COVID-19 and Contractual Responsibilities

COVID-19 is creating multiple and unprecedented issues for British Columbians, including local governments.  The number, type, and severity of issues will likely increase in the coming days and weeks.  One potential issue that may arise is the effect of a contractor or a local government being unable to perform their obligations under a contract, either due to the illness itself or governmental efforts to prevent or slow the transmission of the virus.

The first place to look in such circumstances is the contract itself.  Many contracts include a “force majeure” clause, also sometimes referred to as an “Act of God” clause, that addresses the parties’ responsibilities in unforeseen circumstances beyond either parties’ control.  As stated by the Supreme Court of Canada in Atlantic Paper Stock Ltd. v. St. Anne-Nackawic Pulp & Paper Co., [1976] 1 S.C.R. 580,, a force majeure clause “generally operates to discharge a contracting party where a supervening, sometimes supernatural event beyond the control of either party, makes performance impossible.  The common thread is that of the unexpected, something beyond reasonable human foresight and skill”.

It is important to note that the mere occurrence of an event is insufficient to trigger a force majeure clause.  The triggering event must be such that it makes performance impossible.

Some force majeure clauses expressly include pandemics a triggering event.  Other force majeure clauses need to be interpreted to determine whether the current outbreak would be a triggering event, based on the wording of the clause as a whole, and the contractual obligations at issue.

Force majeure clauses also include the effect of a triggering event on the parties’ obligations under the contract.  Typically, these are either the suspension of obligations until the event is over, the parties’ being relieved of their obligations, or the cancelling of the contract.

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 “frustrated”. As stated by the Supreme Court of Canada in Naylor Group Inc. v. Ellis-Don Construction Ltd., 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.  The criteria for frustration were stated by the BC Supreme Court in Folia v. Trelinski (1997), 14 R.P.R. (3d) 5 as follows:

“The event in question must have occurred after the formation of the contract and cannot be self-induced.  The contract must, as a result, be totally different from what the parties had intended.  This difference must take into account the distinction between complete fruitlessness and mere inconvenience.  The disruption must be permanent, not temporary or transient.  The change must totally affect the nature, meaning, purpose, effect and consequences of the contract so far as concerns either or both parties.  Finally, the act or event that brought about such radical change must not have been foreseeable.”

Whether the doctrine of frustration applies will depend on whether these factors have been met.  We are not aware of any cases in which a court considered whether a pandemic resulted in the frustration of a contract, but of note is the requirement that the disruption must be permanent, as opposed to temporary or transient.  As a result, whether a contract has been frustrated may depend on how long the current measures to prevent the spread of the virus are maintained, as well as their effect on a party’s ability to perform its obligations.

At common law, the effect of frustration is to excuse the parties from any further obligation to perform the contract, and to leave them in the position they were when the frustrating event occurred.  This potentially results in significant unfairness in situations where one party has paid for the other to perform a service they have yet to perform.  As a result of this unfairness, the Province passed the Frustrated Contract Act, R.S.B.C. 1996 c. 166.  The Act applies to many different types of agreements, and creates rules to account for situations where payment occurs before performance.

Over the coming weeks, contractual performance may be one of the issues that local governments face as a result of COVID-19.  When these issues arise, it is important to examine the language of the contract to determine the effect of the virus on the parties’ obligations.