Force majeure

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1.0 Introduction

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 participateFootnote 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) ManualFootnote 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 studyFootnote 3.

2.0 Force majeure explained

Force majeure is a contractual clause intended to “protect the parties from events outside normal business riskFootnote 4.” The clause may be used to manage the risk of unforeseeable future events that could impact a party’s ability to complete its contractual obligations. The clause aims to provide relief to a party to a contract when an unexpected event occurs that is beyond the party’s control, leaving them unable to perform their contractual obligation(s) Footnote 5 Footnote 6. The force majeure clause is sometimes referred to as an “Act of God” clause or an “excusable delay” clauseFootnote 2 Footnote 3 Footnote 5. Examples of force majeure events or “Acts of God” include an epidemic, flood, earthquake, or fireFootnote 7.

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 toFootnote 8.

Unlike force majeure, frustration occurs when the parties made no provision for triggering events in advance, within the terms and conditions of the contractFootnote 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 resultFootnote 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 contractFootnote 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.

3.0 Advantages of force majeure

The major benefit of having a force majeure clause in a contract (as opposed to relying on frustration) is that it gives the parties a degree of control over: (1) selecting or excluding the triggering events; (2) the severity of impact on a party who invokes the clause; and (3) what effect the clause will have on the invoking party’s contractual obligationsFootnote 10 Footnote 11.

Careful drafting of the force majeure clause can minimize the possibility of dispute or litigationFootnote 12. Consideration should be given to the specific type of contract, the participating parties, and the commercial context Footnote 12. In a private commercial context, both parties participate in the drafting process, giving them the power to tailor the contract to a particular transaction, industry, and purpose, while also distributing riskFootnote 13. Between the Canadian Federal Government and a supplier, excusable delay (force majeure) clauses are templated in the SACC Manual. Except in the case of a Negotiated Request for Proposal (NRFP), the supplier has no control over the templated text of the excusable delay clause in a federal contract, but the clause still provides the benefit that the contract is not necessarily terminated as a result of the triggering event.

4.0 Interpretation and anatomy of a force majeure clause

A force majeure clause should answer the following 3 questions:

  1. What constitutes a triggering event?Footnote 4
  2. What impact must those events have on a party who invokes the clause?Footnote 4
  3. What effect should invoking the clause have on the contractual obligation?Footnote 4

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 industryFootnote 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 qualifyFootnote 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 statementFootnote 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 listFootnote 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 wordingFootnote 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 quarantineFootnote 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 aboveFootnote 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 obligationsFootnote 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 occurrenceFootnote 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 courseFootnote 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 clauseFootnote 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 contractFootnote 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 generalFootnote 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 clauseFootnote 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 mitigateFootnote 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 applyFootnote 5.

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

5.0 Force majeure clauses in federal procurement contracts: Excusable delay

Federal Government contracts usually incorporate standardized clauses from the SACC Manual. These contracts use the title “excusable delay” rather than force majeure to describe what is otherwise commonly known as a force majeure clauseFootnote i. These templated clauses often include a provision for excusable delay that addresses performance issues brought on by an unforeseeable event that is beyond the control of the partiesFootnote 3. One example of an excusable delay clause taken from the SACC Manual is 2030 11 (2014-09-25) Excusable DelayFootnote ii (SACC Manual Excusable Delay clause); this clause is included in its entirety in Appendix 2.

In part, the SACC Manual Excusable Delay clause states:

“1. A delay in the performance by the Contractor of any obligation under the Contract that is caused by an event that

  1. is beyond the reasonable control of the Contractor,
  2. could not reasonably have been foreseen,
  3. could not reasonably have been prevented by means reasonably available to the Contractor, and
  4. occurred without the fault or neglect of the Contractor,

will be considered an "Excusable Delay" if the Contractor advises the Contracting Authority of the occurrence of the delay or of the likelihood of the delay as soon as the Contractor becomes aware of it. The Contractor must also advise the Contracting Authority, within 15 working days, of all the circumstances relating to the delay and provide to the Contracting Authority for approval a clear work around plan explaining in detail the steps that the Contractor proposes to take in order to minimize the impact of the event causing the delayFootnote 2.”

Applying the 3 questions noted in section 4.0 above to this SACC Manual Excusable Delay clause reveals the following:

1. What constitutes a triggering event?

The SACC Manual Excusable Delay clause does not contain a list of specific events or a general statement (basket clause, all-inclusive language, or catch-all wording). Rather than a list, the clause uses the broad term “event” combined with 4 broad conditions (specifically 1(a), (b), (c) and (d) above) to describe the type of events that could trigger an excusable delayFootnote 2.

2. What impact must those events have on the party who invokes the clause?Footnote 4

The benefit in delaying performance from the SACC Manual Excusable Delay clause is only available to the Contractor. It is not available to the Contracting Authority. To trigger the clause, the event must not only meet the 4 conditions (specifically 1(a), (b), (c) and (d) above), but must also cause a delay in the performance of the Contractor’s obligations under the contract.

3. What effect should invoking the clause have on the contractual obligation?Footnote 4

Under the SACC Manual Excusable Delay clause, the effect of invoking the clause is to postpone contractual delivery dates by a reasonable time that does not exceed the period of delay.

Other factors to note regarding the SACC Manual Excusable Delay clause:

  • To benefit from the clause, the Contractor must give notice of the delay or the likelihood of a delay as soon as the Contractor becomes aware of the delay. Furthermore, within 15 working days, the Contractor must:
    • advise the Contracting Authority of all of the circumstances relating to the delay; and
    • provide the Contracting Authority with a work around plan (for approval) explaining the detailed steps that the Contractor proposes to take to minimize the impact of the event causing the delayFootnote 2.
  • If the delay continues for 30 days or more, while the performance of the Contractor will still be delayed, the Contracting Authority may (on notice to the Contractor) terminate the contract. In this event, neither party has a legal claim against the other. If the contract is terminated by the Contracting Authority, the clause sets out how to close out the contractFootnote 2.

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 contractFootnote 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 obligationsFootnote 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 neglectFootnote 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.

6.0 Enquiries

Enquiries should be directed to:

Office of the Procurement Ombudsman
410 Laurier Ave. W., Suite 400
Ottawa, Ontario  K1R 1B7
Canada

Telephone:
1‑866‑734‑5169
Toll-free for hearing-impaired:
1‑800‑926‑9105
Email:
ombudsman@opo-boa.gc.ca

Appendix 1: Comparison between a force majeure clause and the doctrine of frustration

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 remedyFootnote 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 contractFootnote 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 eventFootnote 30.
  • Doctrine of frustration: Unforeseeable event(s) that are beyond the control of either party are not listed in the contractFootnote 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 performanceFootnote 31, Footnote 2.
  • Doctrine of frustration: The contract is terminatedFootnote 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 certainFootnote 6.
  • Doctrine of frustration: Parties to a contract have less control over triggering events and do not anticipate triggering events in their contract in advanceFootnote 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 certainFootnote 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.

Appendix 2: 2030 11 (2014-09-25) excusable delayFootnote 2

  1. A delay in the performance by the Contractor of any obligation under the Contract that is caused by an event that
    1. is beyond the reasonable control of the Contractor,
    2. could not reasonably have been foreseen,
    3. could not reasonably have been prevented by means reasonably available to the Contractor, and
    4. occurred without the fault or neglect of the Contractor,

    will be considered an "Excusable Delay" if the Contractor advises the Contracting Authority of the occurrence of the delay or of the likelihood of the delay as soon as the Contractor becomes aware of it. The Contractor must also advise the Contracting Authority, within 15 working days, of all the circumstances relating to the delay and provide to the Contracting Authority for approval a clear work around plan explaining in detail the steps that the Contractor proposes to take in order to minimize the impact of the event causing the delay.

  2. Any delivery date or other date that is directly affected by an Excusable Delay will be postponed for a reasonable time that will not exceed the duration of the Excusable Delay.
  3. However, if an Excusable Delay has continued for 30 days or more, the Contracting Authority may, by giving notice in writing to the Contractor, terminate the Contract. In such a case, the Parties agree that neither will make any claim against the other for damages, costs, expected profits or any other loss arising out of the termination or the event that contributed to the Excusable Delay. The Contractor agrees to repay immediately to Canada the portion of any advance payment that is unliquidated at the date of the termination.
  4. Unless Canada has caused the delay by failing to meet an obligation under the Contract, Canada will not be responsible for any costs incurred by the Contractor or any of its subcontractors or agents as a result of an Excusable Delay.
  5. If the Contract is terminated under this section, the Contracting Authority may require the Contractor to deliver to Canada, in the manner and to the extent directed by the Contracting Authority, any completed parts of the Work not delivered and accepted before the termination and anything that the Contractor has acquired or produced specifically to perform the Contract. Canada will pay the Contractor:
    1. the value, of all completed parts of the Work delivered to and accepted by Canada, based on the Contract Price, including the proportionate part of the Contractor's profit or fee included in the Contract Price; and
    2. the Cost to the Contractor that Canada considers reasonable in respect of anything else delivered to and accepted by Canada.

The total amount paid by Canada under the Contract to the date of termination and any amounts payable under this subsection must not exceed the Contract Price.

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