A 20/20 Perspective On COVID-19's Impact On Contracts

• Published date: 09 February 2021
• Subject Matter: Real Estate and Construction, Coronavirus (COVID-19), Landlord & Tenant - Leases, Litigation, Contracts and Force Majeure, Operational Impacts and Strategy
• Law Firm: MLT Aikins LLP
• Author: Mr Jason Mohrbutter and Shawna Sparrow

Many legal uncertainties accompanied the pandemic's arrival in March 2020. As businesses closed and events were cancelled, the legal community wondered how contractual legal concepts such as force majeure, frustration, material adverse event and best efforts might apply in the context of COVID-19.

This blog will briefly explore how Courts have interpreted these contractual clauses against the background of the COVID-19 pandemic in 2020.

Key Takeaways

• The specific factual circumstances are crucial. The Courts have been unwilling to simply accept the mere presence of the COVID-19 pandemic as resulting in a presumed inability to carry out contractual obligations.
• The Courts have closely assessed the particular impact, if any of the pandemic on the particular relationship. For example, when evaluating whether COVID-19 constitutes a material adverse effect courts will consider whether the target business has been disproportionately affected by the pandemic.
• Other relevant considerations include the timing of the alleged breach, the specific wording of the clause at issue, the sufficiency of the parties' evidence regarding the financial impact of COVID-19, and the nature of governmental measures in response to the pandemic.
• If any trend can be gleaned it is that the Courts will not lightly set aside contractual obligations - despite the challenges posed by the pandemic.

Force Majeure

Most contracts include a force majeure clause with the objective of allocating risk in the event of an extraordinary and intervening event.

In Hengyun International Investment Commerce Inc. v 9368-7614 Quebec Inc., 2020 QCCS 2251 (Hengyun), the Quebec Superior Court considered whether a commercial tenant, a fitness centre, could be relieved of its obligation to pay rent due to its inability to operate during a provincially mandated lockdown.

In making its decision, the Court considered the doctrine of force majeure as well as the doctrine of 'superior force' in the Quebec Civil Code. The Court concluded that COVID-19 was a force majeure or superior force which prevented the landlord from fulfilling its obligation to provide the tenant with peaceable enjoyment of the premises (at para 101). Since the lease specifically provided that the tenant could only operate as a gym, which was an activity prohibited by provincial decree, the Court concluded the landlord could not insist on payment of rent for the period that it was not able to perform its obligation to provide peaceable enjoyment (at para 106).

However, in Durham Sports Barn Inc. Bankruptcy Proposal, 2020 ONSC 5938, Justice Gilmore held that a force majeure clause could not relieve the tenant business of its obligation to pay rent during a COVID-19 shutdown.

Justice Gilmore found that, due to the wording of the lease, the landlord's obligation to provide quiet enjoyment was subject to the payment of rent by the tenant. Justice Gilmore also concluded that while government legislation enacted during the shutdown prevented eviction by landlords, it did not suspend the payment of rent (at para 57). Justice Gilmore also found that Hengyun was not applicable because of the different wording of the force majeure clause...