Contract Litigation, Frustration of Contract & COVID-19

Contract disputes are a common occurrence for both corporate and individual clients. Given the hardships being felt by people and businesses across Canada due to COVID-19, they are more common than ever. Further, we anticipate that contract litigation will see a significant increase once Ontario courts are functioning as usual again. Many parties to a contract may be aware of the concept of frustration of contract and wondering if they can use this to remove some or all of their obligations under a contract that they are unable to perform in full thanks to limitations presented by the current pandemic.

What is “Frustration of Contract”?

Frustration of contract is a common law concept that allows a party to escape liability for some or all of their duties under certain circumstances. In order to demonstrate a contract has been frustrated, a party must be able to establish that due to unforeseen circumstances, which were not the fault of either party, it would be impossible to satisfy their responsibilities under the contract. Additional inconvenience, expense or other hardship is not necessarily sufficient to establish a contract has been frustrated. Rather, it must be unreasonable to expect a party to continue performing its duties under the contract given the situation.

Successfully demonstrating frustration of contract is a notoriously challenging thing to do in an Ontario court. While it is expected that many parties may raise this concept in contract disputes in the near future due to challenges presented by COVID-19, it remains to be seen how courts will interpret the matter.

Force Majeure Clauses: A Specific and Narrowly Applied Remedy

Similar to frustration of contract, a “force majeure” clause, also sometimes referred to as an “Act of God” clause, allows a party to escape liability when unforeseen circumstances make the performance of duties impossible. However, unlike the common law doctrine described above, a force majeure clause must be included in the contract itself in order to be raised by one of the parties. Further, the wording of the clause will go a long way to determining whether a court will allow a party to rely on it for a circumstance such as COVID-19.

Some force majeure clauses list specific events or circumstances that will satisfy the clause, such as weather, the death of a party, or border closures. If this is the case, then the party attempting to invoke the clause must be able to show that the circumstances in question fit within the enumerated grounds. In other cases, the clause will contain more general language, making the clause more flexible. However, parties to a contract should keep in mind that they will likely be precluded from invoking a force majeure clause if the circumstances were reasonably foreseeable or could have been avoided by exercising due diligence.

When entering into a contract, parties may be aware of certain circumstances that could come into play during the contract term. In these cases, parties can specifically list those circumstances as exemptions from a force majeure clause. For example, it would have been reasonable that a contract drafted in late March 2020 would specifically list the pandemic as an exemption to the force majeure clause, since it was widely known at the time.

Could the Volume of Claims Affect How Courts Will Interpret These Issues?

While the pandemic and the resulting implications could not have been predicted, there may be another bar to courts allowing it to excuse performance under a contract. The sheer number of expected claims may also play a role. Allowing one party to escape liability due to COVID-19 could set a precedent that would have a ripple effect on contracts throughout the province. Given this, it is likely that courts will be extremely discriminating when allowing the effects of the pandemic to frustrate a contract or enable a party to invoke a force majeure clause. Parties planning to use this as a litigation strategy should expect a challenge in this area, to be sure.

The lawyers at Prudent Law in Mississauga are trusted advocates in any type of civil litigation, including contract disputes. We provide practical advice and experienced representation to corporate and individual clients in a wide variety of matters. If you are facing a legal dispute and you’d like to discuss your options with one of our experienced litigation lawyers, please call us at 905-361-9789 or contact us online.

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