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Legal Notes: Could COVID-19 trigger ‘force majeure’ in contracts?

John Bleasby
Legal Notes: Could COVID-19 trigger ‘force majeure’ in contracts?

COVID-19 has been declared a global pandemic by the World Health Organization (WHO). The NBA season has been postponed until further notice. Conventions, conferences sport events and festivals around North America are being cancelled. It may be inevitable that COVID-19 will impact ongoing project worksites across Canada.

What happens if a contractor is unable to fulfill contractual obligations because of COVID-19? Could this trigger the ‘force majeure’ provisions outlined in many contracts?

Force majeure is defined as a contract provision excusing a party from performing its contractual obligations when it becomes impossible or impracticable due to an event or effect that the parties could not have anticipated or controlled when the contract was signed. Earthquakes, floods and hurricanes are examples. However, does force majeure cover epidemics or pandemics?

Elliot Smith, Jagriti Singh and Danna Donald of law firm Osler, Hoskin & Harcourt LLP, recently write that the list of force majeure events included in many contracts does, in fact, include epidemics or pandemics.

“The Ontario Independent Electricity System Operator’s (IESO) forms of agreement include a specific reference to ‘epidemics’ in the definition of an event of force majeure.”

Other jurisdictions such as Alberta have adopted those references, and have based their forms of agreement on the IESO’s. As a result, Smith, Singh and Donald say it has become more common for contractors to “back-to-back” force majeure clauses described in their supply contracts into their construction contracts.

Not all contracts specifically mention epidemics and pandemics. Nevertheless, Smith, Singh and Donald suggest that an event like COVID-19 might still come in under the wire. “This is the case in the Canadian Construction Documents Committee (CCDC) 2 stipulated price contract and the CCDC 5B construction management contract. In those circumstances, COVID-19 could potentially still qualify as a force majeure if the definition includes open-ended language covering any other causes beyond the party’s control (which is the case in the CCDC documents).”

It’s not advisable to rely solely on general contract language for protection but to look at the details. There might be restrictions on force majeure provisions based on circumstance, such as impacts felt by subcontractors but not by the contracted party themselves.

Timing is also now an issue. It could be argued that COVID-19 does not qualify as a force majeure event in contracts executed after December 2019 — when the virus became known. It’s also important to recognise that the WHO has stated that, “the likelihood of an infected person contaminating commercial goods is low and the risk of catching the virus that causes COVID-19 from a package that has been moved, travelled, and exposed to different conditions and temperature is also low.”

In other words, the force majeure trigger would be the inability of workers to fulfill their duties due to illness or quarantine, not the presence of the disease itself.

Force majeure repercussions can vary. “The consequences under a construction contract for a force majeure event include relief from the performance of contractual obligations along with an extension of time for any obligations to achieve milestone dates, such as substantial performance,” write Smith, Singh and Donald. “In the case of a prolonged force majeure event, some contracts may permit one or both parties to terminate without liability. In the event of a force majeure, relief is allowed for any milestone dates.” They point out that some contracts, but by no means all, might allow price adjustments due to “reasonably incurred costs”.

Smith, Singh and Donald recommend that contractors seek special legal advice in order to examine force majeure provisions included in their contracts. “As the global reach of COVID-19 outbreak continues to expand, parties must carefully examine their project documents to ascertain the impact of closures or delays and plan for their course of action in the upcoming weeks in light of their project schedules.”

 

John Bleasby is a Coldwater, Ont. based freelance writer. Send comments and Legal Notes column ideas to editor@dailycommercialnews.com.

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