COVID-19'S Effect on Commercial Contracts
On March 11, 2020 the World Health Organization ("WHO") declared a global health pandemic as a result of COVID-19. National and local governments followed suit in due course. Whilst the Government of Alberta made Ministerial Orders pertaining to residential rent, and evictions, no guidance has been provided with respect to the effect on commercial or business contracts. The closure of non-essential businesses has resulted in uncertainty with respect to the contractual obligations of Albertans, and the resulting effect.
For example, what affect will this have on contracts relating to event planning in which, the event is for much larger than 25 people? What remedies do parties to contracts affected by the pandemic have?
Enter Force Majeure Clauses:
Generally speaking a clearly drafted Force Majuere clause may be the most reasonable method to provide some relief to parties. Such clauses when properly drafted operate to discharge a party from contractual obligations when a supervening, sometimes supernatural, event, beyond the control of either party makes performance of the contract impossible. However, the law does not simply allow parties to escape contractual obligations by raising it as a defence. Such a low threshold would certainly affect the efficacy and certainty of commercial contracts.
A Force Majeure clause may say something to the effect of " neither party shall be liable for the failure to perform or delay in performing any obligation under this contract, including obligations to make payments when due if such failure or delay is due to an act of god, war, embargo riot...". Needless to say the circumstances or the even of Force Majuere should be clearly stated.
Unless expressly stated in the clause, the question arises as to whether the COVID-19 pandemic can be construed as an act of god, and remains to be determined by the Courts. Limited case authority is available in that regard, given the unprecedented nature of the situation. In the case of Atlantic Paper Stock Ltd, the Supreme Court of Canada has provided guidance on what can be construed as an "act of God". The "common thread" as analyzed by the Supreme Court of Canada is that of the "unexpected, something beyond reasonable human foresight and skill".
Consequently, the following factors may be considered by the Court:
(i) The language of the Force Majeure clause itself.
If the language does not refer to the pandemic then the words "act of God" may be relied on, provided the event is "unexpected, something beyond human foresight and skill".
(ii) Is the contract now impossible to perform or is not as convenient to perform?
If the pandemic simply makes the performance inconvenience as opposed to impossible, the force majeure defence is unlikely to succeed thus rendering a party in breach of the contract.
(iii) Was the event foreseeable?
If the contract was entered into after the pandemic was declared the Court may find that non-performance was foreseeable and the Court may find that the failure to perform was upon the affected by party through it's own lack of due diligence.
The pandemic has raised issues in both settled law, and matters which are the subject of scholarly dispute and debate at this time. But, whether an event meets the threshold a Force Majeure clause primarily depends on the language of the clause among the other factors discussed above. I note, frustration may also be arguable when the parties cannot perform the contract due to the closures, however, this determination cannot be made without the specific contract for each client being reviewed.
If you are in a situation where you are unable to discharge your obligations under a contract we may be able to assist you in interpreting your contract, and advising you of your options. Please contact me at firstname.lastname@example.org to discuss your issue.