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Commercial and Contractual Implications of COVID-19

The COVID-19 pandemic has resulted in several protective measures undertaken by federal and provincial governments in Canada in response to the effect on Canadians’ livelihoods. In addition to the societal and economic impacts, the pandemic has commercial and contractual implications, some of which are analyzed below.

Commercial and Contractual Implications Of A Force Majeure

In some cases, commercial agreements are structured in a way that relieves/postpones the parties of their contractual obligations or the consequences of non-performance through a “force majeure” clause.

This relief is granted when a natural hazard arises beyond either party’s control or is an “act of God.” In these circumstances, either party can suspend performance or terminate the contract if their contract has a force majeure clause. Such a clause is a creature of contract, not common law, so if the parties wish to rely on such a provision, it must be in their contract.

A force majeure clause should be added to contracts to ensure greater protections for the parties in cases where either party cannot fulfill their contractual obligations due to an uncontrollable specified, unforeseeable event or circumstance. Such an event or circumstance should be the actual and direct cause of a party’s inability to perform the contract.

Given the relief stemming from a force majeure clause, these clauses are interpreted narrowly, and the language must therefore be drafted carefully if the parties wish to rely on the clause.

The clause of the contract usually includes a threshold and specific triggering events. A threshold will consist of a phrase such as “renders impossible” but will depend on the obligation from which the parties wish to be relieved.

With respect to triggering events, as the World Health Organization has declared COVID-19 as a pandemic, COVID-19 will likely fall under terms such as “epidemic,” “pandemic,” or “disease.” For broader, more ambiguous terms, such as “act of God,” it becomes arguable.

An essential aspect of the force majeure clause is that the event that prevented either party from fulfilling their contractual obligations was unforeseeable. A notice requirement may be embedded into the clause as a condition to alleviate the abrupt nature of such an event. In most cases, the clauses will relieve and suspend the party’s obligations temporarily as per the duration of the force majeure event.

Frustration As A Commercial and Contractual Implication

Frustration is another example of commercial and contractual implications. If a situation arises where the unforeseen event renders the contract to be substantially different from what the parties agreed to, or contractual obligations impossible, the parties can rely on the doctrine of frustration. While the frustration of a contract permits one party to set aside the contract due to the other party’s inability to perform the contract, it often involves a higher threshold than force majeure.

To prove there is a frustration of contract, the party relying on the frustration must show that the event was (1) unforeseeable at the time the contract was entered into; and (2) not be the fault of either party. Given that the COVID-19 pandemic was unforeseeable and, for many people, unlikely to be anyone’s “fault” and likely to have effects for an indeterminate amount of time, we may see a rise in allegations of frustration due to the pandemic.

Mitigation and Cooperation

Whether a party wishes to rely on a clause such as force majeure or defence, the parties must still mitigate their damages and exhaust all options to permit them to perform their contractual obligations or risk commercial and contractual implications.

The party relying on a clause such as force majeure is must prove they used all the resources available to them and took reasonable steps to mitigate the effect of the uncontrollable event or circumstance. Only then will they be able to recover damages for their losses.

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Disclaimer: This blog is not intended to serve as or should be construed as legal advice and is only to provide general information. It is in no way particular to your case and should not be relied on in any way. No portion or use of this blog will establish a lawyer-client relationship with the author or any related party. Should you require legal advice for your particular situation, fill out the contact form, call (800) 771-7882 or email [email protected].