The COVID-19 pandemic has resulted in the temporary inability of businesses to carry out contractual obligations. As a result, there has been a great deal of discussion on contractual force majeure clauses. These commonplace, but rarely invoked, clauses have been increasingly relied upon to excuse non-performance under contracts in some circumstances. It is expected that they will become the subject of increased litigation in the wake of the COVID-19 pandemic.
What is force majeure?
“Force majeure” is a purely contractual concept that relieves parties to a contract from performing certain contractual obligations if specified events or conditions occur. These events and conditions are usually described in terms of both their nature and their impacts on the ability of the invoking party to perform its obligations. There is no common law right of force majeure.
Force majeure litigation in Canada has been historically rare, and the question of whether a force majeure clause is operative will depend on the facts of each case and the specific language of the relevant clause.
How does a party invoke force majeure?
In order to successfully invoke a contractual force majeure clause, a party must establish that: (a) a force majeure event has occurred; (b) the force majeure event has had the requisite impact on a party’s ability to perform contractual obligations; and (c) the party invoking the clause has made reasonable efforts to mitigate both the event and its effect.
- Force majeure event: The type of event required under force majeure is often described generally as an “Act of God” or in terms such as “unforeseen” and “beyond the control of the party”. Some clauses specifically include events such as “epidemics” and “pandemics” as well as government orders in their list of force majeure events. Reliance on general descriptions of force majeure events may difficult given that force majeure language tends to be construed narrowly by the courts.
- Impact of force majeure event: The party seeking to establish force majeure must show both a triggering event and that such event has directly impacted their ability to perform under the contract. Generally, the event must have prevented performance, rather than simply rendering it more onerous or economically difficult. Some clauses will specify a lesser level of impact (often based on economic threshold or “reasonableness”) that will suffice to trigger force majeure.
- Mitigation: Some force majeure clauses will specifically address the steps that a party must take to mitigate the force majeure event or its impact on that party’s ability to perform under the contract. The required threshold beyond which mitigation is not required under these types of clauses may be defined in economic terms, by “reasonableness” or may exclude certain types of mitigation, such as providing an alternative product supply. If the clause is silent, then the invoking party must generally show that it made all “reasonable” efforts to mitigate, which will be a fact-specific inquiry.
There has been little force majeure litigation arising from COVID-19 to date. Both US and Québec courts have indicated that while the COVID-19 pandemic, and government orders in response to same, could constitute force majeure, the impacts of such events in a particular case may be determinative.[1] That seems reasonable and in accordance with the underlying concepts and principles.
Parties claiming force majeure or receiving force majeure notices should be mindful that:
(a) The terms of the force majeure clause will be of critical importance;
(b) Such clauses are likely to be construed narrowly;
(c) Subject to specific provision, the party invoking force majeure will be obligated to mitigate both the force majeure and its impacts; and
(d) Given the small volume of litigation on force majeure, there may be significant uncertainty in how clauses and governing concepts may be applied by a court to particular circumstances.
In drafting force majeure clauses, consideration should be given to expressly including or excluding pandemic as a force majeure event, and defining and setting out thresholds for the impacts required to base a valid force majeure claim, and to defining the nature and limits of the claiming party’s obligations to mitigate. Choices made by parties in these respects should always reflect the nature of the contract in question, the nature of the business of each party, the potential impacts of non-performance and the potential means of mitigation that may be available.
[1] In re Hitz Restaurant Group, No. 20-B-05012, 2020 WL 2924523 (Bankr. N.D. Ill. June 3, 2020; 9333-8309 Québec Inc v Procureure générale du Québec (Minister of Transport) 2020 QCCS 1785; and Hengyun International Investment Commerce Inc. c. 9368-7614 Québec Inc. 2020 QCCS 2251.
