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We are excited to welcome guest blogger Peter Kissick, course developer of our Corporate Law course, to discuss the "force majeure" clause and it's newfound importance given the current pandemic. If you’d like to share your thoughts on the program, for this space or otherwise, please drop us a line: firstname.lastname@example.org.
Current events are causing us to re-examine so many things we take for granted. For example, never did I think I would not see my students in person. That I would teach them in a social distancing way through Zoom technology.
Recently, during one such online lecture about contract law it occurred to me that an oft-forgotten legal concept needs to be dusted off. While lecturing on “discharge (or termination) of business contracts”—a dry topic that in any other year would lead to the glazing of eyeballs—I began to receive an unusually large number of questions from students about things like revoked job offers and cancelled airline tickets. I realized that the current pandemic is causing the sudden and unexpected cancellation of all manner of contracts—shining a spotlight on the formerly obscure notion of force majeure and its common law cousin, frustration of contract.
Simply put, “force majeure” means an unforeseeable event, or “Act of God”. Many contracts—consumer and commercial alike—contain such a clause. It is usually tucked away at the end of the document, and often written in boilerplate language. Effectively, a force majeure clause is what is known as a “condition subsequent”: Once the parties begin to perform their obligations under a contract, some event occurs that causes the contract to end (or in some cases to be suspended for a specified period of time). In the case of a force majeure clause, those “events” are things beyond the parties’ control, such as “natural disasters and other Acts of God”. As a result, the parties’ obligations are rendered impossible (or nearly so), and they are released, or discharged, from those obligations.
What if a contract does not include a force majeure clause? If an external event renders continued obligations impossible, then that contract would be governed by the common law doctrine of “frustration”. This legal concept will apply automatically; but typically it is applied more narrowly than a properly written force majeure clause.
You may wonder, what would amount to an “Act of God”? Surprisingly, there is not a lot of case law to guide us on this concept. Certainly natural disasters, like earthquakes and hurricanes, qualify. If my widget factory is destroyed in an earthquake, then I am released from my obligations to deliver widgets to you next week. But companies often include other events beyond natural disasters in their force majeure clauses, including: labour strife, political upheaval and, especially since 9/11, “acts of terrorism”.
This brings us to today, and a pressing question: Is the pandemic—and government edicts to shut down businesses to quell the spread of the virus—an Act of God, therefore triggering a force majeure clause or frustration?
Well, to give a lawyer’s answer, it depends. In the aftermath of the SARS outbreak, some court decisions in Hong Kong suggested that an epidemic would be considered a frustrating event. But does that mean every contract must now be considered terminated under force majeure by the onset of COVID-19? Is every contract now impossible to perform?
Certainly any contractual obligation that is time sensitive could be seen as frustrated. For example, a construction company cannot finish putting up an apartment building by May 1 because the government has ordered construction sites to close. However, what if my client wants me to provide a legal opinion about the health and safety liabilities of that building site? It may be more challenging to write since I am now a lawyer working from home and away from the resources and people in my law office. But this work can still conceivably be done.
Of course, things can get even more complicated. Consider a business that has a contract with a professional basketball team for in-arena advertising. If the NBA decides to resume its season by playing games in empty arenas, has that contract been frustrated? People might see the ad on TV. But no one will see it in the arena. As you see, it isn’t always clear if a force majeure clause is triggered.
Determining if a contract has been cancelled is a big step in force majeure analysis. But unfortunately, it is in many cases only a first step. Next, we have to consider if someone is going to suffer an economic loss because the contract has been discharged.
For example, what if your firm contracted in January to purchase services to be delivered in June, and you paid 50 per cent of the price up front. You will not receive those services because we can presume that the force majeure clause clearly applies to discharge the contract. But are you entitled to repayment of your money? Hopefully the force majeure clause provides an answer. But many do not address the risk of loss. While there is “frustrated contracts legislation” in most provinces that addresses the allocation of such loss (albeit in a somewhat arbitrary and not always satisfactory way), many of these cases will end up being settled by the parties themselves—hopefully in a commercially reasonable way.
In the case of frustrated consumer contracts, this might even be an opportunity for service providers to foster customer loyalty with fair refund policies. As an example, my wife and I decided at the beginning of this year to book a cycling trip through southern Italy in May. The tour company voluntarily altered their cancellation policy in such a way that we will receive full value for our money. As a result, we will book again with that company.
If you have potentially terminated contracts due to COVID-19, what then should you do? I recommend that you review any ongoing contracts (contracts where there are uncompleted obligations) and see if there is a force majeure clause (hint: look at the end of your contract). Read that clause and try to determine if it applies given the reality of our pandemic world. If it does apply, determine if the clause provides for loss allocation. And, of course, if the answer to any of these questions is unclear, contact your lawyer. After all, even in a pandemic, legal opinions can still be given!
Peter Kissick is an associate professor and Distinguished Faculty Fellow of Business Law at Smith School of Business.
This blog post was originally posted by Smith School of Business: Business Insight.