The Implications of Force Majeure and Frustration in the Time of COVID-19

In response to the outbreak of COVID-19, governments have declared states of emergency, imposed travel restrictions, and have mandated the closure of non-essential businesses, all of which have caused significant business disruptions. These are rapidly-evolving and legally unprecedented circumstances which have had, and will continue to have, significant impacts on construction projects. This article considers the potential applicability of force majeure provisions and the doctrine of frustration in the current circumstances.

It is possible that a party may be excused from certain contractual obligations to the extent that those obligations have become impossible to perform. In such circumstances, a force majeure clause or the common law doctrine of frustration could potentially apply.

With respect to whether force majeure provisions apply, it is important to note that the determination is dependent on the scope of the relevant provision. For example, force majeure may apply to the outbreak of COVID-19 where the clause references specific events such as “epidemic” or “disease”.

With respect to the scope of force majeure in widely-used standard contracts, while many include general terms that contemplate circumstances which are beyond the control of the parties, some contracts may not specifically list “pandemic” or “disease” in the force majeure provision itself. For example, the CCDC-2 force majeure includes: labour disputes, strikes, fire, and abnormally adverse weather, among other things, but it does not specifically include disease or pandemics.

In the event that the outbreak of COVID-19 is not captured by the force majeure provision, parties may be able to seek relief from contractual performance under the doctrine of frustration. According to the Supreme Court of Canada, “frustration occurs when a situation has arisen for which the parties made no provision in the contract and performance of the contract becomes ‘a thing radically different from that which was undertaken by the contract.’”[1]

If a contract is frustrated, the parties are released from future or continuing obligations under the contract. However, rights and liabilities that accrued prior to frustration remain unaffected. In order for frustration to apply to a contract, the supervening event must make performance of the contract impossible, which is a high threshold to overcome.

It is not sufficient that the supervening event has resulted in more onerous or more costly performance.[2] Ultimately, the requirement is that the supervening event has made performance of the obligation radically different from what was originally contemplated in the contract.[3] This may include the obligation becoming a permanent physical impossibility (e.g. the subject matter of the obligation is destroyed), a legal impossibility (e.g. performance of the obligation becomes illegal), and in very limited circumstances, an indefinite physical impossibility (e.g. performance is delayed indefinitely by a state of war).

It is worth noting that some jurisdictions have enacted legislation that applies if a contract is found to be frustrated. In Ontario, the Frustrated Contracts Act, RSO 1990, c. F.34 may allow parties to recover the expenses incurred or benefits accrued prior to the supervening event. The legislation also enables the court to sever the frustrated portion of a contract from the remainder.

In any event, owners, contractors, and sureties will be carefully scrutinizing the language of the construction contracts to which they are parties, in order to determine the scope of any applicable force majeure provisions and to what extent they may apply to COVID-19. Parties should seek legal advice where appropriate – particularly with respect to assessing the limitations of force majeure provisions and the applicability of the doctrine of frustration in the circumstances.

[1] Naylor Group Inc. v. Ellis-Don Construction Ltd., 2001 SCC 58 at para 53.

[2] Heintzman and Goldsmith on Canadian Building Contracts, (5th ed) at Chapter 8 §9.

[3] Davis Contractors Ltd. v Fareham Urban District Council, [1956] AC 696 (HL).

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