COVID-19: Force Majeure

This article aims to provide general advice regarding the applicability of force majeure clauses within the current COVID-19 climate. The information herein is based on articles that have been recently published in Canada regarding contractual performance and COVID-19, as well as basic force majeure principles.

As this is not client-specific, this document is merely information and not legal advice.  Before implementing any steps, we urge you to seek legal advice to confirm that those steps are appropriate at the current time and in light of your specific circumstances.  Our main office contacts for this topic are at the bottom of this document.

I. INTRODUCTION 

A force majeure has three distinct criteria:

1. An event that is beyond the reasonable control of the affected party;
2. That the affected party’s ability to perform its obligation under a contract have been prevented, impeded or hindered by the event[1]; and
3. That the affected party has taken all reasonable steps and exercised reasonable diligence in seeking to avoid or mitigate the event or its consequences.

II. FORCE MAJEURE & COVID-19

It is important to note that the WHO has stated that the likelihood of an infected person contaminating commercial goods is low, and that the risk of catching the virus from a package that has been moved, travelled and exposed to different conditions and temperatures is low. Therefore, the force majeure event for companies like Canada Post, Amazon, and general suppliers of goods is not the existence of the virus itself, but the inability of employees to come to work due to:

1. Government-mandated self-isolation periods;
2. Quarantine by reason of being diagnosed with COVID-19, caring for someone with COVID-19 or having been exposed to someone with COVID-19[2];
3. Government-mandated closures of non-essential services; and
4. Such other impactful events as may occur with the development of the situation in Canada.

The affected party will need to establish a causal link between the event (i.e. the above situations) and its inability to perform its contractual obligations.  A disruption that merely impacts the profitability of a contract may not be sufficient for a force majeure claim unless the situation is expressly contemplated in the contract. Likewise, general adverse business conditions (for example, performance becoming more expensive or time-consuming) or an economic downturn may not be sufficient. However, particularly in commercial contexts, a significant change in the circumstances of the industry, may be accepted as a force majeure event (note, however, that neither of the following cases are in Alberta and one is from Singapore):

• In A. Hanna Company v Sydney Steel Corporation, 1995 CanLII 4530 (NS SC), Sydney Steel Corporation (“Sydney”) was in a long-term contract to purchase iron pellets from M.A. Hanne Company (“Hanna”). When the steel market crashed, Sydney changed their practices and refused to accept the contracted quantity of pellets. The Court accepted Sydney’s argument that the market crash was a force majeure event, holding that the changed circumstances of the market fell within the general and broadly-worded force majeure clause within the contract.
• In Holcim (Singapore) Pte Ltd. v Precise Development Pte. Ltd., [2011] SBCA 1, the Singapore Court of Appeal established a “commercial practicability” approach to force majeure The Court held that where the event (in this case, a government-imposed sand ban that led to a shortage of raw materials for the commercial manufacturer to complete its work) constitutes a disruption that leaves the affected party in a commercially impracticable situation, it will be deemed a force majeure event (subject, of course, to proof that the affected party took reasonable steps to mitigate).

The wording will be different for most, if not all contracts. Some may state that a party must be prevented from performing its obligations, rather than having the performance merely impeded or hindered by the event in question. In such cases, relying on a force majeure clause for relief will be more difficult unless there has been a government-mandated shut down of all non-essential business operations or an entire work-force is quarantined due to a co-worker(s) testing positive for COVID-19. Some clauses may contain an exception where the event leaves a party with insufficient resources to perform all of its contracts and is forced to pick between contracts to fulfill with those insufficient resources. In Androscoggin Energy LC v Producers Marketing Inc., [2003] A.J. No. 1701 (QL), a number of the affected party’s gas wells was blocked off by the Alberta Regulatory Board. The Court accepted the force majeureargument, holding at para 14 that, where there a limited goods due to force majeure, “any reduction in supply is to be apportioned among the various purchasers who share similar contracts…on a pro rata basis”.

The definition of a force majeure event will generally contain a lengthy list of events which:

• Are not anticipated, as of the date of the contract’s formation;
• Are beyond the parties’ reasonable control;
• Are not caused, directly or indirectly, by the negligence of the affected party; and/or
• Prevent or delay the affected part from performing its obligations.

In some cases, an epidemic or pandemic may already be contemplated by the specific clause in question. However, where the contract is silent on the impact of an epidemic or pandemic, it can still be argued that the COVID-19 pandemic falls under the definition, particularly where the definition includes open-ended language such as “any other causes beyond the party’s control” or where COVID-19 can be captured by an existing concept in the contract, such as an “acts of government” (for example, where the government orders a shut-down of non-essential businesses).

Contractual Exclusions

Whether a party is seeking to rely on an open-ended force majeure clause or one that explicitly contemplates endemics and/or pandemics as a force majeure event, it will need to consider whether any contractual exclusions apply to the circumstances – i.e. there may be a contractual restriction on a party claiming force majeure for something that is impacting its subcontractors or suppliers, but not the party directly.

Furthermore, exclusions will also likely contemplate events which were reasonably foreseeable at the time the contract was entered into. This is not likely to affect contracts that were entered into before COVID-19 was deemed a pandemic by the WHO or possibly even those contracts that were created in the early stages of COVID-19. However, some legal articles have held that since the outbreak of COVID-19 has been known since December 2019, any consequences were foreseeable. Accordingly, the affected party may be required to prove that it acted in a reasonable and diligent manner as the outbreak developed to mitigate its effects.

Notice

Generally, force majeure clauses will contain procedural mechanisms that are to be followed when a party seeks to invoke the clause – the most important being putting the other party on notice of the force majeure event within the requisite timeframe. Failure to comply may result in an exclusion of the event from force majeure relief.

There is some discussion in the available legal articles around parties issuing “protective” or “rolling” force majeurenotices that take into account the developing impact that the COVID-19 outbreak has upon the performance of their obligations.

Consequences

With respect to the consequences for a force majeure event, most clauses will provide for relief from the performance of the contractual obligations along with an extension of time for any obligations to achieve milestone dates. Some clauses may contemplate the termination of a contract without liability if the force majeure event is prolonged.

Mitigation

Even where a force majeure argument is accepted by a court, the affected party is expected that have mitigated the damage in a reasonable manner. Due to the requirement of the affected party taking “all reasonable measures” to avoid the force majeure, those workplaces that have not already done so should consider implementing a policy of working from home to avoid the potential of an entire, or even partial office quarantine that could result if one co-worker is diagnosed with COVID-19.

For contractors, “reasonable measures” could mean seeking alternative suppliers. For suppliers, these measures could mean using alternative manufacturing lines in a different location. The reasonableness of the steps taken to mitigate the force majeure event are fact-specific and will likely take into account any additional burdens and costs that are incurred, as well as the availability of the alternatives. With the ever-changing landscape of coronavirus and its continued global spread, it is entirely possible that few, if any, mitigation measures remain available to contracting parties.

Summary:

Unfortunately, there is currently very little case law on how courts have interpreted force majeure clauses within the context of an outbreak. As such, it is difficult to predict exactly how COVID-19 will be viewed. However, the general evidence on successful force majeure arguments appears to require the following:

1. That the event and its effects are immediate (as mentioned below, the longer an outbreak has been in existence, the greater the question of foreseeability and reasonable mitigation efforts);
2. Performance is commercially impracticable, unreasonable or fundamentally at variance with the business or industry of the affected party; and
3. As mentioned above, that the affected party’s inability to perform its obligations under the contract is causally related to the event (and was not caused by a variety of factors/merely exacerbated by this event)

Practical Suggestions

1. All businesses should review their contracts to determine whether they include a force majeure Any provision found to exist in a contract should be scrutinized to determine whether there is any express event in the definition of force majeure incorporating endemics/pandemics/medical emergencies such as the COVID-19 outbreak and, if not, whether there is general, “catch-all” language sufficient to include COVID-19 and its consequences.
2. Consideration should be given to those aspects of a contract that have been affected by the outbreak (i.e. self-isolation, government-mandated shut downs, etc.). Businesses should satisfy themselves that they are unable to perform those aspects of the contract as a direct result of the outbreak.
3. Consideration should be given to potential steps to mitigate the effects of the pandemic on your employees and your ability to continue to perform contracts. As above, remote working should be considered where possible. It is in a business’s best interests to document any steps taken to mitigate the effects of the pandemic on business operations and the business’s ability to perform its contractual obligations.
4. Make note of notice requirements to trigger entitlement to relief, including whether any supporting documents must be provided and any time limits within which notice must be provided.
5. Businesses should also consider reviewing their financial documents to determine whether there are any notice provisions that must be complied with in relation to anticipated or actual force majeure
6. If there is a chain of contracts, businesses should consider issuing protective notices of force majeure under the linked contracts as a protective measure.
7. Finally, a detailed review of insurance documents should be undertaken to determine whether there is coverage for any expected losses (i.e. business interruption insurance or force majeure insurance).

For more information on these topics or any related matters please contact one of the below lawyers from Bryan & Company LLP or access our Commercial Litigation group here and it would be our pleasure to assist.

This article was prepared with the assistance of:

[1] This is not to be confused with performance becoming physically or legally impossible to perform, in which case the affected party would likely need to argue that the contract, and its obligations therein, have been frustrated (that is, argue that the contract is at an end). In contrast, force majeure does not end the contract; it merely excuses the affected party from penalties and damages that may otherwise have been imposed as a result of delayed performance.

[2] In some situations, an entire office may need to self-isolate by virtue of coming into contact with one co-worker who is later diagnosed with COVID-19. In others, only some staff will need to self-isolate as a result. The situation is too fluid at the moment to provide a closed list of examples or criteria.