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Contractual Obligations and COVID-19

The COVID-19 pandemic has caused significant economic disruption and affected the ability of many businesses and individuals to fulfill terms of a contractual agreement. Circumstances may arise where a party to a contract is unable to perform their obligation either due to health concerns or formal restrictions placed by the government. In such circumstances a party may be protected from non-performance or breach of contract either by looking to the provisions of the contract or towards common law principles.

(a) Force Majeure Clause

Many contracts include a “force majeure” clause, sometimes referred to as an “Act of God” clause. This clause addresses the parties’ responsibilities in unforeseen circumstances beyond either parties’ control that may prevent either party from fulfilling the terms of the contract. The purpose of a force majeure clause is to absolve the non-performing party of liability for their failure to fulfill contractual obligations due to extenuating circumstances.

A party’s ability to claim relief under a force majeure clause depends on the wording of the clause and the overall terms of the contract. Firstly, a party must establish that an unexpected intervening event falls within the contract’s definition of “force majeure”. Most force majeure clauses provide a list of specific triggering events, such as a natural disaster. Secondly, the party invoking this clause must also prove that the triggering event sufficiently impacted its ability to perform contractual obligations.

Canadian courts have typically applied a high threshold when determining if an event qualifies as force majeure/act of God. Performance is typically only excused where it is rendered essentially impossible because the event is unexpected and beyond reasonable human foresight and skill.

(b) Doctrine of Frustration

If a contract does not include a force majeure clause, or if the clause does not apply, it is still possible that performance could be excused, if the contract is deemed “frustrated”. Unlike the operation of a force majeure clause, a successful claim of frustration ends the contractual relationship between the parties instead of suspending the contractual obligations.

A contract is frustrated when an unforeseeable intervening event, through no fault of either party, significantly changes the core of the contract such that it would cause undue hardship or be unjust to hold the parties accountable to the strict contractual terms. In British Columbia, the Frustrated Contract Act, R.S.B.C. 1996 c. 166. can apply when a contract is deemed frustrated and the contract does not provide for the consequences of frustration. The Frustrated Contract Act sets out the rights and obligations of the parties in such circumstances, such as the right to restitution of a party that has done something towards the fulfillment of contractual obligation.

As BC courts prepare to resume regular operations in the coming weeks, there will likely be an increase in disputes and potential litigation over the impact of Covid-19 on contract performance and enforceability. Successful resolution will require a case-by-case analysis to determine whether a party can seek relief for non-performance of a contractual obligation due to the Covid-19 pandemic.

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