More doom, gloom and government restrictions loom; frustrated?
Covid-19 Cases Surging
As of yesterday, Canada’s COVID-19 death toll surpassed the 10,000 lives mark. On this matter Prime Minister Justin Trudeau said the pandemic is a “horrific national tragedy.” And he is right. Behind this number are thousands of stories of loss and countless loved ones that have been left behind to struggle with their grief.
Among the many struggling with the hardships brought on by the pandemic have been new and small business owners. Government restrictions that aim to safeguard public health force businesses to operate in less than normal capacities. The result of which has been to make contract performance difficult and in some cases impossible. Sadly, Covid-19 doesn’t seem to care. Cases in Canada continue to surge. And more regions will likely be joining Ottawa, Toronto, York, and Peel in their modified Stage 2. The performance of obligations under contracts may become ever more complicated for more and more businesses as a result.
Last week, I wrote about the force majeure clause. I did so to provide new and small business owners with some information that may be useful for navigating contracts in this age of uncertainty. A force majeure clause can protect the parties of a contract from unforeseeable events that are agreed to be outside normal business risk. But not all contracts have a force majeure clause. And in the absence of a force majeure clause in a contract, a party may seek relief from its contractual obligations by claiming that the performance of the contract has been frustrated.
Doctrine of Frustration
A party to a contract may consider relying on the common law doctrine of frustration to excuse its non-performance. Consistent with this doctrine, a court may completely excuse both parties from their obligations. And the court would do so on the basis that the performance of the contract has become legally or physically impossible.
When a court determines that a contract has been frustrated the remaining obligations owed by parties are dismissed. There can be no breach of a frustrated contract. In this way, no damages are suffered or awarded.
How can one determine whether they will be excused from their contractual obligations in the age of COVID-19? At the moment it is too early to tell exactly how courts in Canada will apply the doctrine of frustration to cases arising out of the COVID-19 pandemic. Even so, Canada does have a common law legal system. Meaning we can look to previous court decisions for some guidance.
Some Case Law
The 1918 flu pandemic was a very deadly influenza pandemic caused by the H1N1 influenza A virus. Lasting from February 1918 to April 1920, it infected about a third of the world’s population and hit in four successive waves. In the years after this pandemic courts around the globe had to make many challenging decisions. The Cunningham v. Insinger,  S.C.R. 8 case was one of those. The respondent claimed it was unable to develop a mine in part due to the effect of the 1918 flu on available manpower. The Supreme Court of Canada (SCC) decided that the claim was indeed valid.
In terms of more recent cases, we can look to Naylor Group Inc. v. Ellis-Don Construction Ltd., 2001 SCC 58 at para 53. In this case, the Supreme Court of Canada described frustration as occurring “when a situation has arisen for which the parties made no provision in the contract and performance of the contract becomes ‘a thing radically different from that which was undertaken by the contract’.” By and large this is quite a high threshold to meet.
The Cunningham v. Insinger and Naylor Group Inc. v. Ellis-Don Construction Ltd. cases offer some insight. Though only time will tell how the courts in Canada will apply the doctrine of frustration to cases arising out of the COVID-19 pandemic.
There won’t be a one size fits all decision that will apply to all cases. The facts of each case will be too different. The better a defendant can demonstrate that the pandemic made it effectively impossible for them to carry on their business the more likely the defendant will be to succeed. Until there are some post-pandemic decisions in this area many people will simply have to wait. Stay tuned to Law4Startups newsletters and blogs as we follow this developing story.
Disclaimer: The information in this article is not (and is not intended to be) legal advice. This is legal information only. Reviewing information about the law may help you understand whether you need legal assistance. Whether and how this information applies to your circumstances requires the assistance of legal counsel who can apply the information to your needs. Do not rely on this article to make decisions.