COVID-19 Bulletin No. 16: Frustration Of Contracts And Force Majeure Clauses

With the summer 2020 season approaching and COVID-19 coronavirus causing major disruptions to nearly all aspects of life in Ontario, condominium corporations will need to think carefully about whether they can still fulfill their obligations under the contracts that they have entered into.

Some contracts may have a “force majeure” clause written into them, which likely sets out a list of possible events (e.g. war, terrorism, pandemic, natural disaster, other acts of God) that excuses a party from contractual performance. Such a force majeure clause may stipulate that the party is no longer required to perform the contract, can delay performance of the contract to a future time, or is still obligated to perform the contract regardless of the force majeure event. Because of the wide variety of force majeure clauses out there, condominium corporations should consult with their legal counsel to assess the potential impact that COVID-19 might have on their obligations.

If the contract does not have a “force majeure” clause, then the common law doctrine of “frustration” may apply. Broadly speaking, frustration is a supervening event that the parties could not have reasonably anticipated when they entered into the contract. In such cases, the court is asked to intervene to relieve the parties of their contractual bargain, because a radical change in events, which are not the fault of either party, makes the contract impossible to perform.[1] The party claiming that the contract has been frustrated, bears the onus of proving the elements necessary to establish frustration.[2]

In Taylor v. Caldwell,[3] a fundamental case with respect to the frustration of contracts, the plaintiff entered into an agreement with the defendant to rent “The Surrey Music Hall and Gardens” for concerts and entertainment. The Surrey Music Hall and Gardens was accidently destroyed by a fire, which prevented the events from being held. Following the fire, the plaintiff sued the defendant for breach of contract and damages for non-performance.

Ultimately, the English Court of Queen’s Bench excused both parties from their obligations under the contract, because neither party was at fault for the destruction of the music hall.  In the Court’s view, the unexpected event of the fire made performance of the contract by either party, impossible.[4] In rendering the decision, Justice Blackburn stated that the contract was “subject to an implied condition that the parties shall be excused in case, before breach, performance becomes impossible from the perishing of the thing without default of the contractor”.[5] This was the basis for the common law doctrine of frustration.

Where the performance of a contract depends on the continued existence of a specific person or thing, then a condition is implied in that contract; which stipulates that where that person or thing is no longer available, the performance of the contract becomes impossible, and both parties should be excused from their respective obligations under the contract.

Under the doctrine of frustration, the key factual question is whether the contract can still be performed despite the unforeseen event, such as COVID-19; is the contract truly impossible to perform now, or is it merely more difficult to perform? Mere hardship or inconvenience to one of the parties, is not sufficient to justify discharge of the contract.[6]

There are 3 preconditions to the doctrine of frustration: (i) the contingency was not provided for in the contract (i.e. there was no force majeure clause); (ii) the supervening event struck at the root of the contract, making the contract impossible to perform; and (iii) the supervening event was not the responsibility of, or in the control of, either party.[7]

Whether the contract is frustrated or not, will depend on its terms and the surrounding circumstances in each case.[8] Not every major event or catastrophe will trigger the doctrine of frustration. Generally speaking, the following types of events will often invoke frustration: the physical destruction of the contract’s subject matter of the contract by an act of God, a change in the law rendering the performance of the contract illegal, or the involuntary incapacitation of a party to a contract for personal services.[9] However, because the COVID-19 coronavirus pandemic is a wholly-new crisis with unique impacts on various parties, it remains to be seen whether the courts of Ontario will find that COVID-19 validly triggers the doctrine of frustration in contracts.

Even in the face of a global pandemic, parties still have a duty to mitigate their own potential losses. For example, a landscaping provider should not simply invoke the doctrine of frustration and refuse to honour its summer landscaping contract with a condominium corporation due to COVID-19, without having at least explored potential accommodations first (e.g. its employees wearing sufficient medical masks and personal protection equipment to protect themselves and the residents of the community, and/or reducing the number of hours on-site with a consequent reduction in fees).

In Ontario, the common law doctrine of “frustration” is also supplemented by legislative statute, namely the Frustrated Contracts Act, R.S.O. 1990, c. F.34 (the “Act”). Pursuant to Section 2 of the Act, the parties to a contract may be discharged from their obligations if their contract is governed by the laws of Ontario, and the contract has become impossible to perform or has been otherwise frustrated. Parties should speak to their legal counsel regarding whether the doctrine of frustration or the Act applies to them in light of COVID-19.

The full extent and impact of this pandemic to parties in Ontario remains unknown. The courts of this province – whose regular operations, as of the date of this writing, remain currently suspended – have not yet had the opportunity to go through the myriad of cases concerning force majeure clauses and frustrated contracts that are bound to pop up in the months to come due to COVID-19. Nevertheless, condominium corporations should be proactive and consult with their legal professionals to determine if, and how, the outbreak of COVID-19 coronavirus influences their contractual obligations.