COVID-19 And Contracts: Remedies For Non-Performance Of Contractual Obligations

In light of current social distancing measures, the shut down of non-essential businesses, and other government-imposed measures in response to the COVID-19 outbreak, many business and commercial activities have been disrupted and, in some cases, entirely halted.

Due to the various constraints on normal business operations, will parties to commercial contracts be able to rely on the doctrine of frustration, or force majeure clauses, to absolve them of their contractual obligations?

Common Law Frustration

At common law, frustration of contract occurs when "a situation has arisen for which the parties made no provision in the contract and the performance of the contract becomes 'a thing radically different from that which was undertaken by the contract.'"1

In ACT Greenwood Ltd. v. Desjardins-McLeod, the Ontario Court of Appeal held that: "the law of frustration requires that there be a radical change in the nature of the parties' contractual obligations, arising from a situation which the parties had not contemplated in the formation of the contract."2

In G.H.L. Fridman's The Law of Contract in Canada, the author writes:

From the decided cases to which reference has been made it is deducible that the basis of frustration is impossibility. By this is meant physical impossibility and impossibility resulting from a legal development that has rendered the contract no longer a lawful one. However, frustration goes further, and comprehends situations where the contract may be both physically and legally capable of being performed but would be totally different from what the parties intended were it performed after the change that has occurred.[...]3

In some circumstances, it will be clear that the performance of a contract has been frustrated, as the operation of a business has been rendered illegal, due to the government ordered closure of various non-essential businesses.

However, in other circumstances, when a business remains open but, due to the current state of affairs, is unable to operate normally, maintain their normal staff, and maintain normal business operations generally, it is less clear whether the doctrine of frustration will apply.

The key consideration is whether the contracting party seeking to rely on frustration can demonstrate that the events surrounding COVID-19 rendered performance of the contract impossible, or "totally different from what the parties contemplated." This will depend on the particular circumstance of each...