COVID-19: Commercial Contracts FAQs

Whether the COVID-19 pandemic would be considered a force majeure event will depend on the drafting and interpretation of an individual contract. That is, whether the contract includes a force majeure clause that anticipates some sort of supervening event beyond the control of the parties that may affect the performance of a contract and provides contractual relief for one or both parties from performance of some or all of their obligations as a result.

The next question is whether that contract's concept of a force majeure event, as drafted, applies to the COVID-19 pandemic. The force majeure clause might contain:

For more information, see Practice Note, Force Majeure Clauses: Key Issues. For guidance on force majeure that refers specifically to COVID-19, see Legal Update, Commercial and Contract Law Implications of the COVID-19 Pandemic and Practice Note, Supply Chain Issues in the Event of a Crisis: Force Majeure Clauses.

Yes. A causal link is necessary to invoke a force majeure clause, and the COVID-19 pandemic must have an actual and direct impact on the relying party’s ability to perform their contractual obligations in order to invoke a force majeure clause. It is not always clear whether an inability to perform is a direct result of a relevant event, and individual contracts might impose different standards. The contract might require that the impacted party's performance be entirely prevented or might impose a less onerous standard of the impacted party's performance being hindered or delayed.

It is important to look at the specific facts to determine whether an inability to perform is a direct result of COVID-19. For example, if COVID-19 has impacted a party's cash flow, which has in turn impacted a party's ability to meet payment obligations under a contract, but the party can still perform, that may not be sufficient to establish the necessary causal link. Similarly, price fluctuations that make performance more expensive but still possible would not be grounds for invoking a force majeure clause.

As with any situation where losses are likely to occur, parties to a contract are obligated to mitigate any losses arising as a result of COVID-19. The obligation to mitigate exists despite the possible availability of a force majeure clause or the doctrine of frustration (see Could the COVID-19 pandemic frustrate a contract?). As a result, when seeking to invoke a force majeure clause, a party must show that there were no commercially reasonable alternatives that could have mitigated the effect of the event and its impact on the other party. Similarly, parties who stand to lose the benefits of a contract due to the other side’s failure to perform their obligations are required to mitigate their damages. Damages for breach of contract will only be recoverable to the extent a party has taken reasonable steps to prevent further losses.

For more information, see Practice Notes, Force Majeure Clauses: Key Issues: Mitigation and Mitigation of Contract Damages in Sale of Goods Contracts.

Whether an event must have been foreseeable for a party to claim relief under a force majeure clause depends on the nature of the force majeure clause itself.

If the parties unambiguously allocated the risk of the specified event, such as a pandemic, in their force majeure clause, there should be little room for a court to inquire into the foreseeability of the event. However, if COVID-19 is not caught by a listed force majeure event, the courts would look to foreseeability and whether the event could have reasonably been provided against, avoided, or overcome. The risk is even greater for new contracts entered into after the specified risk becomes well known and therefore foreseeable (such as new contracts entered into after the onset of COVID-19).

For more information, see Practice Note, Force Majeure Clauses: Key Issues and Standard Clause, General Contract Clauses: Force Majeure (Long Form): Drafting Note: Force Majeure.

The effect of invoking a force majeure clause will depend on how it is drafted and the governing law of the contract. Typically, if a force majeure event occurs, common provisions in a force majeure clause may:

Often, a force majeure clause will set out a period before either party has the right to terminate the contract entirely.

In most contracts, the specified consequences do not automatically follow whenever a force majeure event (however defined) is present. Some element of causation is also required. For example, the affected party may need to show that the force majeure trigger has prevented, delayed, or hindered its performance (see Is it necessary to establish a causal link between COVID-19 and a party's inability to perform its contractual obligations?).

When invoking a force majeure clause, the affected party should:

The force majeure event may also affect a liquidated damages provision for late delivery depending on the drafting of the contract as a whole (particularly on how the liquidated damages and force majeure provisions work together).

Finally, invoking a force majeure clause may affect other agreements and legal obligations (for example, financial agreements that require the company to provide notice of material events that may lead to litigation or anticipated loss outside of the ordinary course of business).

There is no common law right in Canada to invoke force majeure where none is provided for in the governing agreement. In common law provinces, if the contract is silent on force majeure, a court is left to decide whether to excuse an impacted party’s performance based on other principles, such as impossibility and frustration of purpose (see Frustration and Impossibility). These excuses for non-performance may have different interpretations under the applicable law but, in general, are narrowly interpreted and applied.

For more information on excuses for non-performance, see Practice Note, Excuses for Non-Performance: Post-Contract Formation: Supervening Events Excusing Performance.

Frustration is a limited excuse that applies where, through no fault of the parties, an unforeseen event destroys or obviates a party's principal purpose for entering the transaction. With this excuse, performance is not impossible but one party's reason for undertaking the transaction no longer exists. The party's contractual relationship is materially different because a supervening event has altered the inherent meaning behind one party's performance obligations. Performance remains possible with frustration but is excused when one party would no longer receive the expected value of their counterparty's performance.

Unlike the flexibility of force majeure, which can be determined by the parties as expressed in their contractual terms, frustration automatically results in both parties being discharged from their obligations.

Given its significant impact, the threshold for frustration is a very high bar. If the impact of COVID-19 drastically changes the character of contractual obligations, for example, in the event of government-imposed restrictions preventing travel or trade, it is possible that the contract would be considered frustrated. Alternatively, if the party's reason for entering into the contract is not destroyed, for example, if the effect of COVID-19 is a dramatic increase in price with performance at a higher cost still possible, a court would not likely determine that the contract has been frustrated.

For more information, see Practice Note, Excuses for Non-Performance: Post-Contract Formation: Frustration. For guidance that refers specifically to frustration in the context of COVID-19, see Legal Update, Commercial and Contract Law Implications of the COVID-19 Pandemic: Frustration.

Possible circumstances that, in the context of COVID-19, may constitute frustration include:

However, a contract is not frustrated if:

The doctrine of frustration can only excuse performance if:

The result of a successful frustration claim at common law is that parties can rescind the agreement. In other words, the contract is deemed frustrated and all obligations are extinguished as of the date of the supervening event. Almost all Canadian jurisdictions have enacted provincial legislation to administer the outcomes of contracts found to be frustrated. For example, Ontario's Frustrated Contracts Act, R.S.O. 1990, c. F.34, applies to any contract that is governed by the law of Ontario and that has become frustrated and consequently discharged. It prescribes that amounts paid, or benefits conferred, prior to discharge are recoverable. Additionally, it allows the severance of frustrated obligations of a contract if the remainder was substantially performed prior to discharge.

The contractual obligations of a party can be excused if its performance becomes objectively impossible because of a supervening event beyond its control.

In general, impossibility will discharge a party where, without its fault:

For a party to use this excuse successfully, performance must be impossible, not just financially unappealing or more difficult, regardless of any amount of time, money or energy spent. For instance, performance may be excused when the subject matter of the agreement is destroyed, or a party's means of performance is prevented. If the contract is to be performed in a region where there is a state-imposed lockdown, performance may well be impossible for the affected party. With impossibility, performance is excused entirely, not merely suspended.

For more information, see Practice Note, Excuses for Non-Performance: Post-Contract Formation: Impossibility.

Parties may generally suspend their performance during a change in circumstances when a supervening event temporarily causes:

Once the circumstances revert to those under which the parties agreed, the party whose performance was affected by the supervening event must resume performance in full.

It is of course open to the affected party to approach the other to request a suspension by way of a contract variation (see Can the parties amend the contract or renegotiate its terms?)

For more information, see Practice Note, Excuses for Non-Performance: Post-Contract Formation: Temporary and Partial Performance Interruptions.

Commercial contracts typically set out the termination rights of each party in some detail. Relevant contractual termination rights in light of the COVID-19 pandemic will include:

A party should consider the consequences, both practical and legal, before giving a termination notice to the other party as, depending on the importance of the contract, the impact on their business and long-term strategic goals could be catastrophic.

For more information, see Practice Note, Supply Chain Issues in the Event of a Crisis: Supplier and Customer Relationships.

Yes. The COVID-19 pandemic and the government response to it is unprecedented both in Canada and globally, and it is a rapidly changing situation. The government has announced a variety of measures to support businesses and self-employed workers, and discussions with industry are ongoing.

Keeping contracts on track and avoiding bringing claims against each other in respect of the difficult circumstances that the COVID-19 pandemic has given rise to is the optimum solution and will help preserve relationships with customers. However, this may not always be possible.

If parties do agree to mutually vary or renegotiate the terms of their contract, they should comply with any relevant requirements of the contract, such as recording any variation in writing, and carefully consider the long-term impact of any proposed changes to deal with the immediate situation the parties are currently facing. Accurate record keeping is essential, and parties should ensure that there is adequate consideration.

The parties should consider whether changing one aspect of their arrangement has a knock-on effect on other provisions, has implications for other contracts related to the project, or has a practical impact that should be recognized. Among other things, parties should consider:

For a sample amendment agreement, see Standard Document, Amendment Agreement.

While the COVID-19 pandemic may be unprecedented, it is critical that the parties continue to operate the contract properly and comply with their obligations relevant to the on-going situation. This is particularly important where strict compliance with the contractual requirements is a condition precedent to a party obtaining the relief or remedy it seeks, and a party’s reliance on a force majeure clause or the doctrine of frustration of impossibility is likely to affect, or be affected by, several other contractual clauses, including:

Even where there is no formal requirement to provide evidence or documentation as part of a force majeure clause, it is in your best interest to document the impacts of COVID-19 on your ability to meet contractual obligations as well as efforts to avoid and mitigate such impacts. This documentation will be useful in the event of a dispute and may also help avoid disputes if shared voluntarily with counterparties.

This question raises several issues, including the following:

If you receive a force majeure notice from an impacted party claiming to be unable to perform its obligations under the contract due to COVID-19, you should begin by completing your own due diligence. You should review your contract to confirm that COVID-19 qualifies as a force majeure event and be mindful that this may become a dispute to be resolved by arbitration or litigation.

It is also important to ensure compliance with any contractual notice requirements or any notice requirements set out in the force majeure notice you received.

For more information, see Practice Note, Supply Chain Issues in the Event of a Crisis: Responding to Force Majeure Notices.

Even if you have robust contracts in place to support your supply chain, those contracts may not be enforceable if a force majeure clause or claim of frustration or impossibility relieves the counterparty of its obligations.

In some situations, termination may be an option, though it is important to consider whether an alternative supplier can meet your supply chain requirements if lockdowns around the world last for weeks and months. The relationship with key suppliers is also an important consideration, and seeking a longer-term commercial resolution to the immediate problems may be more beneficial than resorting to legal remedies (for more information, see Practice Note, Supply Chain Issues in the Event of a Crisis: Supplier and Customer Relationships).

A force majeure clause may allow a party to suspend performance in part or in full, with or without a procedure for negotiating a workaround. In any case, parties can always negotiate a variation to suspend performance until a fixed date, the occurrence of a future event or indefinitely (see Can the parties amend the contract or renegotiate its terms?).

The COVID-19 pandemic is causing many companies to urgently consider ways and means to continue carrying on business when in-person meetings are limited and, in particular, how to validly execute commercial agreements. In many cases, execution can be validly achieved through electronic means.

Provincial electronic commerce legislation typically defines an "electronic signature" as electronic information that a person creates or adopts in order to sign a document and that is in, attached to or associated with the document. The federal Personal Information Protection and Electronic Documents Act, S.C. 2000, c. 5, also has a similar definition.

In practice, this means that an electronic signature can take a variety of forms, including:

For more information, see Legal Update, How to Sign a Commercial Document During a Pandemic, Practice Note, Signature Requirements for an Enforceable Contract and Practice Note, Electronic Contracts and Electronic Signatures.

The absence of a counterparts clause will not of itself invalidate an agreement that the parties execute by separate counterparts; however, the inclusion of this type of clause may help to prevent a party from claiming that an agreement is not binding because there is no one copy that is signed by all parties.

For further information, see Standard Clause, General Contract Clauses: Counterparts: Drafting Notes, Counterparts and Case Law.