COVID-19 may constitute 'force majeure' to exempt firms from contract obligations

B.C. and Canada’s construction sector may be facing an increasing instance of contractors filing “force majeure” on contracts that cannot be carried out as planned due to the COVID-19 outbreak, legal analysts from Gowling WLG said.

Whether or not a judge under Canadian common law would grant “force majeure,” however, varies greatly from case to case, said Sahil Shoor, a Waterloo, Ont.-based civil litigator for Gowling WLG, in a legal bulletin to the construction sector on March 20.

That is because while some contracts include “force majeure” clauses that clearly states diseases, plagues, epidemics or quarantine restrictions as applicable conditions (beyond the typical “acts of God” events such as natural disasters, fires, floods and wars), other make no such distinctions. Some other contracts yet, Shoor said, may not have a “force majeure” clause at all, further complicating the issue in court.

“In order to successfully rely on a force majeure clause, the relying party [contractor] has the burden of establishing Force Majeure Event and proving that the Force Majeure Event has effectively prevented the party from fulfilling its obligations under the construction contract,” Shoor said in the bulletin, adding the court will assess the merits of the case based on whether the COVIC-19 outbreak qualifies as a force majeure, whether the risk of not being able to complete the contract was “foreseeable and able to be mitigated,” as well was whether it was really impossible to complete the contract.

In cases where there is no clear description of an epidemic or disease as force majeure, a judge will often hinge decisions on the availability of an “alternative method of performance” - even if the alternative is significantly more expensive for the contractor applying for relief.

“As an example, are the party’s employees ill due to the virus and unable to work, or simply afraid to work and choosing not to attend?” Shoor said, adding that cases without a force majeure clause will follow similar lines of legal logic under the Doctrine of Frustration - a provision for remedying extreme events that destroy the basis of the contract in question.

Shoor also noted that parties currently negotiating contracts may be wise to be clear about whether COVID-19 applies as force majeure to limit future confusion and the need for court or arbitration.

There is already a precedent for the use of force majeure during the COVID-19 pandemic, albeit not in a common-law setting: In early March, China issued 4,811 force majeure certificates because of the epidemic, exempting companies from obligations in contracts totalling 373.7 billion Chinese yuan (or US$53.79 billion).

However, legal observers have said the certificates - while useful within China if a dispute arises between two Chinese companies - will carry little wait if a Chinese company tries to use it to get out of contract obligations to an international counterpart, since most trading contracts internationally are governed by English common law (which has to follow the presence of force majeure clauses in the contract, as is with Canadian cases described by Shoor).