Am I still obligated to complete my contract after the Covid 19 Pandemic?

Access to Justice during the COVID-19 Pandemic
March 27, 2020

Am I still obligated to complete my contract after the Covid 19 Pandemic?

Given the global financial, social and institutional changes that are emerging daily, a common question keeps being asked – “Do I have to complete my contractual obligations because of what is happening with Covid 19?

Leaving aside issues of creditor protection such as Bankruptcy and Insolvency,  it depends on whether Covid 19 falls within a Force Majeure clause or whether the contract was frustrated.

A Force Majeure Clause is often referred to as an Act of God clause.  The purpose of a Force Majeure clause is to protect the parties against events that are outside of their tolerable risk; if a certain event or type of event happens, the parties can be excused from completing their contractual obligations without liability for breach of contract. An act of God clause or force majeure clause generally operates to discharge a contracting party when a supervening, sometimes supernatural, event, beyond the control of either party, makes performance impossible. The common thread is that of the unexpected, something beyond reasonable human foresight and skill. See Atlantic Paper Stock Ltd. v. St. Anne-Nackawic Pulp and Paper Company Limited, 170 (SCC), [1976] 1 SCR 580

Typically Courts hold a party to a high level when seeking to avail themselves to a force majeure clause. To determine whether Covid 19 would be an act of god or trigger the force majeure clause depends on a proper interpretation of the clause in question.  If the clause specifically refers to a pandemic, plague, national emergency or shut down, it is easier to say that Covid 19 will trigger it. In circumstances where the wording of the clause does not make it clear what events would trigger the clause, Courts will (subject to the wording of the clause) look to whether performance of the contract is impossible or just more expensive and whether inability to perform the contract was foreseeable and the risk can be mitigated.

Frustration of contract is some ways similar to a force majeure clause.  It is intended to relieve a contracting party from having to complete its bargain due to a radical unforeseen event that renders performance of the contract impossible or impractible.

Frustration of a contract takes place when there supervenes an event (without default of either party and for which the contract makes no sufficient provision) which so significantly changes that nature (not merely the expense or onerousness) of the outstanding contractual rights and/or obligations from what the parties could reasonably have contemplated at the time of its execution that it would be unjust to hold them to the literal sense of its stipulations in the new circumstances; in such case the law declares both parties to be discharged from further performance. (National Carriers Ltd. v. Panalpina Ltd., [1981] 1 All E.R. 161 (H.L.))

In some ways frustration of contract addresses the fairness of the agreement/bargain; because things have radically changed it would be unfair or impossible to force the parties to complete the contract.

A contract cannot be frustrated by an event that is the subject of a force majeure clause. If a force majeure clause kicks in to end a contract, it is not because the contract is frustrated, rather the obligations end under the contract (subject to obligations to mitigate), because the contract itself provides for the chain of events.

In order to find that the contract at issue has been frustrated, the following criteria would have to be satisfied. The event in question must have occurred after the formation of the contract and cannot be self-induced. The contract must, as a result, be totally different from what the parties had intended. This difference must take into account the distinction between complete fruitlessness and mere inconvenience. The disruption must be permanent, not temporary or transient. The change must totally affect the nature, meaning, purpose, effect and consequences of the contract so far as concerns either or both parties. Finally, the act or event that brought about such radical change must not have been foreseeable.

In considering whether a contract has been frustrated by Covid 19, the nature of the contract and the associated obligations must be considered as against the effects of the global pandemic.   Is performance of the contract more difficult or is it impossible? For example, the agreement to have your hair cut on Tuesday when all hairstylists have been ordered to be closed would be a frustrated contract.  Conversely, the agreement to pay for a car will likely not be frustrated given that reticence to buy based on fear of what the pandemic will bring, does not render the contract impossible (perhaps improvident).  As time passes and the effects socially, economic, institutional and legal change, the scope of contracts that are frustrated will likely grow.

If one is considering resiling from contractual obligations, thought should be paid to the risks associated with a finding that the contract remains in force.  Additional consideration should also be given to such things as whether the matter can be discussed (and resolved or renegotiated) with the other party or whether there is insurance available.