Covid 19: An Act of God and Force Majeure?
Over the past months the coronavirus (COVID-19) outbreak has infiltrated almost every nation of the world. The full scope, impact, and long-term ramifications of the pandemic are yet to be ascertained, but from a sheer “numbers” standpoint the human toll will perhaps be the easiest to calculate. (At the time of writing, there have been over 241,550 confirmed cases). On the other hand, the economic toll – which is predicted to be staggering – will only fully reveal itself over the course of time.
Broken Contracts and the Coronavirus
One aspect of that future economic assessment will involve looking at the legal impact of the coronavirus on contracts – either existing contracts already in place before the outbreak, or those that were signed when it first started to unfold. Once the full extent and repercussions of the pandemic became clearer, and the Canadian government stepped in with measures to stop its spread, many contracts literally became impossible to complete.
Examples of this are truly too numerous to mention, but from the perspective of the average citizen it might include booked vacations that had to be aborted due to government restrictions on travel, or sporting and entertainment events or venue rentals that were necessarily cancelled in compliance with social isolation directives.
From this perspective, it may seem daunting to untangle the legal fallout from the coronavirus. However, a quick peek into the past reminds us that this type of situation has arisen before, most recently with the SARS outbreak in 2003. In fact, from a business standpoint the allocation of risk for such extraordinary contingencies is nothing new; a well-drafted business contract will anticipate them in what is called a “Force Majeure” (or “greater force”) clause.
Force Majeure Clauses, Defined
Conceptually, Force Majeure clauses cover unpreventable and unpredictable events, which are beyond either contracting party’s control, and which make the agreement wholly impossible to perform.
They can include natural events, such as earthquakes, hurricanes, floods, lightning, or similar events that were historically called “acts of God”. They can encompass societal-political events like an outbreak of war, terrorist attacks, riots, job-related strikes, slowdowns or lockouts. And they can also include unforeseen catastrophic events such as explosions, and power outages or blackouts.
When included in a contract, the wording of a Force Majeure clause solidifies the parties’ mutual understanding as to what happens and what remedies arise if, for example, an “act of God” occurs that renders the contract impossible to perform.
Returning to the example of an aborted vacation: Let’s say a Canadian airline passenger cannot fly home from a tropical vacation destination because all flights are grounded due to a severe hurricane. The Force Majeure clause (likely printed on the back of the passenger’s purchased airline ticket) might specify that in such event, the airline is only required to rebook the passenger on a new flight when the hurricane passes, and to provide reimbursement for expenses incurred while waiting, such as food, drinks and hotel.
Assessing the Scope of the Clause
Like the SARS outbreak before it, the coronavirus pandemic will likely force the courts to determine liability and remedies for spate of new legal claims brought by disappointed parties to agreements that – due to circumstances beyond their control – can no longer be performed.
In doing so, each court will have to reflect on one key issue: Is the coronavirus the type of event covered by the particular Force Majeure clause in these parties’ contract? That determination will start with a review of the contract’s wording, with a focus on the following questions:
- Is a pandemic like the coronavirus is covered by the wording of the Force Majeure clause, based on a reasonable interpretation?
- From the perspective of the party hoping to invoke the Force Majeure clause, what is the impact of the coronavirus on their ability to complete the contract?
- Have the parties taken reasonable and sufficient steps to avoid the impact of coronavirus, and to reduce its impact to the extent possible?
- If the contract called for one party to give the other one notice that they intend to rely on the Force Majeure clause, has the required notice been given? Have any other prerequisites been met?
Force Majeure clauses are interpreted by courts in a strict and narrow manner. If the wording is ambiguous, the court will err on the side of the party who did not draft it, and will interpret the vague words or sentences in that party’s favour.
When applied to the coronavirus, this means that unless the Force Majeure specifically refers to specific words like “outbreak”, “plague”, “epidemic”, or “pandemic”, it may be difficult to argue successfully that the pre-agreed contractual obligations can be avoided. Similarly, terms like “act of God” might not be sufficient to cover the current pandemic, but once again this could vary from case to case.
Also, the court will look at whether the circumstances prompting reliance on the Force Majeure clause were known to the parties at the time they entered into their contract. In other words, with a quickly-spreading, well-publicized pandemic like the coronavirus outbreak, the court consider what the parties reasonably knew or could foresee at the time they signed the contract, and interpret its meaning with that information in mind.
Frustration of Contract as Another Avenue
What happens if the contract does not contain a Force Majeure clause at all? In that case, the situation is assessed against broader contract law principles, which include the concept that a contract might be “frustrated” or rendered impossible to perform by intervening events taking place after it was signed. The key factual question is whether the contract can still be performed in light of a wholly unforeseen event like the coronavirus outbreak.
What’s the Bottom Line?
The coronavirus pandemic has wreaked havoc in all corners of the globe, and in many aspects of our individual lives. It has also had a sharp impact on business, not merely from the standpoint of the economy but on a more micro-level as well: It has drastically interfered with the ability of contracting parties to perform their part of the bargain.
With the courts’ help, the full extent of this impairment and the business-related and legal consequences will necessarily play out over the coming months, and probably over the coming years.