Force Majeure – Can I Get Out of My Commercial Lease Agreement?
The answer to this question turns, in large part, on the exact wording of the clause itself. Force majeure clauses are usually interpreted narrowly, with close attention paid to the specific language of the impugned clause.
Force majeure is latin for “superior force”. It is a common clause in most contracts that essentially frees both parties from liability or obligation when an extraordinary event or circumstance beyond the control of the parties, such as a war, strike, riot, crime, plague, or an event described by the legal term act of God (hurricane, flood, earthquake, volcanic eruption, etc.), prevents one or both parties from fulfilling their obligations under the contract. In practice, most force majeure clauses do not excuse a party’s non-performance entirely, but only suspend it for the duration of the force majeure. Force majeure is generally intended to include occurrences beyond the reasonable control of a party.
In the words of the Supreme Court of Canada:
An act of God clause or force majeure clause […] generally operates to discharge a contracting party when a supervening, sometimes supernatural, event, beyond control of either party, makes performance impossible. The common thread is that of the unexpected, something beyond reasonable human foresight and skill.
To constitute a force majeure, it is likely that the language in the clause in question must explicitly capture an event like COVID-19 – for example, by using language like “pandemic”, “epidemic”, or “public health emergency.” Absent such specific language, courts may be reluctant to recognize COVID-19 as a force majeure. Many contracts that were drafted post-SARS do contain such terminology, but the first step of any analysis is to review the language of your contract, agreement, policy or coverage.
Depending on the context, COVID-19 could arguably be included within the scope of broader phrases, such as “Act of God,” or “plague” or “circumstances beyond a party’s reasonable control.” At first review, this pandemic seems to instinctually meet these definitions.
Please note, this article does not provide legal advice and we encourage our review of the precise language of the lease agreement or contract to provide our opinion on whether Force Majeure can be relied on.
Was the Pandemic Really to Blame?
Force majeure clauses are a means of allocating risk in a contract. As the court set out in Atlantic Paper, these clauses excuse non-performance of a contractual obligation upon the occurrence of a specified, unforeseeable (or at least unpredictable) event or circumstance that is beyond the parties’ control. The issue becomes whether this event is one that is beyond the relying party’s control?
If one wants to rely on a force majeure clause, it would be well served to analyze why and how they have arrived at this juncture. The court (and the other party) will dissect the facts leading up to their decision. If there were problems that pre-dated the execution of the contract or if the clause is relied on as an excuse for other business issues, reliance on a Force Majeure clause could be endangered.
Was the Event Foreseeable?
Courts sometimes inquire into the foreseeability of an event even if it is explicitly listed in the force majeure clause. In the case of COVID-19, this issue could arguably arise for clients who entered into contracts after it became reasonably likely that the pandemic would take root. Thus, the date on which the contract was effective or signed will be an important consideration.
The COVID-19 pandemic, as a specific event, was arguably not foreseeable; at least until a specific point in time. Those that took steps in the face of reasonable evidence that the pandemic would occur may be unable to rely on the force majeure provision to relieve themselves of their performance obligations under the contract.
Is Performance Impossible?
Whether an event qualifies under a force majeure clause depends on the facts of the case, the wording of the clause, and the obligation from which a party seeks excuse. There is usually a level of interference with an obligation that must exist before a force majeure clause is triggered. Depending on the specific wording, such as “prevents,” “renders impossible,” and “substantially hinders,” the ability of the relying party to perform will be inspected.
Most importantly, COVID-19 (or the event to be relied on) must have an actual and direct impact on the relying party’s ability to perform their contractual obligation. Indirect impacts of COVID-19, such as pricing fluctuations, are less likely to be found to prevent contractual performance. If the impact is caused by the relying party or pre-dated the contract, the clause will not likely assist you to avoid performance. This is especially the case where the impact on the relying party was avoidable or where the only impact was to render an obligation more expensive to perform.
When you examine the events that lead you to this, you should also assess whether you have any control over any of these events or reasons for non-performance. If as a result of COVID-19, for example, you were required to lay off workers due to reduced demand, but in so doing failed to meet contractual obligations in respect of certain supply, you may be called to task for decision you made that was under your control.
Has Your Client Taken Steps to Mitigate Damages?
Those seeking to rely on COVID-19 as a force majeure must also keep in mind their obligations to avoid and mitigate foreseeable impacts of the pandemic. Some contracts will specify the requisite level of mitigation efforts that the relying party must take. Even where the contract is silent on mitigation, courts will be more reluctant to recognize COVID-19 as a force majeure where the impacts to the relying party were reasonably avoidable. Once impacted, the relying party is still obligated to take steps to mitigate. This duty to mitigate is described as limited to a standard of commercial reasonableness.[1] The inquiry as to what constitutes commercially reasonable mitigation is also case and industry specific.[2]
It is imperative that we review the entire contract when assessing the force majeure clause. Some contracts, for example, will provide for the maintenance of a continuity plan or a disaster recovery plan, which will impose additional requirements on the relying party to mitigate against the occurrence of a force majeure event.
You should keep track of your mitigation efforts if you are seeking to rely on a force majeure clause to excuse performance. Conversely, if you are advised that the other contracting party is seeking to rely on the force majeure clause, you should demand proper notice and confirm that the other party is taking adequate steps to mitigate.
Frustration of Contract
Where there is no force majeure clause at all in the contract, or where it does not assist you, a party may still have recourse to the doctrine of frustration of contract.
Under the current common law, frustration occurs when an event supervenes (without the fault of either party, and for which the contract makes insufficient provision) which so significantly changes the nature of the parties’ rights or obligations from what they could reasonably have contemplated when executing the contract, that it would be unjust to hold them to its literal stipulations in the new circumstances. In such situations, both parties are discharged from further performance of their obligations under the contract.[3]
The event must go to the core purpose of the contract. Frustration has a different (higher) standard than force majeure before it is triggered, and different implications for the contracting parties; primarily, the fact that a finding of frustration of contract brings the entire contract to an end rather than excuse a party from force majeure related obligations.
Conclusion – Can you rely on force majeure to relieve your obligations under your lease agreement or other commercial contracts?
Of course, we must qualify our opinion here and state that this article does not provide legal advice. We encourage our review of the precise language of the lease agreement or contract to provide our opinion on whether Force Majeure can be relied on.
Generally speaking however, the operative consideration relating to force majeure is whether COVID-19 had an actual and direct impact on the relying party’s ability to perform their contractual obligation. In the context of a lease agreement, the landlords performance is to provide the leased space and the tenant’s performance is to occupy it and to pay rent. By way of example, if a tornado took out the leased premises, this would wholly prevent the performance of the contract as the landlord could not provide the space. In the instance of COVID-19, a tenant can perform the contract in that there is no event or legal ordinance preventing the tenant from occupying the premises. The tenant can occupy it, it is merely closed to customers or the general public.
There may be ordinances now or in the future which prevent one’s customers from patroning your businesses, but in this instance still, the tenant is entitled to occupy it. As for the tenant’s other obligation, its inability to pay is not force majeure under any circumstances in the context of a lease or any contract. If, by way of imagination, the government ruled that no business owner was entitled to occupy their commercial space, then this may constitute force majeure, but that is unlikely.
However, consider a commercial agreement which required one to travel to the US to carry out certain work; here, the performance is impossible due to the travel restrictions imposed by both the Canadian and US government. This would likely constitute force majeure such that the performing party may be relieved from these obligations under the contract.
In conclusion, force majeure is often cited in defence of a claim for damages due to breach of contract. Although relying on the clause, of course, does not necessarily absolve a party of a possible lawsuit, taking proper steps to mitigate both party’s damages may be an ameliorative tool, in addition to a necessary one at law.
As with any anticipated or potential breach, once a client knows their risk, they are usually wise to approach the other party to see if some partial performance or revised contractual terms will avoid a complete breach or failure to perform.
F.A.Q’s:
Please
note, this article does not provide legal advice. We encourage our review of the precise language of the lease agreement
or contract to provide our opinion on whether Force Majeure can be relied on to
relieve your business from its contractual obligations.
[1] Atcor Ltd. v. Continental Energy Marketing Ltd., 1996 CarswellAlta 642 (Alta. C.A.) at para. 14 [Atcor].
[2] Ibid.
[3] Naylor Group Inc. v. Ellis-Don Construction Ltd. (2001), 2001 CarswellOnt 3340 (S.C.C.).
-Baber Rahim, Tax Law Clerk & JD Candidate
Baber works in our tax department assisting our tax lawyers in preparing Voluntary Disclosure Applications, Taxpayer Relief Applications, and with Appeals, Audits and Objections within the CRA. Baber’s passion for tax law was sparked by an advanced tax law professor at the Goodman School of Business at Brock University, where he received his Bachelor of Accounting (Honours) degree. He subsequently worked for the Canada Revenue Agency (CRA) for several years. After working in the federal public service for a number of years, Baber decided to pursue a career in law and is currently working towards completing his law degree at Western University, while working for Kalfa Law Firm.
© Kalfa Law Firm 2020
