Menu

January 2021

Explaining Force Majeure Within A Pandemic Context

Explaining Force Majeure Within A Pandemic Context

The purpose of a contract between parties is to define their rights and obligations, as well as to outline any other eventualities that may occur throughout the contractual relationship. Common clauses include performance time frames, methods of resolving disputes and acceptable reasons for non-performance. Which raises the question, is a global pandemic considered an absolute and a ‘slam dunk’ reason for non-performance?

While it is nearly impossible to draft a contract to include all reasonably foreseeable eventualities that may cause non-performance, the “force majeure” clause is often included to expand the scope. A 1975 Supreme Court of Canada case described a force majeure clause as: 

“An act of God clause or force majeure clause generally operates to discharge a contracting party when a supervening, sometimes supernatural, event, beyond the control of either party, makes performance impossible. The common thread is that of the unexpected, something beyond reasonable human foresight and skill.” i


In Canada, there is no force majeure clause implied by common law, so a contract has to specifically include it and define it, for it to be applicable.ii A well drafted force majeure clause lists events that trigger the application of the clause, so there is less ambiguity for contractual parties. Such lists commonly include war, act of government authority, pandemic, explosion, fire, general labour disturbance and more.iii

Since the COVID-19 pandemic was declared, many businesses invoked their contract’s force majeure clause to prevent a breach of their contractual obligations. A business looking to invoke a force majeure clause must establish that the pandemic fits into their contract clauses. For instance, where government has stepped in to restrict business operations, border closures or trade, this may trigger clauses such as a “general labour disturbance”. Some contracts even include broad clauses such as “other events beyond the reasonable foreseeability or control of the parties”, which could encompass the COVID-19 pandemic. 

However, invoking the force majeure clause does not preclude a business from fulfilling contractual obligations as a matter of right. Both parties to the contract must also demonstrate causation: that the force majeure event has specifically impacted their ability to execute their obligations under the contract. Some contracts utilize specific language related to the force majeure clause such as “prevented”, which sets a high standard where the party must provide evidence that contract fulfillment is not possible because of the force majeure event, or “delayed”, which sets a lower standard. If there happens to be other reasons that contractual obligations cannot be completed, it may be more challenging to invoke the force majeure clause. If a business is able to successfully invoke this clause, contracts typically set out what happens next such as: the contract is terminated; the contract is suspended for the period of time that the event prevents the business from performing their obligations; or there is the option to negotiate. 

It is also important to note a business invoking the force majeure clause is expected to have implemented measures to mitigate the effects of the event or attempt fulfillment of their contractual obligations by alternate means. There may even be specific clauses requiring certain steps to be taken so that a force majeure event does not stop business operations entirely. It is important to thoroughly examine a contract before invoking the force majeure clause and potentially exposing your business to legal costs for breach of contract.

We hope this article has shown that an event qualifying as force majeure is not an absolute or ‘slam dunk’ reason why contractual obligations cannot be fulfilled. This pandemic and the application of the force majeure clause is one of the many reasons why DAS has seen a 37% increase in accepted contract dispute claims.iv Over time, judicial interpretation and legislation regarding the application of the force majeure clause may change. That is why the insights and experience of a lawyer provided under a Legal Expense Insurance policy is needed to help manage a business’s or individual’s legal risks. 


                                                                                      
Atlantic Paper Stock Ltd. v. St. Anne-Nackawic Pulp and Paper Company Limited, 1975 CanLII 170 (SCC), [1976] 1 SCR 580
<http://canlii.ca/t/1z6h1>, retrieved on 2020-10-20
ii Sahil Shoor, What Happens If Your Contract In Canada Does Not Have A Force Majeure Clause (October 2020), online:<https://gowlingwlg.com/en/insights-resources/articles/2020/covid-19-contract-in-canada-force-majeure clause/#:~:text=Despite%20the%20occurrence%20of%20an,majeure%20provision%20in%20common%20law.&text=However%2C%20there%20have%20been%20some,contracts%20missing%20such%20express%20provisions.>
iii Thomas J. Timmins and Howard Xin, Redrafting Your Force Majeure Clause in the Era of COVID-19 (October 2020), online:<https://www.lexology.com/library/detail.aspx?g=da88ed0c-ce09-4791-9acc-f9c28f51bbf5>
iv DAS Case Study: A Winding a Path To A New Normal: The Impact of COVID-19 in a DAS Legal Expense Insurance Context

 
Posted: 1/11/2021 12:06:48 PM by Joanna Milnes


Comments
Blog post currently doesn't have any comments.


DAS Whitepaper
Small Business Owners & the Canadian Legal System

- An IPSOS study

DAS Research
Access to Justice or Exposure to Debt?

- An IPSOS study