A second look: Force Majeure and postpandemic business challenges

The world’s global, collective response to COVID-19 leading to the end of many public health orders, was to be the light at the end of the tunnel for Saskatchewan businesses. Alas, while the public health effects of COVID-19 are still apparent today, businesses are now faced with a host of post-pandemic challenges, including inflation, labour shortages, and supply chain disruptions. In this article, McKercher LLP overviews important Canadian contractual clauses applicable to these post-pandemic challenges.

It is important to keep in mind, however, that Saskatchewan supply chains often extend beyond Canadian borders, and the laws of Canada may not apply to the full supply chain. Businesses should not assume that Canadian laws apply to all their commercial dealings. It’s also important to remember that if your business operates in the middle of a supply chain, a contracting party’s upstream and downstream obligations need to be assessed in totality.

As a starting point, contracting parties are, by common law, have a duty to act in good faith and to perform their agreed obligations. Lawful excuses for non-performance exist but are available in only limited instances. A contract may include an express force majeure clause, which typically provides that no party to an agreement should be held to perform its obligations to the extent that performance is prevented by certain extreme circumstances outside that party’s control. If it does, that force majeure clause will allocate the risk of non-performance or delayed performance among the contracting parties.

Often contracting parties negotiate a list of force majeure events. If the specified event occurs and causes the non-performance of a party, the impacted party is excused from performance and avoids breach of contract and further liability ensuing therefrom. If the specified event is not listed, this means that the parties allocated the risk of the specified event to the impacted party. Additionally, contracting parties typically include open-ended or catch-all language, such as: “acts beyond their reasonable control”, “Acts of God”, or “such other similar (or dissimilar) events.”

Christopher J. Masich

When entering contracts in the wake of the pandemic and post-pandemic challenges, special care and attention are needed when including and scoping a force majeure clause. In most cases, the contracting parties agree to limit the force majeure events to those events that are outside of the control of the impacted party. Most relevant today are the listed events of (1) epidemics, pandemics and public health emergencies, (2) organized labour activities such as strikes and work slowdowns, and (3) and shortages of power, supplies, infrastructure, or transportation. Often a contracting party will strongly resist listing events that are reasonably within the other party’s control. The nuance, however, reveals in the degree to which these events are foreseeable and capable of control at the time of entering into a contract today.

Unless negotiated otherwise, a contract will often exclude events that may have reasonably been provided against, avoided, or overcome. This may affect the allocation of risks not listed that the parties were aware of at the time of contract negotiations or new contracts entered into after the specified risk becomes well known and therefore foreseeable. Notwithstanding, a contracting party can negotiate the inclusion of known events with foreseeable impacts if their negotiating power and deal circumstances allow for it.

Canada’s top court has described the effect of a force majeure clause as “generally [operating] to discharge a contracting party when a supervening, sometimes supernatural event, beyond control of either party, makes performance impossible.” However, Canadian courts have held that a supervening event that makes performance more expensive does not give rise to force majeure. Contracting parties will have a duty to mitigate, meaning that impacted parties, even if they can rely on a force majeure event, must mitigate the delayed performance by working around the impediment if that is feasible.

Businesses should not assume that it is easy to invoke force majeure as an excuse for non-performance. Therefore, it remains necessary to ensure these risks are fully identified and adequately mitigated in all appliable parts of the contract, including the force majeure clause and beyond.

As labour shortages, supply chain disruptions, and other post-pandemic challenges arise, businesses will want to review their existing contracts, particularly the force majeure clause, in anticipation of an excusable delay. Additionally, as businesses enter into new contracts, they must ensure that those listed force majeure events remain available in the face of these now known and foreseeable challenges.

Chris Masich is a Partner practicing in McKercher LLP’s Natural Resources Practice Group. Chris maintains a commercial transactions and project development practice focusing on Saskatchewan’s key economic sectors – energy, mining, natural resources and agricultural.

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