The Impact of COVID-19 on Contractual Performance

With the global spread of Coronavirus disease 2019 (“COVID-19”) causing unprecedented disruption to individuals and businesses, many will wonder whether their inability to perform contractual obligations can be excused, or whether they may be discharged from a contract, either in reliance on a force majeure provision of a contract or in circumstances where no such clause exists.

1.  To what extent can a force majeure clause protect a non-performing party from liability given the impact of COVID-19?

Parties often negotiate a force majeure clause into their contracts. The standard effect of a force majeure clause is that the person who is affected by the event gives notice to the other party that they cannot perform in order to be excused from performance for a period of time. Such clauses are usually negotiated in a manner that allocates risk between the parties in the event of a supervening event, such as war or a natural disaster, that materially affects a party’s ability to perform in a manner that was not within the contemplation of the parties when they entered into the contract.

The party seeking to rely on a force majeure clause will need to be able to demonstrate that the force majeure event is captured by the clause, and that it is causally linked to the party’s inability to perform the contract.

Force majeure clauses which reference epidemic, disease and/or quarantine will provide support for the assertion that COVID-19 is an event falling within the scope of the clause. It is anticipated that force majeure clauses which include acts or restraints of a governmental body preventing contractual performance, and acts of God, will similarly be relied upon by parties in connection with the impact of COVID-19.

2.  But what if the contract does not include a force majeure provision?

If the contract does not contain a force majeure clause, the doctrine of frustration may nevertheless be available to excuse contractual performance and to discharge the parties’ respective obligations under the contract.

The doctrine of frustration has a longstanding history at Canadian common law. The Supreme Court of Canada has held that frustration is available when a supervening event has occurred without the fault of either party, and for which the parties did not allocate risk in the contract, but which causes performance of the contract to become “a thing radically different” from what the parties had in mind when entering into the contract.¹

While the remedy flowing from the doctrine of frustration, being the discharge of both parties’ obligations under the contract, is less flexible than a carefully drafted force majeure clause, the doctrine of frustration may nevertheless apply to insulate a party from liability for non-performance of its contractual obligations as a direct result of the impact of COVID-19. It is also anticipated that many parties who have a mutual desire to see a contract continue, but recognize the unanticipated consequences of COVID-19, will seek to renegotiate a contract in good faith.

The Litigation and Financial Services Groups at Aird & Berlis can advise their clients with respect to the applicability of force majeure clauses and the doctrine of frustration in circumstances of contractual non-performance, in negotiating and drafting contracts and the provisions of force majeure clauses, and in re-negotiating existing contracts. Details are available on our Litigation & Dispute Resolution webpage and on our Financial Services webpage.