What Happens If An Act of God, Such As Coronavirus, Makes a Contract Impossible to Perform?
If a Contract Contains a Force Majeure Clause Specific to a Type of Incident the Parties May Become Excused. The Doctrine of Frustrated Contracts May Also Excuse Parties When An Incident Makes a Contract Impossible to Perform.
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A Helpful Guide on How to Determine What Constitutes a Frustrated Contract and Thereby Waives Obligation to Perform
When an unforeseeable situation occurs such as an unusually extreme storm or government ordered closures due to pandemic, among other things, such an incident is legally referred to as a force majeure. Often a force majeure results in a party, or parties, to a contract, becoming unable to fulfill obligations within a contract due to the force majeure incident that involves something extreme as well as outside and beyond the control of the parties to the contract. In such a situation, when a party, or parties, become incapable of performing the contract due to the impossibility arising unexpectedly due to the force majeure, the party, or parties, become legally excused from the obligations within the contract and the failure to fulfill the agreed terms is treated in law as a non-breach.
If a contract is silent regarding a force majeure incident, meaning that the agreement failed to address the possibility, the doctrine of frustration of contract may still apply and thereby negate the obligations of the contact. In Ontario, the doctrine of frustration of contract is codified in statute law via the Frustrated Contracts Act, R.S.O. 1990, c. F.34 which states, among other things:
Application of Act
2 (1) This Act applies to any contract that is governed by the law of Ontario and that has become impossible of performance or been otherwise frustrated and to the parties which for that reason have been discharged.
(2) This Act does not apply,
(a) to a charterparty or a contract for the carriage of goods by sea, except a time charterparty or a charterparty by way of demise;
(b) to a contract of insurance; or
(c) to a contract for the sale of specific goods where the goods, without the knowledge of the seller, have perished at the time the contract was made, or where the goods, without any fault on the part of the seller or buyer, perished before the risk passed to the buyer.
Adjustment of Rights and Liabilities
3 (1) The sums paid or payable to a party in pursuance of a contract before the parties were discharged,
(a) in the case of sums paid, are recoverable from the party as money received for the use of the party by whom the sums were paid; and
(b) in the case of sums payable, cease to be payable.
(2) If, before the parties were discharged, the party to whom the sums were paid or payable incurred expenses in connection with the performance of the contract, the court, if it considers it just to do so having regard to all the circumstances, may allow the party to retain or to recover, as the case may be, the whole or any part of the sums paid or payable not exceeding the amount of the expenses, and, without restricting the generality of the foregoing, the court, in estimating the amount of the expenses, may include such sum as appears to be reasonable in respect of overhead expenses and in respect of any work or services performed personally by the party incurring the expenses.
(3) If, before the parties were discharged, any of them has, by reason of anything done by any other party in connection with the performance of the contract, obtained a valuable benefit other than a payment of money, the court, if it considers it just to do so having regard to all the circumstances, may allow the other party to recover from the party benefitted the whole or any part of the value of the benefit.
(4) Where a party has assumed an obligation under the contract in consideration of the conferring of a benefit by any other party to the contract upon any other person, whether a party to the contract or not, the court, if it considers it just to do so having regard to all the circumstances, may, for the purposes of subsection (3), treat any benefit so conferred as a benefit obtained by the party who has assumed the obligation.
Severe Damaging Storms
Examples of a force majeure incident that may frustrate a contract are often those such as extreme weather events. A tornado that destroys an event venue seems a plain and obvious example whereas a tornado strike was likely unforeseeable at the time parties entered into a contract for use of an event venue. With this said, it is possible that some weather events would fail to qualify as a force majeure, such as a snowstorm during the winter season whereas although the snowstorm may be signficant, a snowstorm, even a major snowstorm, is generally a reasonably foreseeable possibility; however, a three-day freezing rain storm, with collapse of hydro-electric towers and loss of major parts of the electrical service grid as occurred in 1998, would more likely be viewed as a force majeure or contract frustrating incident.
Public Emergency Issues
Recently, the COVID-19 pandemic (coronavirus) resulted in the cancellation of many events, activities, services, among other things. In many cases, contracts of various sorts will be affected both directly and indirectly whereas some agreements may become impossible to perform or the performance may become moot. Parties to contracts for which the performance of such contracts is adversely affected by the coronavirus should contact a legal professional, such as GBOC Paralegal Services to carefully review whether legal obligations or legal rights are affected, including whether the doctrine of frustrated contract may apply and to discuss the available legal remedies, if any.
The concept of force majeure involves an unforseeable incident, usually occurring naturally, that interferes with the capacity to fulfill a contract. Parties to a contract may be exempted from contract performance if the type of force majeure incident occurs as described within a contract. Furthermore, the doctrine of frustrated contract, which is codified within the Frustrated Contracts Act, may also exempt parties from performance of contract and entitle return of deposits or payment for the value of partially completed contracts that are made impossible to complete due to outside forces beyond the fault of the parties.