Addressing Covid-19 in Contracts

In the face of COVID-19, we have been asked what happens if a business believes it cannot fulfil its obligations under a contract.  These unprecedented times may trigger typically untriggered clauses, including force majeure.  Some of you have asked whether your business would be safe from legal consequences for non-performance (or breach) by relying on a force majeure clause.  We will briefly go over how force majeure works and what steps you should take if you are worried that your business cannot perform a contract.

What is force majeure?

Force majeure is a typical clause that suggests that when a certain event happens, a party (or both) is relieved from performing the contract because they have no control over the events that impede their performance.  In most cases, contracts will spell out the types of events that constitute force majeure and the consequences of relying on force majeure, including excusing the parties from performance.

When is non-performance covered under force majeure?

There are several factors that you must consider if you are to rely on force majeure to save you from legal claims because of non-performance or breach, namely whether: (1) the force majeure wording captures COVID-19; (2) COVID-19 directly caused the breach; and (3) you did everything commercially reasonable to prevent damages. 

First, whether you can rely on force majeure depends on the wording of the clause.  For instance, if the clause specifically lists ‘pandemic’ or ‘public health emergency’, then you may be covered (even better if it said ‘COVID-19’!).  If your contract does not contemplate pandemics, then you may be out of luck.  On the other hand, potentially unhelpful wording for COVID-19 would be references to ‘acts of God’.  What constitutes an act of God?  This is up for interpretation by courts.  It is thus important to review the wording to check whether you can rely on a force majeure clause.

We can split the second factor into three questions: (a) did the event lead to the breach; (b) could you foresee the event at the time you entered into the contract; and, (c) can you still perform the contract despite the event.  In essence, you need to consider whether COVID-19 directly impacted your ability to perform the contract.  If your business had pre-COVID-19 problems, for instance, you may not be able to rely on force majeure since those problems could have caused the non-performance rather than COVID-19.  Courts will also look at what control you had regarding COVID-19 and whether you had the ability to prevent non-performance.  If you were able to avoid non-performance, you may be prevented from relying on force majeure.  For example, perhaps you could have sourced your goods from an unaffected supplier rather than the one that closed due to COVID-19.  Determining whether you can properly rely on force majeure, therefore, depends a lot on the facts and the events leading up to the breach. 

Lastly, a common question related to non-performance is whether you were able to avoid any negative impacts of the event.  Courts would look at whether you could have prevented or reduced damages to you or the other party due to COVID-19.  But to what extent should you attempt to prevent or reduce damages?  The standard is based on commercial reasonableness.  In other words, you must be able to show that you did what a reasonable person would do in the same circumstances keeping in mind any fiscal considerations.  Courts will look at the facts and the contract as a whole to determine what was commercially reasonable in the circumstances. 

How is force majeure different from frustration?

A common legal doctrine, where there is no force majeure clause, is frustration.  Put simply, frustration occurs when the parties’ circumstances have changed so much from when they signed the contract that forcing them to perform the contract would be unjust.  An example is if a business had signed a lease, but the building they leased subsequently burned down.  Through no fault of either party, neither the business or the landlord is unable to perform the contract.  However, frustration requires that the impeding event affects the contract’s main purpose. Thus, frustration arguably requires a higher standard than force majeure because you must show that the contract is impossible to perform and is at an end because of the impeding event. 

What should you do if you think you cannot perform contract due to COVID-19?

If you suspect you may not be able to perform contractual obligations, we recommend that you:

1.       Assess the risks and consider potential damages from non-performance under the contract.

2.       Document how COVID-19 has affected your business.

3.       Review the contract and any force majeure or frustration clauses.

4.       Keep track of what you have done to mitigate non-performance and potential damages.

5.       Do not wait!  Provide written notice of non-performance ASAP and disclose your mitigation efforts to the other party.

We leave you with this final thought: if you think there is a chance you will not be able to perform your obligations under a contract because of recent events and COVID-19, you need to ensure you are doing everything to avoid non-performance.  This could mean approaching and advising the other party of the situation, mutually agreeing to amend the contract, or suspending your obligations under the contract. 

As always, our team is available and ready to address any further questions you may have. Please give us a call at 613-695-7899 or send us an email at info@businesslawadvice.com

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