Force Majeure Clauses, Covid-19 and your contractual obligations
In face of a global pandemic many businesses are struggling to resume the operation of their business and satisfy their contractual obligations under their commercial contracts. The Province of Ontario and many other provinces in Canada have declared a state of emergency which has continued until further notice. But what will happen if you cannot fulfil your existing contractual obligations. What does this mean if you are in the midst of negotiating new contracts.
This article will discuss the availability of Force Majeure provision for those commercial actors who have been affected by Covid-19.
A force majeure (FM) clause is a contractual provision which contemplates an “act of God” and a laundry list of matters and items that are not anticipated as of the date of the contract, that are beyond the control of the parties, and are not caused directly or indirectly by the fault or negligence of the party who wishes to invoke the provision and seek relief for delaying the performance of their duties under the contract. Usually FM provisions include an exception that financial inability of a party is not considered an excuse for delay in fulfillment of that party’s financial obligations (e.g. rent). Contracts will have a predefined procedure in place that must be followed when a party is seeking relief under FM.
Not all FM clauses list “pandemic” or “epidemic” as an item. However, even if Covid-19 does not satisfy the contractual definition of an event listed, it is important to have your contracts reviewed to confirm whether any contractual exclusions may apply to the circumstances; to see whether your current situation can satisfy the two part test for invoking FM provisions. First, you must prove that Covid-19 has in fact made the performance of your contractual obligations impossible. And second you must demonstrate that the pandemic and its consequence were not reasonably foreseeable at the time of entering into the contract. It is important to show whether the FM event was wholly outside the control of the party claiming relief. It is important to note that the party seeking relief cannot rely on its own actions or inaction that has led to a certain consequence.
More often than not, FM clauses include number of additional requirements before a party can seek relief under the provision. Some may require that the party has taken reasonable steps to prevent the event from happening in the first place or that has taken reasonable preventive and mitigating measures to lessen the likelihood of having to rely on the clause. Mitigating and preventive measures in relation to Covid-19 may include implication of quarantine protocols, capability to work remotely and etc. Some may even consider the availability of government relief programs such as the new Ontario-Canada Emergency Commercial Rent Assistance Program (OCECRA) as a mitigating factor.
We are curious to see how the courts will assess these questions as the impact of Covid-19 continues to evolve and effect small and major businesses. Although it is likely that the courts will find Covid-19 as an unforeseeable event outside the control of the parties, the concept of impossibility to perform ones contractual obligations may not be completely diminished and rather merely delayed.
If you are in doubt whether your contract includes a FM clause, whether you can seek relief under the clause and what is the procedural mechanism in place under your particular contract, we can help you find the answers.
For more information on government programs and assistance during the COVID-19 pandemic, please click here.
-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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