Force majeure

1.1 The Office of the Procurement Ombudsman

The Office of the Procurement Ombudsman (OPO) is a neutral and independent organization of the Government of Canada that works collaboratively with federal departments and Canadian businesses to promote fairness, openness and transparency in federal procurement. OPO delivers on this mandate by connecting stakeholders, investigating complaints, resolving problems, making recommendations and sharing good practices.

OPO:

• Reviews the practices of federal departments for acquiring materiel and services to assess their fairness, openness and transparency and makes any appropriate recommendations to the relevant department;
• Reviews any complaint respecting the award of a contract for the acquisition of goods below the value of $26,400 and services below the value of $105,700 where the criteria of the Canadian Free Trade Agreement would otherwise apply;
• Reviews any complaint respecting the administration of a contract for the acquisition of materiel or services by a department, regardless of dollar value; and
• Ensures that an alternative dispute resolution process is provided, if the parties to the contract agree to participate^{Footnote 1}.

In 2018, OPO launched a knowledge deepening and sharing (KDS) initiative to better understand key issues in federal procurement. Through the publication of KDS studies, OPO intends to share knowledge and provide meaningful guidance for federal procurement stakeholders.

1.2 Purpose of the study

This study was undertaken during the COVID-19 pandemic for the purpose of helping parties to a federal contract understand the key components of a force majeure clause and explain its utility both in normal times and during a crisis situation.

Force majeure is relevant in the context of COVID-19 as global supply chain disruptions have, and are expected to leave many contractors unable to fulfill their contractual obligations, and many of these contractors may seek to obtain relief from their contractual obligations through this type of clause. This study is further intended to inform the federal procurement community (both buyers and suppliers) about the legal framework related to a force majeure clause. It is important to note that this study will address force majeure in a common law context only.

This study is not legal advice and should not be relied on as legal advice. Any such reliance will be at the sole risk of the user.

1.3 Development methodology

This study is based upon a review of legal literature, cases, articles published by law firms, and force majeure clauses contained in Public Services and Procurement Canada’s (PSPC’s) Standard Acquisition Clauses and Conditions (SACC) Manual^{Footnote 2}. The SACC Manual includes multiple “excusable delay” clauses that collectively represent the federal government’s templated language for force majeure clauses, one of which is examined in section 5 of this study^{Footnote 3}.

2.1 Force majeure clause compared to the doctrine of frustration

Force majeure is often discussed alongside the legal concept of frustration, as both involve the occurrence of events which interrupt the parties in the course of performing the contract, and which leave a party to the contract unable to perform its contractual obligation(s). As legal concepts, force majeure and the doctrine of frustration are similar, but distinct, in nature. Force majeure is a contractual clause intended to “protect the parties from events outside normal business risk.”^{Footnote 4} Conversely, the doctrine of frustration, or simply frustration, occurs when an unforeseeable event, which is not the fault of either party, makes performance of a contract impossible or radically different from what was originally agreed to^{Footnote 8}.

Unlike force majeure, frustration occurs when the parties made no provision for triggering events in advance, within the terms and conditions of the contract^{Footnote 5}. The party that cannot fulfill its obligations can then seek to terminate the contract based on frustration. If a frustration claim is successful in court, the contract is deemed frustrated, extinguishing all contractual obligations as a result^{Footnote 9}.

Alternatively, with force majeure, the party may be entitled to suspend performance or seek a time extension until it can perform the obligations under the contract^{Footnote 5}. When a force majeure clause does not exist in a contract, the parties can only rely on the doctrine of frustration for relief from their contractual obligations and can only obtain termination of the contract as a result.

For both force majeure and the doctrine of frustration, if brought to court, the onus is on the party alleging the claim to prove the necessary elements.^{Footnote 5 Footnote 9}

Refer to Appendix 1 for a more detailed comparison between a force majeure clause and the doctrine of frustration.

4.1 What constitutes a triggering event?

A force majeure clause should identify the unforeseeable events that would trigger the application of the clause and provide relief. These triggering events can be identified in different ways:

1. list of specific events;
2. general statement (basket clause, all-inclusive language, or catch-all wording); or
3. combination of (a) and (b).

The list of triggering events may be tailored to include events that are specific to the party, the contract, the region or the industry^{Footnote 11}. For example, if the subject of the contract is shipping, the unavailability of fuel supplies could be listed as a triggering event. Furthermore, the parties may customize the force majeure clause by including an event that would normally not qualify as a frustration under common law, or excluding an event that normally would qualify^{Footnote 14}. A customized force majeure clause tailored to the subject matter of the contract is likely to benefit the parties.

The literature suggests striking a balance between detail and generality in the clause, meaning the clause should include the following 2 parts: (1) a non-exhaustive but sufficient list of detailed triggering events; and (2) a general statement^{Footnote 15}. When a detailed list and a general clause are combined, the ejusdem generis rule of interpretation will demand that the general clause only applies to items similar to those identified in the detailed list^{Footnote 16}. The Latin wording of the ejusdem generis principle translates to “of the same kind.” When general wording follows specific wording in a listed format, the principle requires the interpretation of the general wording to be restricted to the same kinds of things as mentioned in the specific wording^{Footnote 18}.

Examples of common triggering events include:

1. “acts of God, landslide, flood, tempest, washout, fire, lightning, disaster, earthquake, and storm;
2. actions of military, naval, or civil authority, the Queen’s or a public enemy, war, revolution, political disturbance, and terrorism;
3. civil disturbance;
4. expropriation, acts of restraints of a governmental body or authority, and failure to obtain a requisite permit or authorization from a governmental authority by reason of any statute, law, or Order-In-Council, or any regulation or order passed or made pursuant thereto or by reason of the order or direction of any administrator, controller, or board, or any governmental department or officer or other authority, or by reason of not being able to obtain any permission or authority required thereby;
5. unusual delay by common carriers;
6. sabotage, rebellion, vandalism, riot, blockade, insurrection, strike, lockout, and explosion;
7. power failure and non-availability of labour, materials service, equipment, goods, or utility; and
8. epidemic and quarantine^{Footnote 7}.”

In a private commercial context, the case of Atcor Ltd.v. Continental Energy Marketing Ltd. provides an example of a force majeure clause containing both a list of specified events and a general statement, as recommended above^{Footnote 4}. However, this clause was criticized by the Court of Appeal of Alberta as being too broad and all-encompassing, to the extent of trying to become an escape clause. As noted above, a good force majeure clause should include a customized, non-exhaustive list of triggering events combined with a general statement, rather than trying to cover off every conceivable possibility.

4.2 What impact must those events have on a party who invokes the clause?^{Footnote 4}

After establishing that a triggering event falls within the definition demanded by the force majeure clause, the party relying on the clause “must show that the force majeure event impacted the party’s ability to perform its contractual obligations^{Footnote 17}.” As a result, the party must determine whether contract performance is impossible.

When a triggering event included in a force majeure clause has occurred, the impact upon the parties to the contract should be determined. Each party should consider the consequences associated with the triggering event(s) and its obligations relative to the event’s occurrence^{Footnote 18 Footnote 19}. If the event impacts the contracting parties’ ability to perform their contractual obligations, the clause may likely be relied upon because business cannot continue its normal course^{Footnote 19}.

4.3 What effect should invocation have on the contractual obligation?^{Footnote 4}

Unlike the doctrine of frustration where the only result is termination of the contract, a force majeure clause often allows for a less drastic result. A force majeure clause should include a desired result or outcome that may be relied upon by the party invoking the clause^{Footnote 20 Footnote 21}. The desired result or outcome may only be considered once a triggering event has occurred and it is impossible for a party to perform its contractual obligations under the contract^{Footnote 21 Footnote 23}. The typical results or outcomes that force majeure allows for parties are: to extend the contract’s time frame, suspend the contract until performance is possible, lower or increase prices, or adjust costs in general^{Footnote 21,Footnote 23}.

4.4 Additional considerations when invoking a force majeure clause

Some additional considerations are important when invoking a force majeure clause, such as notice and evidence requirements. Often, a notice is a required pre-condition to invoking the clause. If supporting documentation is mentioned as a requirement under the contract, such documentation must be provided. The timing of when a notice must be given or when supporting documentation must be provided should be outlined in the clause.

The party seeking to invoke the force majeure clause likely has a duty to mitigate its inability to perform its contractual obligations. If the party seeking relief under force majeure does not take reasonable action to mitigate the court may not apply the clause^{Footnote 5}. Accordingly, where the triggering event is lack of supply, but the required item is available from another source (even though more costly), the contracting party may not be able to rely on the force majeure clause. In a dispute, the court will consider the degree of control the party has over its circumstances, alongside the opportunities the party has to mitigate.

“Where a party invokes a force majeure clause, the court will impose a duty to mitigate upon that party, prior to permitting the invoking party to have its contractual obligations suspended. If the party can mitigate in a commercially reasonable manner, it is obliged to do so and cannot rely on the force majeure clause to suspend its obligations.“^{Footnote 22}

“(R)eliance upon a force majeure clause will be permitted where the contracting party cannot exert any degree of control over the circumstances it faces, or reasonably avail themselves of alternatives to enable performance.“^{Footnote 5 Footnote 23}

Insurance is another consideration relative to force majeure because it enables a party to exercise its duty to mitigate. The parties should consider risks that may be insured against relative to the specifics of their contract, and consider purchasing insurance to cover those risks. The insurance proceeds will assist the party invoking the force majeure clause in mitigating its losses. As a result, the party will likely be able to rely on the insurance proceeds to enable it to continue performance.

Canadian courts have found that even if an event is a force majeure event and its impact on the supplier is covered by the clause, it may not be enough to ensure that the force majeure clause will apply. In the 1976 case of Atlantic Paper Stock Ltd v. St Anne Nackawic Pulp & Paper Co., the Supreme Court of Canada found that the non-availability of markets for pulp or corrugating medium was insufficient to discharge a party from its contractual obligations, as the party had not fulfilled its duty to mitigate^{Footnote 24}, ^{Footnote 5}. Contractors looking to rely on force majeure should ensure that they have exhausted all options to ensure performance under the contract, or force majeure may not apply^{Footnote 5}.

Today, few cases illustrate how Canadian courts have interpreted the force majeure clause in common law^{Footnote 25}. The lack of case law may be because of arbitration clauses. Both force majeure and arbitration clauses seem to exist together in numerous contracts^{Footnote 30}.

5.1 COVID-19 in the context of force majeure

Broadly speaking, the COVID-19 pandemic might constitute an unforeseeable event for the purposes of a force majeure clause if it is considered to be out of the control of both the parties to a contract^{Footnote 26}, ^{Footnote 27}. To constitute a force majeure event, the unforeseeable event must be the direct cause of why the party is unable to meet its contractual obligations^{Footnote 3 Footnote 26 Footnote 28}.

According to the SACC Manual Excusable Delay clause, an excusable delay must be caused by an “event” that is beyond the Contractor’s reasonable control, could not reasonably have been foreseen, could not reasonably have been prevented by means reasonably available to the Contractor, and occurred without the Contractor’s fault or neglect^{Footnote 2}. The question is: Would a court consider the COVID-19 pandemic to be an “event” that meets these criteria?

For contracts entered into before the start of COVID-19, the pandemic might constitute an “event” under the SACC Manual Excusable Delay clause because it could be argued that the pandemic was beyond the parties’ control and could not have been foreseen or prevented. The clause’s other requirements with respect to notice and mitigation would also have to be met; hypothetically, COVID-19 might be an “event” that meets these criteria.

Conversely, the pandemic might not constitute an “event” under the SACC Manual Excusable Delay clause because it could be argued that a pandemic of this nature was foreseeable, and that actions could have been taken to prevent or mitigate its impact on a Contractor’s ability to perform obligations under a contract.

For contracts in a private commercial setting that contain other force majeure clauses, it is possible that terms such as “epidemic” or “pandemic” were listed as triggering events, in which case the onset of COVID-19 might successfully be used to invoke a force majeure clause.

Conversely, if the terms “epidemic” or “pandemic” (or similar wording) were not listed as a force majeure event or were explicitly excluded from the list of triggering events, it becomes more difficult to argue (in court) that the performance of contractual obligations should be delayed or excused.

For contracts entered into after the onset of COVID-19, it becomes harder to argue that performance of contractual obligations is delayed by an event that “could not reasonably have been foreseen”^{Footnote 26}, as is required under the SACC Manual Excusable Delay clause. The same would likely apply to other force majeure clauses (in a private commercial setting), unless the parties specifically drafted their force majeure clause to include COVID-19 as a triggering event that would excuse them from having to perform their contractual obligations.

Ultimately, whether COVID-19 constitutes a force majeure event is an interpretation question, which makes the wording used in force majeure and excusable delay clauses of utmost importance.

Considerations to be taken into account include:

• In the federal contracting context, suppliers will usually not be involved in drafting a force majeure or excusable delay clause because such clauses are templated in the SACC Manual (for example, the SACC Manual Excusable Delay clause enclosed in its entirety in Appendix 2).
• If the parties want to avoid having to rely on the doctrine of frustration, they should consider including a force majeure clause in the contract to add certainty and control with respect to triggering events, impacts on the parties, and outcomes if the clause is invoked.
• Force majeure clauses should be drafted so that both parties benefit from them.
• When listing either triggering events or events intended to be excluded from triggering force majeure clauses, parties should consider factors such as the subject-matter of the contract, the location where performance is taking place, and the particular industry involved (for example, the unavailability of fuel supplies for a shipping contract).
• When listing specific triggering events in addition to a general clause, parties should consider avoiding a situation where the list of specific events is so broad that it resembles an escape clause, as mentioned in the Atcor case in section 4.1 above.
• Parties should consider the duty to mitigate on the party seeking to have contractual obligations delayed or excused. As noted in section 4.4 above, contractors looking to rely on force majeure should ensure that they have exhausted all options to ensure performance under the contract, or force majeure may not apply.
• Parties should consider drafting force majeure clauses with clear notice requirements (for example, within X amount of time after becoming aware of the triggering event) and clear mitigation steps (for example, a detailed plan to minimize the event’s impact and reduce delay).
• Parties should consider whether the specific subject-matter and context of their contract warrants a force majeure clause that expressly references several possible impacts and outcomes (for example, different consequences for different situations).
• Both parties should consider the commercial risks that are not insurable and reasonably allocate those risks to one party or the other.

This study is not legal advice and should not be relied on as legal advice. Any such reliance will be at the sole risk of the user.

Topic 1: Is it included or excluded in the contract?

• Force Majeure: A force majeure clause is either present in a contract or it is not. If a force majeure clause is not included in a contract, the court will not read in the clause and the parties are left with frustration as the only remedy^{Footnote 8,Footnote 9}.
• Doctrine of frustration: Unlike a force majeure clause, the doctrine of frustration is not a clause that may be included or excluded from a contract^{Footnote 8,Footnote 29}. The doctrine of frustration is a historical precedent established in common law.
• Difference: Force Majeure is dealt with in the contract; frustration is not.

Topic 2: Triggering event(s)

• Force Majeure: Unforeseeable event(s) that are beyond the control of either party are contemplated by the parties in advance and listed in the contract as a force majeure event^{Footnote 30}.
• Doctrine of frustration: Unforeseeable event(s) that are beyond the control of either party are not listed in the contract^{Footnote 30}.
• Difference: Force Majeure lists the unforeseeable event(s) in the contract; frustration does not.

Topic 3: Required impact on relying party

• Force Majeure: The event interrupts performance by the relying party, making the contract impossible to perform at the time. Some force majeure clauses require the relying party to mitigate the impact of the event. The party who cannot perform avoids having to default and is entitled to suspend performance until it can meet its obligations.
• Frustration: The event causes a radical change in performance of the contract for the relying party. The radical change makes performance, under existing circumstances, impossible because it frustrates the original purpose of the agreement and it would be unjust for the relying party to be bound by the contract under the existing circumstances. Performance must become impossible, not just (a) more onerous; (b) difficult but possible; (c) impractical; (d) less advantageous; or (e) more expensive. Since performance is impossible, the contract becomes frustrated and all obligations are extinguished.

Topic 4: Available remedies

• Force Majeure: The party is entitled to pre-selected remedies, such as suspended performance^{Footnote 31}, ^{Footnote 2}.
• Doctrine of frustration: The contract is terminated^{Footnote 5}.
• Difference: Frustration only has one result or outcome (termination of contract), whereas in force majeure the parties may pre-select the results in their contract.

Topic 5: Parties’ degree of control over triggering events, impacts, and outcomes

• Force Majeure: Parties to a contract have some degree of control over triggering events by identifying the events, impacts and outcomes in their contract in advance. The force majeure clause provides the parties with more control over the result of the legal process, meaning the outcome of the legal process is more certain^{Footnote 6}.
• Doctrine of frustration: Parties to a contract have less control over triggering events and do not anticipate triggering events in their contract in advance^{Footnote 5}. The doctrine of frustration may be applied in numerous ways by courts. The courts will likely apply the doctrine of frustration in a narrow fashion, therefore there is less control over the result, meaning the outcome of the legal process is less certain^{Footnote 30}.
• Difference: In frustration, parties have no control over what events do or do not constitute frustration; whereas, in force majeure, parties have a degree of control and can identify in advance which events constitute force majeure.