What is force majeure?
Black's Law Dictionary defines force majeure—French for "superior force"—as an event or effect that can be neither anticipated nor controlled. The term is commonly understood to encompass both acts of nature, such as floods and hurricanes, and acts of man, such as riots, strikes, and wars.
It further defines force majeure clauses as contractual provisions that address circumstances in which contractual performance becomes impossible or impracticable due to events that could not have been foreseen and are not within a party's control.
The rationale behind force majeure clauses is that there will always be events that cannot be anticipated and addressed, and for which neither party to an agreement is responsible. In such circumstances, it is equitable and reasonable to suspend performance and extend contract deadlines.
However, contracts can and usually do include terms as to what qualifies as a force majeure event and what notice requirements must be met to obtain relief from required performance.
Is COVID-19 a force majeure event?
The term "force majeure" will be a matter of contractual interpretation. Standalone references to "force majeure", without any contractual definition or other relevant contractual wording by reference to which the term can be interpreted, may well be void for uncertainty. However, where COVID-19 is not captured by a specific or analogous term, it may nevertheless be covered by more open-ended language in the agreement. For example, reference to events or circumstances such as "beyond the parties' reasonable control". Determining whether this covers issues arising from COVID-19 is a question of interpretation and fact-specific.
Given the almost unprecedented nature of the COVID-19 outbreak and/or the actions of governments around the world in response, it may seem likely that COVID-19 would constitute a force majeure event under many force majeure clauses. Canadian courts have typically applied a high threshold, only excusing performance where it is rendered essentially impossible.
The next question to consider is the impact on the affected party's ability to perform its contractual obligations. Reference may be made, for example, to the event or circumstances having "prevented", "hindered" or "delayed" performance. These terms require different levels of impact on performance before a party will be relieved from liability. Where the event has made performance more “expensive” or “unprofitable” it is insufficient to trigger a force majeure clause.
Just because a force majeure event has occurred does not necessarily mean that the parties will be protected from liability for failing to perform or delay in performance.
Can a buyer or a seller walk away from a real estate Agreement of Purchase and Sale by invoking force majeure clause?
In Canada, force majeure is a creature of contract. It can only be invoked if it has been specifically provided for in the agreement or contract. The same agreement also governs its applicability to the parties to the contract.
In Ontario, the standard real estate agreements do not include force majeure provisions. Therefore, the parties to the contract (the buyers and the sellers) are bound by the contract and must complete their obligations under the Ontario Real Estate Association’s (OREA) Agreement of Purchase and Sale. The agreements may be customized by the parties by inserting force majeure clause.
Mere presence of force majeure clause in the agreement does not provide for termination of an agreement or provide parties with freedom to be excused from contractual performance.
Where force majeure clauses are present in an Agreement of Purchase and Sale or leases, the language of the specific force majeure provision is the key factor in determining whether the force majeure clause will apply in a pandemic situation, such as the current COVID-19 situation. Some force majeure provisions expressly exclude pandemics or global health crisis from the application of the force majeure clause, while others expressly include such health events, and still others will be silent on the issue.
Therefore, any party seeking to rely on the force majeure clause must first ascertain whether the intervening event falls within the definition of force majeure in their agreement.
What if there is no force majeure clause in the Agreement?
If there is no force majeure clause, it may in certain circumstances be possible to rely on the doctrine of “frustration of contract”. Frustration of contract is a mechanism for severing the contractual obligations of the parties in certain circumstances with a minimum of liability. It is intended to address situations where the contractual relationship has been rendered untenable by a change of circumstances beyond the control of the parties.
However, the next step will be to establish that an agreement has been frustrated. Frustration requires that an unforeseen subsequent event outside the control of the parties has made the contract impossible to perform, or has transformed performance of the obligations under the contract into something so radically different from that which the parties intended that it would be unfair to hold the parties to their obligations. Given the present circumstances the world over, it might be possible to argue that the extent of the global government enforced lockdowns was unforeseeable. However, be aware of the high bar for establishing that a contract has been frustrated. To sum up, if the contract is held to be frustrated then it automatically results in both parties being discharged from their obligations.
If the spread of COVID-19 has affected your ability to perform contractual obligations, the time to be proactive is now: consult your lawyer to review your agreements for force majeure clauses and communicate with counterparties as early and clearly as possible. You may have to serve notices required under the agreement as soon as possible and in accordance with the notice provisions. Keep a documentary record of why performance was impossible, hindered or delayed, the steps taken by you to find alternatives and mitigate loss.
This article is not intended to give, and should not be relied upon for, legal advice in any circumstance or fact situation. No action should be taken in reliance upon the information contained in this article without obtaining the advice of a lawyer.