Is the force (majeure) with you? It depends on the terms

The Ontario Court of Appeal weighed in on the consequences and remedies of a force majeure. While many cases focus on whether a force majeure event has occurred, here it was not in dispute. In contrast, this case illustrates the wide latitude parties have to create tailored contractual remedies when a force majeure event occurs, including remedies that provide immediate relief to only one party and shift the entirety of the risk to the other party.

In Niagara Falls Shopping Centre Inc. v. LAF Canada Company, a landlord claimed force majeure when COVID-19 government orders closed Ontario gyms¹. The tenant sought rent relief for the same period. The Court of Appeal refused, instead enforcing a contractual “pay now, be compensated later” remedy in the lease. The lease’s terms relieved the landlord of its obligation to provide access to the premises during a force majeure event but required the tenant to continue paying rent during the same period. The tenant’s only remedy was the contractual right to an extension of the lease after the force majeure event, for the same period as the shutdowns, rent free.

What you need to know

• Force majeure clauses are not created equal. Force majeure is not a freestanding legal doctrine. The circumstances when a party may be relieved from the consequences of acts that are beyond their reasonable control are dictated by the terms of the contract.
• Courts will enforce the remedy that the contract sets out for a force majeure. Force majeure events are often major incidents with the potential for widespread impacts. However, the parties can provide for different remedies for force majeure. Courts will not stray from these remedies, even if the terms grant immediate relief to only one party.
• Drafting tip: get specific in the clause when it comes to outcomes. Here, a lack of specificity in describing the scope of relief for both parties in the event of a force majeure led to a result that neither party may have reasonably foreseen.

Background

In this case, there was no dispute that government shutdowns counted as a force majeure event under the lease, relieving the landlord of its obligation to provide access to the premises. The dispute was over whether the tenant would be excused from the obligation to pay rent while the event of force majeure deprived it of use of the property.

The force majeure clause provided:

If either party is delayed or hindered in or prevented from the performance of any act required hereunder because of…restrictive laws…or other reason of a similar or dissimilar nature beyond the reasonable control of the party delayed, financial inability excepted (each, a “Force Majeure Event”), subject to any limitations expressly set forth elsewhere in this Lease, performance of such act shall be excused for the period of delay caused by the Force Majeure Event and the period for the performance of such act shall be extended for an equivalent period (including delays caused by damage and destruction caused by such Force Majeure Event). Delays or failures to perform resulting from lack of funds or which can be cured by the payment of money shall not be Force Majeure Events.

Court of Appeal enforces the contractual remedy set in the contract

The Court of Appeal found that shutdowns did not excuse the tenant’s obligation to pay rent because the force majeure clause excluded relief for “financial inability.”

The practical consequence of this exclusion is that, except for a force majeure that incapacitates major payment networks (preventing funds from deposited into the landlord’s account), the obligation to pay rent under this lease was virtually guaranteed—even while the tenant was deprived of the use of the property.

The tenant’s remedy was to receive credit for rent paid during the shutdowns, during an equivalent extension to the lease after the shutdowns. This remedy was set out in the contract and was, in fact, one of the outcomes pursued by the tenant in court. The motions judge refused to grant this relief holding that it was “commercially absurd”. The Court of Appeal overturned and held that such an extension was required on the strict language of the force majeure clause.

Implications

The decision illustrates the wide latitude parties have to allocate risk for force majeure events in their contracts, including tailored remedies that may provide immediate relief to only one party.

When drafting or reviewing force majeure clauses, counterparties should consider how these clauses allocate risk:

• Is it desirable for both parties to receive relief at the same time or are there commercial or market reasons to grant immediate relief to one party without providing corresponding relief to the other party in respect of its obligations? Specifically, if one party is not performing, should the counterparty be required to pay for performance?
• Are there specific scenarios that should be considered outside the general scope of force majeure? In this case, the lease excluded “financial inability” caused by force majeure, but in other circumstances, specific foreseeable outcomes which are outside the parties’ reasonable control may also warrant special treatment. Consider, for example, a contract entered into during the pandemic: both parties would be aware that government restrictions may impede ordinary performance of the parties’ obligations. In such circumstances it may be more prudent to address such circumstances head-on, instead of relying on a more general force majeure construct.
• What types of notice, update, and other mitigation obligations should parties have in place to reduce the impacts of a force majeure? For this tenant, there was not much the landlord could have been expected to do to mitigate the effects of government shutdowns on a gym business, but in other cases, a framework for force majeure can present an opportunity to actively manage an unforeseen event such that the intentions of the contracting parties can be more readily achieved.