Commercial Contracts, Force Majeure Clauses, and COVID-19

As the COVID-19 outbreak continues to unfold, the news reports for the moment are quite properly focused on the human impact and toll. However, as the nations of the world work toward getting the deadly virus under control, that focus will soon be shifting towards calculating and redressing the staggering economic and commerce-related consequences and costs of the pandemic.

From the perspective of business, there are a vast number of commercial contracts that will have been affected by the widespread interruptions that COVID-19 has caused, not just globally but on a local level. These can involve manufacturing, supply, transportation, and technology (among many others), and might involve contracts, leases, mortgages and a host of other agreements.

For corporations, business owners and financiers, the inevitable question arises as to exactly how – from a strictly legal standpoint – COVID-19 has jeopardized or thwarted the many contracts that make their operations possible.

Force MajeureClauses

Although no one could have predicted the rise and proliferation of COVID-19 specifically, most commercial agreements already contain provisions that anticipate the possibility of grand-scale world events and disasters, and stipulate the pre-agreed business repercussions to the parties.

These are known as “Force Majeure” clauses (which is the French phrase for “superior force”). They commit to writing what the parties agree will happen in the event of a truly unpredictable, unpreventable event – beyond either party’s control – that renders the contract impossible, illegal, or commercially impractical to perform. Once triggered, a Force Majeure clause relieves all parties from any further performance of their contractual obligations.

In the business context, a typical Force Majeure clause will cover a wide assortment of contract- impeding events: earthquakes, hurricanes, floods, lightning, fire, disease, and other catastrophic natural events, which are part of a catch-all category historically referred to “acts of God”. It will also cover manmade events like war, terrorist attacks, labour strikes or shutdowns, as well as power outages, to name a few.

To take a simple example of how a Force Majeure clause works: Let us suppose that two parties, A and B, agree that B will supply A with automobile parts. They negotiate and execute a detailed contract which includes a Force Majeure provision covering various unpreventable natural disasters and other events that might occur after the contract was signed, and which would impede the contract’s performance.

Let us also assume that B’s manufacturing plant, which produces the automobile parts needed by A, suddenly burns to the ground as a casualty of an uncontained wildfire that rages nearby. With B’s manufacturing plant destroyed, it is no longer able to supply parts to A. Under the precise wording of the agreement between A and B, this wildfire clearly falls within the Force Majeure clause’s definition of an unpreventable natural disaster.

If B wishes to invoke the Force Majeure clause as an “escape hatch” from its contractual obligations, it will be required to give written notice to A, and may have to adhere strictly to other conditions as well, as expressly provided in the clause. Once those have been complied with, the clause operates to relieve both A and B of any further obligations towards each other.

Where There is No “Force Majeure” Clause

What if the commercial contract between A and B contains no Force Majeure clause? In that case they must resort to the common law principles relating to contracts. The concept of “frustration of contract” might apply, but it has a more rigorous threshold.

Returning to the example: Let us assume B cannot supply A with automobile parts for an extended period not because the manufacturing facility was destroyed, but because of an unanticipated labour strike among B’s workforce. The duration of the strike is uncertain, but there is currently no end in sight. The legal question is whether the contract has become “frustrated” by unforeseeable events that took place after it was signed, to the point where neither party should be held to it.

If the matter ends up in a dispute, the court’s determination will require a review of many factors, the most basic being whether it has become truly impossible for B to achieve a timely supply of auto parts to A, or whether it is merely much more difficult for B to do so.

Is COVID-19 Covered by Force Majeure Clauses? Or Does it Render Contracts “Frustrated”

With the unexpected appearance of COVID-19, and the series of recommendations and increasingly- strict edicts by the Canadian government that are designed to stop its drastic spread, many commercial contracts have been delayed, aborted, rescinded, and rendered outright impossible to perform.

In the aftermath, there will be many contracting parties in dispute over the precise repercussions to them. If asked to provide judicial resolution, the courts will have to grapple with two recurring questions:

  1. 1) Does the parties’ commercial contract contain a Force Majeure clause, and if so, did its wording reasonably encompass the COVID-19 pandemic? and
  2. 2) If the parties’ contract does not contain a Force Majeure clause, then has COVID-19 generated a situation that legally “frustrates” the contract, by making it impossible for one or both parties to perform their end of the bargain?

When examining commercial contracts with Force Majeure clauses, courts will be looking specifically for terms like “outbreak”, “plague”, “epidemic”, or “pandemic”. It is currently unclear whether broad terms like “act of God” might cover the COVID-19 pandemic. For contracts without such clauses, the courts’ stance on COVID-19 is yet-to-be determined, but in each dispute the outcome will be determined on a case-by-case basis, and only after the court reviews the unique facts.

As it relates to the human population, the prognosis for full containment of the pandemic is currently unclear, and its repercussions are still unknown. Likewise, from a legal standpoint it will take many months and likely years before the true impact of COVID-19 on businesses and the economy can be truly assessed.

Disclaimer: The content in this article is provided for general information purposes only. It does not constitute legal advice. All rights are reserved.