COVID-19’s impact on the fulfillment of contractual terms and a person’s rights and responsibilities under that contract, is a common question and concern these days. COVID’s impact on the economy, supply chain, social interaction, and society generally has caused many businesses and individuals to be unable to fulfill contracts.
In this article we provide a brief overview of certain contractual provisions and legal doctrines, which may assist you in determining your rights and obligations.
Force Majeure
If a party is unable to fulfill its contractual obligations due to COVID-19, they should first review the contract to determine whether the contract contains a “Force Majeure” clause. Conceptually, “force majeure” refers to an extraordinary unforeseeable circumstance that prevents a party from fulfilling a contract. The party impacted by the supposed force majeure (i.e. COVID-19) can invoke the clause if it has breached the contract due to the impossibility of performing its contractual obligations, to avoid liability for that breach.
A Force Majeure clause may look something like the following:
“In the event either party is unable to perform its obligations under the terms of this Agreement because of acts of God, acts of war or terrorism, strikes, equipment or transmission failure or damage reasonably beyond its control, or other causes reasonably beyond its control, such party shall not be liable for damages to the other for any damages resulting from such failure to perform or otherwise from such causes.”
Depending on what the clause says, it may excuse the parties from performing their obligations under the contract, in the case of certain events. Alternatively, it may provide for delayed performance or other terms altering the rights and obligations contained in the contract, in the case of certain events.
Whether a Force Majeure clause applies to COVID-19 depends on the wording on the specific Force Majeure Clause, the factual circumstances and the court’s assessment. In relying on a force majeure clause, a party must show both that COVID-19 made the obligations under the contract impossible to fulfill and that COVID-19 is an extraordinary circumstance that was unforeseeable and beyond the party’s control.
It is important to review the provision to determine if the clause contains a duty to mitigate, notice, or other requirement in order for that clause to be effective. If there is a duty to mitigate, you should ensure you take steps to mitigate the impact of COVID-19 on your obligations, to the best of your ability.
Absent an express force majeure clause in a contract, this remedy will likely be unavailable, as it does not exist at common law.
Frustration
When a contract does not contain an express force majeure clause that applies to COVID-19, a party may seek to rely on the common law doctrine of frustration.
Similar to a force majeure clause, the circumstance that frustrated the contract must not be either party’s fault and must have been unforeseeable at the time the contract was entered. Additionally, the circumstance must have made the obligations under the contract impossible to fulfill.
If the party seeking to rely on the doctrine of frustration proves the above elements and the court accepts that a contract has been frustrated as a result of COVID-19, the contract will be terminated and the parties discharged of their contractual obligations.
If you have any questions or would like advice related to your contractual obligations and the COVID-19 outbreak or would like assistance drafting future contracts including adequate force majeure clauses, please contact us at 604-688-4900 or by email at morgan@barbeau.co or paul@barbeau.co.