14 April 2020
Force majeure, frustration, and fairness: Navigating contractual disputes in the COVID-19 pandemic
The spread of COVID-19 is having an unprecedented impact on our society. This impact will be felt for months and years to come. In light of the current circumstances, many businesses, organizations, and individuals are struggling to meet their obligations and are looking for guidance on how they can resolve any resulting business and contractual disputes.
The presumption is that parties are to be held to their contractual agreements. However, express contractual provisions and common law doctrines may provide relief from contractual performance in specific circumstances.
One source of relief may come from a force majeure clause that is included in a contract between the parties.
The general purpose of a force majeure clause is to give the contracting parties protection when they are unable to perform their obligations due to events that are beyond their control. Or, put another way, events are outside the inherent risk in conducting business.
While this may suggest that a party is entitled to relief under a force majeure clause based on the COVID-19 pandemic, as this pandemic is unexpected and unprecedented in modern society, contractually, this may not be the case.
Force majeure clauses are drafted to contain triggering events, which allow parties to seek relief under such a clause on the occurrence of a listed event. However, COVID-19, or the effects of COVID-19, may not qualify as a triggering event under a force majeure clause. What is or is not a triggering event will depend on how the clause in the contract is drafted.
Further, in order for a party to be entitled to relief on the occurrence of a triggering event, the event must cause the party seeking to rely on the clause to be unable to perform their contractual obligations. If a triggering event simply makes performing an obligation more expensive or more difficult, this may not be a significant enough effect to entitle that party to relief under the force majeure clause.
Even if a party is prevented from meeting their contractual obligations due to the occurrence of a triggering event, the relief they are entitled to can also vary based on the how the force majeure clause is drafted. A party may be completely released from their obligations under the contract, or they may be entitled to some lesser relief, like a rent abatement in the context of commercial leasing.
Finally, contracting parties should be aware of their obligation to mitigate. Mitigation requires parties take reasonable steps to avoid loss and damage. This may require some sort of partial performance by the parties, as the law will not compensate a party for harm that could have been avoided by taking reasonable steps. However, as COVID-19 is a new and quickly developing situation, the answer to what is “reasonable” in the context of the COVID-19 pandemic is still evolving.
Whether or not a force majeure clause creates an entitlement to relief depends almost entirely on how the force majeure clause is drafted, and some contracts will not contain a force majeure clause at all.
In contracts where there is no force majeure clause, or in cases where the force majeure clause is not applicable, the common law doctrine of frustration may provide relief in narrow circumstances.
Frustration of a contract occurs when, without the fault of either party, circumstances arise which cause the performance of the contract to become impossible or “radically different” than the original bargain.
However, there are a number of exceptions to the doctrine of frustration. For example, a contract is not frustrated when the circumstances are temporary or when the contract simply becomes more costly or onerous to perform.
Whether a contract is frustrated is dependent on the facts of each case. Further, if a contract is frustrated, the actual outcome and remedies for the parties depend on a number of different factors.
As is the case in the context of force majeure, parties should keep in mind their duty to mitigate.
Businesses, organizations, and individuals should also keep in mind that all parties to a contract must perform their contractual obligations honestly and reasonably. When encountering contractual disputes arising due to this pandemic, parties should carefully consider this duty and their planned course of conduct.
The concepts of force majeure, frustration, fairness, and mitigation are complex and heavily dependent on the facts at play. Even if a contract contains a force majeure clause, it may not create an entitlement to relief under such a clause in the current circumstances. This will depend on how the force majeure clause is drafted and the facts of each case. If there is no force majeure clause in a contract, or if it does not apply in the context of COVID-19, a party may, in narrow circumstances, be entitled to relief under the common law concept of frustration.
Parties should also review the entire contract to understand their rights, obligations, and remedies. For example, parties should consider any clauses relating to termination, delay, and the consequences of a default under the contract. If you are experiencing issues or disputes related to contractual performance, contact legal counsel for assistance.
Learn more at our COVID-19 Resource Centre.
Yianni Pappas-Acreman is an Associate in our Litigation & Dispute Resolution Group, and Alyshia Jiwan is an Associate in our Business Law Group.