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Legal Notes: Factors to consider before declaring Force Majeure

John Bleasby
Legal Notes: Factors to consider before declaring Force Majeure

The rapid spread of COVID-19 across Canada has resulted in an unsettled landscape for the nation’s construction industry. Some contractors are becoming aware of force majeure (FM) provisions in their contracts. However, before any contractor considers the application of FM, they must first understand the serious implications.

“An attempt to rely on an FM clause is a high-risk manoeuvre,” say contract specialists with law firm Torys LLP. “FM clauses are typically interpreted narrowly. Unless the FM clause includes language that captures an event like COVID-19, some courts may be reluctant to recognize COVID-19 as an FM. Even where the contract is silent, courts will be more reluctant to recognize COVID-19 as an FM where the impacts to the relying party were reasonably avoidable.”

Torys say that any party intending to rely on Force Majeure needs to take key steps, beginning with compliance with all required notice obligations. Faren Bogach of WeirFoulds LLP agrees. “Failing to comply with the timelines attached to a notice provision in a construction contract can be fatal to the exercise of the rights requiring such notice.”

There also needs to be evidence of demonstrative efforts to mitigate any foreseeable or actual impacts of the events leading to the force majeure. Torys points out that,” FM clauses typically set out the threshold of interference in an obligation that must exist before the clause is triggered. Typical phrases include ‘prevents,’ ‘renders impossible,’ and ‘substantially hinders.’”

Increased costs associated with contract performance is not enough to trigger Force Majeure, says Torys. “Courts are reluctant to give effect to FM clauses where the only impact has been to render an obligation more expensive to perform.” In the case of COVID-19, they say the virus, “must have an actual and direct impact on the relying party’s ability to perform their contractual obligation. Indirect impacts of COVID-19, such as pricing fluctuations, are less likely to be found to have prevented contractual performance.” Richard Swan and Preet Bell of Bennett Jones LLP add that, “the affected party has an obligation to seek alternative methods of performance, supplies of input parts and materiel, and the like.”

Any attempt to enact force majeure will undoubtedly result in litigation and dispute resolution procedures. Documentation will be key. “Even where there is no formal requirement to provide evidence or documentation as part of the FM clause, relying parties will be well served if they document the impacts of COVID-19 on their ability to meet contractual obligations as well as efforts to avoid and mitigate such impacts,” says Torys. “This documentation…may also help avoid disputes if shared voluntarily with counterparties in some circumstances.”

Employers need also to consider the labour implications of any layoffs in terms of final pays and records of employment when considering Force Majeure, says Burkhardt. It’s important to understand employment contract provisions when it comes to reduced hours or pay, and collective agreements.

For example, if employees go into self-isolation or quarantine, are laid off, or decline the opportunity to work, they are not entitled to pay, Burkhardt says. They are eligible, however, for EI and other programs being offered by various levels of government or by the employer himself. Alternately, continuing to work with a shortage of workers may result in bringing in more union or non-union workers, having one trade perform the work of another, or sub-contracting out the work.

The contract specialists at Torys also suggest that a party considering the use of force majeure provisions look beyond the contract immediately at hand. They point to, “the possible long-term impacts of relying on an FM clause on the overall relationship between the contracting parties and potential reputational risks. Your business may be better served by coming to the table prepared to negotiate a mutually-agreeable outcome, particularly where the FM clause is not clearly in your favour or where you are not otherwise in a position to rely on it as a result of other terms of the contract.”

 

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

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