Does a Pandemic Nullify a Contract?

What does Covid-19 mean for contractual obligations?

The unique circumstances of this crisis raises, first and foremost, concerns about health and well being.  Second to that, many people are concerned about the implications for their personal finances, as the Canadian and global economies are jolted by this pandemic.

For the most part, assume that all contracts remain binding.  The pandemic will not mean that your credit card debt, mortgage or car lease obligations magically disappear.  Certain entities have, with some prodding from government, agreed to grant limited relief (like suspending payments and evictions), but bear in mind any such relief is on a temporary basis.

There are two legal principles which could nullify certain contracts. One is called “frustration” and the other is “force majeure”.  Contracts tend to be very fact specific, and whether either of these apply to any given situation will depend very much on the particulars of each case.

Force Majeure

Certain contracts will include a force majeure clause, sometimes called an “act of God” clause.  Those provisions may excuse performance of an obligation when truly extraordinary events prevent a party from doing what was supposed to be done.  The Supreme Court of Canada has described them as:

“An act of God clause or force majeure clause … generally operates to discharge a contracting party when a supervening, sometimes supernatural, event, beyond control of either party, makes performance impossible. The common thread is that of the unexpected, something beyond reasonable human foresight and skill.”

To be relieved of a contractual obligation under this principle there must be an actual clause like this in the contract (it does not appear that this term could be implied) and there must be some nexus between the act of God and the non-performance.

For most day to day consumer contracts force majeure will not relieve the consumer of their obligations.  Furthermore, even if there is a clause like that in the contract, many force majeure clauses do not currently have “pandemic” included as a contemplated event (that will undoubtedly change going forward).

Do not count on this concept relieving many obligations, unless there is such a clause and there is a direct connection between the pandemic and the non-performance.

Frustration

The second principle which may apply is “frustration”. Frustration occurs when events intervene, due to nobody’s fault, which so fundamentally change the nature of the situation from what they could reasonably have anticipated when the contract was made that it would be unjust to hold them to its terms in the new circumstances. In those rare cases both parties may be discharged from further performance of their obligations under the contract.

This will be applied rarely.  The legal authorities use language to the effect that there has been a “radical transformation” in the circumstances governing performance under the contract. It must be more than that the court simply thinks that performance would be unreasonably harsh or onerous in the changed circumstances.

In the current Covid-19 circumstances frustration could potentially apply to contracts that simply cannot be performed, for example where it contemplated gathering a large number of people or international travel.  A loss of employment would not, in all likelihood, be considered a legally frustrating event.

The consequences of frustration in a contract are complicated, particularly where it has been performed in part.  In some instances it merely suspends the rights at the point of frustration, and benefits paid can accrue.  In Manitoba, we also have specific legislation enacted in 1949, called The Frustrated Contracts Act, which sets out some of the remedies that may be applied if frustration occurs, giving courts more latitude in how to remedy frustrated contracts.

Conclusion

These are not simple issues.  If you have a contract that you believe may be subject to frustration or force majeure you should seek legal advice about the specifics of your situation.