Common Law Doctrine of Frustration, Covid-19 and your contractual obligations
In my previous article on Force Majeure Clauses, Covid-19 and your contractual obligations, I discussed your contractual obligations in light of invoking force majeure provisions in face of a global pandemic where many businesses are struggling to resume the operation of their business and satisfy their contractual obligations under their commercial contracts.
This article will briefly discuss the common law doctrine of frustration in light of Covid-19. In an event your contract does not have a force majeure clause, you may still be able to rely on this doctrine if the pandemic has made the performance of your obligation impossible and has drastically changed the purpose of your contract.
Bear in mind that invocation of frustration is a nuclear option; an extreme measure for extreme events under which the purpose of the contract has substantially differed from that of the party’s original intention at the time of entering the contract. The leading Supreme Court of Canada (SCC) decision is still Naylor Group Inc. v. Ellis-Don Construction Ltd1 which the court stated that:
“Frustration occurs when a situation has arisen for which the parties made no provision in the contract and performance of the contract becomes “a thing radically different from that which was undertaken by the contract.”2
The courts recent brush with the frustration doctrine was observed in Wilkie v Jeong3 in British Columbia and 2284064 Ontario Inc. v. Shunock4 in Ontario. Without diving into details of each case, the bottom-line conclusion has always been that a contract is not frustrated simply because performance under it has become more onerous.
The courts will generally examine three elements to determine whether a contract has been frustrated:
- Event- occurrence of which is reasonably unforeseeable; had happened by no fault of either party and is directly linked to the reason for invoking frustration.
- Force Majeure- if the contract includes a force majeure clause or similar provisions directed at parties intention to govern unforeseen events; the courts will mostly rely on the interpretation of that provision rather than doctrine of frustration.
- Purpose of contract- the performance of the contract must become impossible; it is not enough that the contract is significantly more difficult to perform.
It is important to note that the law has generally taken the position that financial obligations under contract are not excused by frustration. However, as it is unclear how long the state of emergency will last, we only must muddle through and try to stay reasonable and find reasonable compromises in good faith.
If COVID-19 pandemic has rendered your performance under your commercial contract impossible or radically different than what you have originally bargained for, we can provide you with necessary legal counsel to determine your next steps.
For more information on the various government assistance programs during COVID-19, click here.
[1] 2001 SCC 58
[1] At para. 53.
[1] 2017 BCSC 2131. [1] 2017 ONSC 7146
-Ghazal Hamedani, Associate Lawyer
Ghazal’s practice is focused on corporate-commercial law, including business formations, corporate reorganizations, shareholder agreements, commercial contracts, the purchase and sale of businesses, as well as secured and unsecured lending transactions. After graduating from University of Toronto with distinction, Ghazal completed her law studies with honours at Cardiff Law in 2017. Ghazal is a lawyer licenced to practice law by the Law Society of Ontario. She is also a member of the Canadian Bar Association and Canadian Corporate Counsel Association Ontario.
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