Force Majeure and Frustration

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 these options would apply is dependent on a party’s specific circumstances.

Force Majeure Clauses

An effective “force majeure” clause will discharge a contracting party when an event beyond the control of either party makes performance impossible. These clauses can only be enacted when an event occurs which is exceptional and beyond the party’s “reasonable foresight”.

Parties should review their existing contracts, as a force majeure clause must be expressly stipulated in your contract. However, the existence of a force majeure clause in your contract alone is not sufficient to extinguish a party’s contractual obligations.  Whether a force majeure clause can be applied will depend on how the clause is drafted and how your 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. No clause is drafted exactly the same, and therefore the specific wording in your contract is relevant. 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.

It should be noted that economic downturn is likely not be a sufficient basis to enact a force majeure clause. Economic downturn, even a possible recession, will likely not enact an FM clause. There may be some exceptions if the force majeure clause in your contract specifically references economic conditions.

• What other requirements apply?

If a party decides to enact a force majeure clause, they should comply with any contractual requirements to do so. Commonly, a party will be required provide notice to the other party to their contract that they are doing so, and may have to comply with specific notice requirements in their contract.

The Doctrine of Frustration

A contract may also be frustrated due to circumstances which will relieve parties of their obligations. One main difference between the doctrine of frustration and enacting 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.

Proving frustration of a contract is a high bar. Frustration of contract occurs when:

1. an unforeseen situation, or “supervening event” arises for which the parties have made no provision in their contract, and which was not self-induced or the fault of either party; and,
2. that causes a radical change in the nature of the fundamental contractual obligation.

Performance of the contract in the new circumstances would result in different obligations for the parties than what was agreed originally. In the circumstances, the contract does not need to be literally incapable of being performed; rather, the event in question has made the performance of the contract fundamentally different than what was originally contracted for.

Different circumstances may make a contract frustrated. For example, if a change in the law which 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 which causes a delay may invoke the doctrine of frustration if time is of the essence in a contract or 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 extinguish 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 British Columbia are subject to the Frustrated Contracts Act, RSBC 1996, c 16.  If a contract has been frustrated after partial performance of its obligations, the Frustrated Contracts Act, RSBC 1996, c 166 may apply to determine issues such as whether money needs to be refunded or items returned.

What to do next?

In any case, whether a force majeure clause or the doctrine of frustration applies in your situation will be dependent on your specific circumstances and contract. Parties should review their existing contracts for any requirements pertaining to force majeure clauses or frustration.

If you have questions or require legal counsel, the Business Disputes Team at Alexander Holburn would be happy to assist you.