The illness caused by the novel coronavirus, COVID-19, has now infected nearly 120,0001 people worldwide at the time of this publication, with the World Health Organization yesterday officially declaring it a pandemic. In addition to the human costs, COVID-19 risks disrupting global supply chains, travel, major events, and workplaces. This memo examines whether and when a party to a contract can rely on a force majeure clause due to COVID-19 disruption.
FM clauses are a means of allocating risk in a contract. These clauses excuse non-performance of a contractual obligation upon the occurrence of a specified, unforeseeable (or at least unpredictable) event or circumstance that is beyond the parties’ control.
There are four key factors that determine whether a party can rely on an FM clause based on COVID-19:
These factors are discussed in detail below. For a discussion of the Québec requirements for FM, click here to read our detailed analysis.
Where there is no FM clause at all in the agreement, a party may still have recourse to the doctrine of frustration of contract. 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. The event must go to the core purpose of the contract. Note that frustration has a different (typically higher) standard before it is triggered, and different implications for an agreement than an FM clause—most notably the fact that a finding of frustration of contract brings the entire contract to an end.
Whether COVID-19 is an FM under a contract depends on the clause’s specific wording within that contract, bearing in mind that FM clauses are typically interpreted narrowly. It may therefore be difficult for a party to rely on an FM clause where there is some level of ambiguity over whether it applies to COVID-19.
COVID-19 is more likely to qualify as an FM event when wording such as “pandemic,” “epidemic,” “quarantine,” “illness,” “outbreak” or “disease” is included in the FM clause. Depending on the context, COVID-19 could arguably be included within the scope of broader phrases, such as “Act of God,” or “plague” or “circumstances beyond a party’s reasonable control.”
Requisite level of impact. 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.” Whether COVID-19 meets the requisite threshold of impact depends on the factual circumstances at issue, the wording of the FM clause and the obligation a party seeks excuse from. Courts are reluctant to give effect to FM clauses where the only impact has been to render an obligation more expensive to perform.
Causal link. COVID-19 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.
Companies seeking to rely on COVID-19 as an FM need to keep in mind their obligations to avoid and mitigate foreseeable impacts. Some contracts will specify the requisite level of mitigation efforts to be taken by the relying party but, 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. Once impacted, the relying party is still obligated to take steps to mitigate those impacts.
FM clauses often require the giving of notice as a condition precedent to trigger the operation of an FM clause. A party seeking to rely on an FM clause should consider whether notice and any supporting documentation is required under its contract, and if so, any timing or other formal requirements applicable to its delivery.
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. This documentation will be useful in the event of a dispute, and may also help avoid disputes if shared voluntarily with counterparties in some circumstances.
Reliance on an FM clause should always be considered in light of other contractual and operational realities. To this end, we offer some further factors for consideration:
A party’s reliance on an FM clause is likely to affect, or be affected by, several other contractual clauses:
Reliance on an FM clause may ultimately result in litigation or trigger other dispute resolution mechanisms. Consideration should be given to what means of dispute resolution are available in the circumstances and how to be best prepared if a dispute resolution mechanism is triggered. This includes being mindful of communications to counterparties regarding the FM clause and any honest performance or good faith obligations that may apply, the retention of documents, and whether and when litigation privilege may apply.
Parties weighing how to react to COVID-19 should consider the possible long-term impacts of relying on an FM clause on the overall relationship between the contracting parties and potential reputational risks. An attempt to rely on an FM clause is a high-risk maneuver—the likelihood of disputes and anticipatory breaches by counterparties are greatly increased when a party admits it is or was unable to perform. 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.
1 “Coronavirus: WHO says COVID-19 outbreak a pandemic”. CBC News, March 11 2020.
Read all our coronavirus-related updates on our COVID-19 guidance for organizations resource page.
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This publication is a general discussion of certain legal and related developments and should not be relied upon as legal advice. If you require legal advice, we would be pleased to discuss the issues in this publication with you, in the context of your particular circumstances.
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