Force Majeure and Frustrations

Certain exceptional events may make a contract impossible to perform. In new and unexpected circumstances, businesses may be able to rely on either a force majeure clause in their contract or the doctrine of frustration as a basis to extinguish their contractual obligations. Determining whether either of force majeure or frustration apply depends on the specific circumstances.

Force Majeure Clauses

An effective “force majeure” clause will discharge a contracting party when an event beyond its control makes performance unfeasible. Typically, these clauses can only be invoked when an event occurs which is exceptional and beyond the party’s “reasonable foresight”.

A force majeure clause must be expressly stipulated in a contract. However, the existence of a force majeure clause in a contract alone is not sufficient to relieve a party of its contractual obligations.  Whether a force majeure clause can be applied will depend on how the clause is drafted and how the contract has been affected due to the force majeure event.

• How is your clause drafted?

Force majeure clauses will expressly stipulate circumstances in which the clause will apply. Therefore, the specific wording in your contract is important. For example, if a party tried to enact a force majeure clause due to COVID-19, a clause with wording such as “pandemic” or “epidemic” would be more likely to be found to apply. However, many contracts that have not been precisely drafted and include wording such as “Act of God” may also apply in the circumstances.

• What is the impact of the force majeure event on your contract?

The fact that a force majeure event has occurred is not sufficient to extinguish contractual obligations. The force majeure event must directly impact the ability of a party to perform the contract in question. Parties must evaluate the impact of the event on the performance of their contract.

Economic downturn, even a possible recession, will likely not be sufficient to rely on a force majeure clause. There may be some exceptions, such as if the force majeure clause in your contract specifically references economic conditions.

• What other requirements apply?

If a party decides to rely on a force majeure clause, they should comply with any contractual requirements to do so. For example, the contact may have specific notice requirements for the party seeking to rely on the force majeure clause.

The Doctrine of Frustration

A contract may also be frustrated, in which case ethe parties are relieved of their obligations.  One main difference between the doctrine of frustration and relying on a force majeure clause is that the doctrine of frustration may apply to any contract and does not need to be explicitly mentioned in its terms. Further, the doctrine of frustration will terminate the entire contract, whereas invoking a force majeure clause may only terminate part of a contract or pause the contractual obligation for the duration of the force majeure event.

Proving frustration of a contract is a high bar. Frustration of contract occurs when an unforeseen situation, or “supervening event”, occurs without the fault of either party and causes a radical change to the performance of the contract.

The contract does not need to be literally incapable of being performed  – the supervening event has made the performance of the contract fundamentally different than what was originally contracted for.

A contract can be frustrated for a variety of reasons. For example, if a change in the law makes the contract illegal or impossible to perform, a contract may be found to be frustrated. A radical change in circumstances that makes the contract commercially impossible to perform can also constitute a frustrating event. An event that causes a delay may be enough to show frustration if time is an important aspect of the contract or if the delay is abnormal.

Like the case of force majeure clauses, a lack of money or economic downturn usually will not frustrate a contract. In other words, if you can no longer afford to perform the contract, you likely will not be able to rely on the doctrine of frustration to avoid your obligations.

If a contract is frustrated, the parties are relieved of their obligations as of the date of the frustrating event. Unless a contract makes provision otherwise, frustrated contracts in Ontario are subject to the Frustrated Contracts Act, RSO 1990, c. F.34 .  If a contract has been frustrated after partial performance of its obligations, the Frustrated Contracts Act, may apply to determine issues such as whether money needs to be refunded or items returned.

What to do next?

Whether a force majeure clause or the doctrine of frustration applies in your situation will depend on your specific circumstances and the details of the contract.