Commercial and Contract Law Implications of the COVID-19 Pandemic

  • May 19, 2020
  • Wayne Gray, Practical Law Canada

Background

As a starting point, contracting parties are at common law required to perform their agreed obligations. Excuses for non-performance exist but are narrowly interpreted and applied.

A contract may include an express force majeure provision. If it does, that provision will allocate the risk of non-performance or delayed performance. The terms of the force majeure clause read in their entire context are determinative. There is no force majeure provision implied by common law.

The common law also recognizes, as excuses for non-performance, impossibility and frustration. These supervening events are also narrowly applied and, if applied, vitiate the entire contract rather than simply allow delayed performance.

Force Majeure

In every business transaction, extreme events, commonly referred to as force majeure events, which are beyond the control of one party, may arise and prevent that impacted party from performing the contract. If the contract is silent on force majeure, a court renders its decision whether to excuse an impacted party's performance based on the separate excuses for non-performance consisting of impossibility and frustration.

Inclusion of a force majeure clause in a contract is important because it is not otherwise enshrined as a principle of law at common law, although it is codified in the Québec Civil Code of Québec, CQLR, c. C-1991. If there is no force majeure clause in a contract, a party will not be relieved of its obligations under the contract and will remain liable to the other party for its performance notwithstanding the occurrence of an intervening event beyond its control even when that party's ability to perform is significantly impaired or rendered impossible. Where performance is impaired or impossible and the contract contains no force majeure clause, the breaching party could also be liable to pay liquidated damages in lieu of performance (if the contract includes a liquidated damages provision).

Assuming that the contract includes a force majeure clause, the next steps are to analyze it in detail.

Step 1: Identifying whether an pandemic or epidemic is a specified force majeure event. Many contracts will include one or more of the following as specified force majeure events: