COVID-19 has clearly had a significant adverse impact on the economy of Ontario, Canada and the global economy. Given the impact of social isolation and physical distancing, and the closure of non-essential businesses, the reality is many individuals and businesses will be unable to fulfil their ongoing contractual commitments. What are the available legal defences? Two of them are “force majeure” (act of God) and “frustration”.
Frustration of Contract
Frustration of contract means the early end of a contract arising from an intervening event or change of circumstances so fundamental as to be regarded by the law both as striking to the root of the agreement, and which is entirely beyond what was contemplated by the parties when they entered into the contract. The further performance, including the ability to perform, needs to become impossible. It must be more than difficult or onerous, it must be impossible to perform. The event must not be the fault of the defendant and must also have been unforeseeable at the time of making the contract. At that point, the defendant can show to the court that the purpose of the contract has been frustrated and that it would be unfair and unjust to be bound by it.
It is an extremely difficult defence. Given the heavy burden, there are few reported cases. The defence appears to have merit in light of COVID-19 and we can expect it to be raised in Statements of Defence more commonly in the future.
Force majeure is a contractual defence one writes into their contract. It is not a common-law defence but a contractual one. We insert them into contracts to allow for the relief of contractual obligations where the circumstances would not permit the defence of frustration. Courts are unwilling to imply a force majeure provision into a contract where no express language doing so exists.
Such a clause absolves the non-performing party of liability because of the extenuating circumstance, but its precise effect will depend on the language of the provision.
Such clauses may simply use the words force majeure and leave the details to be argued about down the road. Other contracts will use the words but also include a shopping list of events or circumstances where it would apply. Another approach is to label all acts of God as the trigger. The Supreme Court of Canada (SCC) has defined “act of God” as a “supervening, sometimes supernatural, event, beyond control of either party, [which] makes performance impossible”. The Supreme Court has also held that the “common thread” among interpretations of the phrase “act of God” is that the events are unexpected and beyond reasonable human foresight and skill.
It is likely that COVID-19 will be used to support the defense if such a clause is contained within the contract. The party seeking the benefit of the clause must show that they cannot perform their contractual obligations due to the unforeseeable, extraordinary circumstances owing to the virus and the subsequent fallout.
Some force majeure clauses require notice to be given. Should that be the case the contractual notice obligations must be met first before one can rely on the clause.
If you are involved in litigation resulting from the effects of COVID-19 on your business or expect to be, the exceptionally skilled corporate litigation lawyers at Milosevic & Associates in Toronto can help. Over the years, our team of lawyers has successfully fought for our clients’ rights and our impressive track record speaks for itself. Please contact us by calling 416-916-1387 or connect online for a consultation.