of performance, or negotiate other alternatives with the other party(ies) to the contract.

Conclusion

As discussed above, while force majeure clauses and the doctrine of frustration may provide parties with legal options for being relieved of their contractual duties, the invoking party must meet certain burdens of proof.

We do not know of a British Columbia case that examines the effects of COVID-19 on parties’ contractual obligations. Given the lack of case law considering the effects of COVID-19 and given the high threshold of proof to successfully invoke force majeure or frustration, we recommend that a party anticipating difficulties in performing its contractual obligations to only invoke one of these doctrines after using its reasonable efforts to coordinate with the other party(ies) to resolve the difficulties presented by COVID-19.

[1] Atlantic Paper Stock Ltd. v. St. Anne-Nackawic Pulp & Paper Co., [1976] 1 SCR 580, 56DLR (3d) 409 at 411.

[2] Interfor v. MacKenzie Sawmill Ltd., 2020 BCSC 416 at 43.

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  • Jack  Yong
    Partner, Leader - China Initiative

    Jack Yong is a partner and leader of the China Initiative with Lawson Lundell's Vancouver office, practising corporate and commercial law and providing clients with strategic counsel in diverse areas of business law. 

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