COVID-19: Am I stuck in my contract?

I think it is safe to say almost all, if not all businesses, large and small alike, are feeling some sort of effect from the global epidemic, COVID-19. The impact COVID-19 has had, and likely will continue to have on our economy has business owners asking questions like, “Am I stuck in my contract?”, and “What do I do if I can’t fulfill my contractual obligations?”. Unfortunately, there is not one easy answer to these questions, however the starting point is reviewing the written contract itself.

Force Majeure

When reviewing your contract, you are first looking for what is referred to as a force majeure clause. The purpose of the contractual tool is to either temporarily or permanently, allow one party out of its contractual obligations. The clause may be triggered by an external, unforeseeable event that is beyond the reasonable control of one party, making a party’s contractual obligations commercially unreasonable, impossible, illegal, or a different threshold depending on the exact clause.

External Event

If your contract has a force majeure clause you need to determine if COVID-19 is an external event that falls within the meaning of the clause. You should be looking for language in the clause that clearly describes COVID-19 such as a pandemic, or virus.

Now, not all force majeure clauses will specifically include pandemics. However, it is very common to see “an act of god” in force majeure clauses. It is obvious that COVID-19 falls within the definition of a pandemic or a virus, but is it an act of god? It is difficult to definitively determine how the Courts will deal with this, but the current state of the Canadian jurisprudence, leads us to believe that COVID-19 may be within the meaning of an act of god.

Threshold

If COVID-19 falls within the meaning of a force majeure clause, the degree of difficulty your business is faced by virtue of performing its contractual obligations can now be assessed, I refer to this as the threshold. Some possible thresholds in force majeure clauses include when obligations become impossible, illegal, prevented, hindered, or commercially unreasonable. Each of the aforementioned thresholds, have incredibly different meanings within the law. Take for example, a supply contract, where a supplier is bringing goods that are produced overseas, and the factory that the business owner typically uses is closed as a result of COVID-19. If the threshold in the clause is impossibility, the current jurisprudence states that the business owner relying on the clause should be able to establish that there is no other manufacturer that can produce the goods being supplied under the contract. If this is not the case, it would be possible for that supplier to fulfill its obligations. If the threshold is hindered, or commercially unreasonable the threshold interpretation is entirely different.

Foreseeability

Was, or is COVID-19 foreseeable? I think it is safe to say that if you entered a contract prior to the outbreak of COVID-19, the Court would likely consider the pandemic as an unforeseeable event. However, if you, like many business owners are continuing the operation of your business during the COVID-19 pandemic, you may be entering into new contracts. If you find your business entering new contracts, even contracts with a force majeure clause, be cautions. It is entirely possible that you may not be able to rely on the force majeure clause in the new contract to relieve you of your contractual obligations as a result of the future circumstances now being foreseeable.

Frustration

If you have now reviewed your written contract and your contract does not have a force majeure clause, or the contract is oral, do not panic, it still may be possible to relieve your business of its contractual obligations. You may be able to rely on the common law doctrine know as frustration. Frustration is similar in theory to a force majeure clause, as it requires that an unforeseeable event results in a contractual obligation(s) being impossible to perform, or dramatically changes the purpose for entering the contract.

Frustration terminates the contractual relationship between the parties. This is dramatically different than a force majeure clause that can temporarily suspend obligations, depending on the language of the clause itself.

In the past frustration has been construed very narrowly by the Court. The Court has generally required that the party seeking to rely on the doctrine demonstrate that the unforeseeable event has made it impossible or illegal to perform its obligation. It is not enough that the obligation has become more difficult.

Conclusion

To reiterate, unfortunately there is no easy answer to “Am I stuck in my contract?”. It is possible that your contractual obligations may be suspended or terminated by virtue of a force majeure clause. The contract may be terminated as a result of frustration. Also, don’t eliminate the possibility of negotiating your way out of certain contractual obligations.

If you have questions of concerns relating to current, or future contractual obligations, and the effect of COVID-19 on your business, please feel free to contact someone from our corporate department and we will be happy to assist you find a solution that works for you and your business.