What Happens If a Business Gets Sued for Breach of Contract That Happened Because of Coronavirus?
Where a Contract Contains a Force Majeure Clause Specific to a Type of Incident the Parties May Become Excused or Further Obligated. The Frustrated Contracts Act May Also Excuse Parties When An Incident Makes a Contract Impossible to Perform.
Similar Questions about Frustrated Contracts include:
- Are Businesses Required to Fulfill Contracts Despite Coronavirus?
- If a Contract is Cancelled because of Coronavirus Do I Get Deposits Back?
- What Happens if a Contract Gets Cancelled because of Coronavirus?
- How Does the Law Treat Contracts Made Impossible Due to a Pandemic?
- What Happens to Contracts when a State of Emergency is Declared?
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When an unforeseeable situation occurs such as an unusually extreme storm or government ordered closures due to pandemic, among other things, such an incident is legally referred to as a force majeure. Often a force majeure results in a party, or parties, to a contract, becoming unable to fulfill obligations within a contract due to the force majeure incident that involves something extreme as well as outside and beyond the control of the parties to the contract. In such a situation, when a party, or parties, become incapable of performing the contract due to the impossibility arising unexpectedly due to the force majeure, the party, or parties, become legally excused from the obligations within the contract and the failure to fulfill the agreed terms is treated in law as a non-breach. However, sometimes the opposite is true whereas a force majeure clause may also be written to impose continuing obligations rather than negating continuing obligations.
Generally, unless a contract contains a force majeure clause that includes pandemic with the prescribed incidents and is therefore triggered by the Covid19 Crisis, or the contract is made absolutely impossible by Covid19 as a reasonably unforeseeable circumstance and therefore captured by the Frustrated Contracts Act, R.S.O. 1990, c. F.34, the contract remains alive with the rights and obligations within being legally enforceable.
Force Majeure Clause
In the legal sense, force majeure refers to situations that cannot be foreseen which then render a contract impossible to perform. As the situation involving a pandemic unfolds, the question of whether a force majeure clause found in a contract can be invoked to relieve contracting parties of their obligations will start to wind its way into our court system.
To understand whether a force majeure clause can be invoked, one must first look to the language of the contract. Often contracts contain a phrase that reads something like this:
Neither party shall be liable for any costs or damages due to delay or non-performance under this contract arising out of any cause or event beyond such party’s control, including, without limitation, cessation of services hereunder or any damages resulting the other party as a result of work stoppage, power or other mechanical failure, computer virus, natural disaster, governmental action, or communication disruption.
In this example, the court may not find that force majeure applies as the clause did not list a pandemic or communicable disease as an example. If the force majeure clause specifically denotes a pandemic or communicable disease within the examples listed, then reliance on the clause may be an easier argument to make. However, when the clause fails to list any types of disruptions or lists very generally examples such as “Acts of God,” it then becomes necessary for the party who wishes to rely on it to must prove three things:
- The parties were unable to reasonably foresee the circumstances;
- The circumstances were beyond the control of the parties; and,
- That performance of the contract is rendered impossible.
It is important to note that the court will avoid deeming force majeure as including situations where poor decision-making or inaction were what made the obligations of the contract impossible to fulfill. Furthermore, the contract must be genuinely rendered impossible rather than merely hindered or delayed. Lastly, the parties must always take reasonable steps to mitigate (minimize) losses.
Often, a party to a contract will claim that force majeure led to the failure to perform; however, the courts will disagree. In the case of Tom Jones & Sons Ltd. v. The Queen in Right of Ontario, 1981 CanLII 1915 (ONSC), the firm of Tom Jones & Sons Ltd. (“Tom Jones”) bid on a contract to build a building for the Provincial government in Oshawa, Ontario. Shortly after winning the bid, Tom Jones notified the Crown of an inability to honour the contract due to inability to secure financing. Tom Jones took the position that the inability to secure financing was due to a force majeure. The court disagreed and found that the financing was available; however the rate of interest was unprofitable; and accordingly, the court deemed that failing to anticipate a market change for financing rates failed to render the contract impossible to perform.
If a contract is silent regarding a force majeure incident, meaning that the agreement failed to address the possibility, the doctrine of frustration of contract may still apply and thereby negate the obligations of the contact. In Ontario, the doctrine of frustration of contract is codified in statute law via the Frustrated Contracts Act, R.S.O. 1990, c. F.34 which states, among other things:
Application of Act
2 (1) This Act applies to any contract that is governed by the law of Ontario and that has become impossible of performance or been otherwise frustrated and to the parties which for that reason have been discharged.
(2) This Act does not apply,
(a) to a charterparty or a contract for the carriage of goods by sea, except a time charterparty or a charterparty by way of demise;
(b) to a contract of insurance; or
(c) to a contract for the sale of specific goods where the goods, without the knowledge of the seller, have perished at the time the contract was made, or where the goods, without any fault on the part of the seller or buyer, perished before the risk passed to the buyer.
Adjustment of Rights and Liabilities
3 (1) The sums paid or payable to a party in pursuance of a contract before the parties were discharged,
(a) in the case of sums paid, are recoverable from the party as money received for the use of the party by whom the sums were paid; and
(b) in the case of sums payable, cease to be payable.
(2) If, before the parties were discharged, the party to whom the sums were paid or payable incurred expenses in connection with the performance of the contract, the court, if it considers it just to do so having regard to all the circumstances, may allow the party to retain or to recover, as the case may be, the whole or any part of the sums paid or payable not exceeding the amount of the expenses, and, without restricting the generality of the foregoing, the court, in estimating the amount of the expenses, may include such sum as appears to be reasonable in respect of overhead expenses and in respect of any work or services performed personally by the party incurring the expenses.
(3) If, before the parties were discharged, any of them has, by reason of anything done by any other party in connection with the performance of the contract, obtained a valuable benefit other than a payment of money, the court, if it considers it just to do so having regard to all the circumstances, may allow the other party to recover from the party benefitted the whole or any part of the value of the benefit.
(4) Where a party has assumed an obligation under the contract in consideration of the conferring of a benefit by any other party to the contract upon any other person, whether a party to the contract or not, the court, if it considers it just to do so having regard to all the circumstances, may, for the purposes of subsection (3), treat any benefit so conferred as a benefit obtained by the party who has assumed the obligation.
As above, where a contract becomes impossible to perform by an outside, the contract becomes frustrated and further obligations cease, unless, as further above, a force majeure clause imposes continuing obligations despite a specified peril. Accordingly, a force majeure clause may negate the relief from further obligations as provided for within the Frustrated Contracts Act. This was stated within the case of Ursus Transport Inc v. Jeff Bryan Transport Ltd., 2014 CanLII 75306 where it was said:
97. The Frustrated Contracts Act, R.S.O. 1990, c. F.34 as amended, allows for parties to a contract to build in provisions which survive the frustration of the original contract, and which impose ongoing obligations in the event of changed circumstances.
98. The contract in question here had no such provisions, and on its frustration it ceased to bind Jeff Bryan.
When an uncontemplated event or circumstance occurs after the signing of a contract that without default of either party makes the performance of the contract impossible or would make performance a radically different thing than what was promised or intended by the parties or that strikes at the root of the agreement, both parties may be discharged from further performance and moneys paid may be restored to the party who paid them. See: Focal Properties Ltd. v. George Wimpey Canada Ltd. (1975), 1975 CanLII 49 (ON CA), 14 O.R. (2d) 295 (C.A.) aff'g. (1974), 1974 CanLII 530 (ON SC), 6 O.R. (2d) 3 (H.C.J.), aff'd on other grounds 1977 CanLII 22 (SCC),  1 S.C.R. 2; Capital Quality Homes Ltd. v. Colwyn Construction Ltd. (1976), 1975 CanLII 726 (ON CA), 9 O.R. (2d) 617 (C.A.); Dinicola v. Huang & Danczkzy Properties (1996), 1996 CanLII 8000 (ON SC), 29 O.R. (3d) 161 (Gen. Div.); Bothwell v. Murray,  O.J. No. 3091 (S.C.J.); Davis Contractors Ltd. v. Fareham Urban District Council,  A.C. 696 (H.L.); Frustrated Contracts Act, R.S.O. 1990, c. F.34.
Of special note, per the Dhillon case, as cited above within Ursus Transport Inc., at paragraph 99, the "uncontemplated event or circumstance" must occur after the contract was signed or otherwise executed and agreed to. Such appears obvious whereas a frustration must arise from an unexpected event outside the control of the parties. Accordingly, it could be argued that contracts signed during an event, such as Covid19, whereas the spread and fear of the coronavirus was widely reported within the media and notoriously known, by January 2020, were signed while knowing that a pandemic was possible. However, it could also be counterargued that a severity so significant as to result in government mandated shutdowns was unforeseeable. This counterargument could bear strength as Covid19 is clearly unprecedented and by counterarguing that simple knowledge of the spread of a virus was merely knowledge of concerns such as SARS and H1N1 rather than anything on the scale of Covid19.
For business-to-consumer relations, in addition to force majeure and provisions within the Frustrated Contracts Act, the Consumer Protection Act, 2002, S.O. 2002, Chapter 30, Schedule A, also plays into Covid19 concerns. In particular, section 26 of the Consumer Protection Act, 2002 says:
26 (1) A consumer may cancel a future performance agreement at any time before delivery under the agreement or the commencement of performance under the agreement if the supplier,
(a) does not make delivery within 30 days after the delivery date specified in the agreement or an amended delivery date agreed to by the consumer in writing; or
(b) does not begin performance of his, her or its obligations within 30 days after the commencement date specified in the agreement or an amended commencement date agreed to by the consumer in writing.
Accordingly, a consumer within a business-to-consumer contract appears to have an explicit statutory right to cancel a contract if the contract is delayed by thirty (30) days or more. It is also noted that, aside from failing to cancel in accordance to the required procedure or by waiving the right to cancel for delay, the consumer holds the right to cancel regardless of any unforeseeable factors that caused the delay. This right to cancel contracts could prove very costly for many businesses who may lose profits from what was 'booked business' as well as those businesses who already incurred substantial production expense. In this regard, there may be some saving grace whereas the case decision of Sawh v. Par-Tek Construction Services Inc., 2017 CanLII 53634 at paragraph 50 to paragraph 59 indicates that a business should be compensated for the expense incurred prior to contract cancellation.
Public Emergency Issues
The Covid19 Crisis and consequential government orders, are resulting in the impossibility and frustration of many business contracts. Businesses ordered to refrain from acting as normal are suddenly, and unexpectedly, unable to perform delivery goods and services as previously agreed. The failure to perform as agreed is resulting in cancellation of many events, activities, services, among other things. In many cases, contracts of various sorts will be affected both directly and indirectly whereas some agreements may become impossible to perform or the performance may become moot.
Payment of Expenses or Refunds
With the unprecedented Covid19 Crisis including government ordered shutdown of many businesses, disruption in supply chains, delivery dates made impossible, and even customers who lost jobs and are now looking to back out of inked deals, the business world is currently challenged in many ways. While the Covid19 Crisis is painful for many businesses, those businesses heavily invested in producing big ticket items, or those whose success is seasonally dependent, among others, the affects of Covid19 are severe.
Whether contracts can be cancelled, whether deposits should be refunded, whether payment of expenses for partially performed services should be provided, will require careful review. Accordingly, parties to contracts for which the performance of such contracts is adversely affected by the coronavirus should contact a legal professional, such as SFG Paralegal Services to review whether legal obligations or legal rights are affected, including whether the doctrine of force majeure or frustrated contract law may apply as well as to discuss the available legal remedies, if any.
The concept of force majeure involves an unforseeable incident, usually occurring naturally, that interferes with the capacity to fulfill a contract. Parties to a contract may be exempted from contract performance if the type of force majeure incident occurs as described within a contract. Furthermore, the doctrine of frustrated contract, which is codified within the Frustrated Contracts Act, may also exempt parties from performance of contract and entitle return of deposits or payment for the value of partially completed contracts that are made impossible to complete due to outside forces beyond the fault of the parties.