The possible application of force majeure provisions in construction contracts due to COVID-19 has been given considerable attention recently. Discussions have centred on the wording of force majeure clauses and how specific they might be in the event of a pandemic.
Yet there are other options that could be pursued if a contracted party determines that it cannot meet its obligations. Richard Swan and Preet Bell of Bennett Jones LLP explain that, “Where an event occurs after entering into the contract that renders the contract impossible to perform and goes to the very root or heart of the contract, the doctrine of frustration provides that the contract has become frustrated.”
Frustration shares a similar purpose with force majeure. “Frustration may provide relief from the obligations under a contract where an event renders the performance of the contract impossible or radically different from what was originally agreed to,” say contract experts at Torys LLP.
Michael Bordin of Gowlings WLG adds that both also have an important restriction in common — Frustration is not applicable simply due to more onerous or higher costs associated with fulfilling the contract. “It must be positively unjust to hold the parties to the contract.”
At the same time, Gowlings says that there can be financial implications when frustration has been ruled. “Many provinces have enacted provincial legislation to administer the outcomes of contracts found to be frustrated. For example, Ontario’s Frustrated Contracts Act applies to any contract that is governed by the law of Ontario and that has become frustrated and consequently discharged. It prescribes that amounts paid or benefits conferred prior to discharge are recoverable. Additionally, it allows the severance of frustrated obligations of a contract if the remainder was substantially performed prior to discharge.”
The challenge, however, is that establishing the “doctrine of frustration” is a very high bar to clear. Not only that, Swan and Bell say the consequences are different as well. While force majeure might mean a temporary suspension or deferral of work, frustration signals the end of the contract itself. That may not be the desired outcome.
Despite the challenges of establishing frustration, its application might still be a Hail Mary option worth considering if a contract has no force majeure provisions at all. “Despite the occurrence of an extreme and impairing event, Canadian courts (excluding Quebec) have not implied a force majeure provision in common law,” says Sahill Shoor of Gowling WLG. While noting some exceptions, he also says, “This infers [that] the standard rules of force majeure interpretation would not apply if there is no force majeure clause expressly written in the contract.”
Shoor cites the Supreme Court’s outlook towards frustration as, “a situation [that] has arisen for which the parties made no provision in the contract and the performance of the contract becomes ‘a thing radically different from that which was undertaken by the contract’.” However, in addition to the unforeseeable impact of an event — say, COVID-19 — Shoor says the absence of a force majeure provision would be a prerequisite for the doctrine of frustration to apply. “This means that courts will choose to apply either frustration or force majeure — parties are not meant to rely on both.”
Given the high threshold required to establish force majeure and frustration, Bordin suggests that parties try to find a negotiated solution. “Litigation is always uncertain. Consider giving real notice to the party.”
Blake, Cassels & Graydon LLP agrees. “Force majeure and frustration are last resorts which will not be applied if parties have not exhausted the options available to them to perform their obligations under the contract.”
“Dialogue with the other side, especially in these circumstances [when] they may be facing similar issues. You may be able to work something out,” says Bordin. Delaying performance under the contract, re-scheduling commitments to a later date, or negotiating clearer terms regarding when and why the contract might no longer be binding are all are worth consideration versus the expense uncertainty of legal processes.
John Bleasby is a Coldwater, Ont. based freelance writer. Send comments and Legal Notes column ideas to editor@dailycommercialnews.com.
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