North of 60 Blog

The governments of each of the Yukon, Northwest Territories and Nunavut have implemented restrictions on who can enter their respective territories and what manner of self-isolation procedures those who are permitted entry must follow upon their arrival.

As these COVID-related travel restrictions remain in place, many business may find themselves, their contractors or their suppliers incapable of performing contractual obligations. Many contracts for the provision of goods or services will contain clauses that may relieve a party of its obligations in the event of natural disaster, act of god or other events out of a party’s control – events of force majeure.

Parties use force majeure clauses in commercial contracts to allocate risk and responsibility in the face of unexpected events out of the control of either party. Whether a force majeure clause will allow an owner or contractor to cease performance of contractual obligations without breaching the contract will depend on the specific force majeure clause in the contract, the event in question, and its impact on the particular service or good, which cannot be performed or delivered.

While the applicability of a force majeure clause will require a case-by-case analysis, force majeure clauses will generally address three issues:

• what constitutes an event of force majeure;
• what impact the event must have on a party to justify invoking the clause; and
• what effect will the invocation of force majeure have on contractual obligations.

Triggering Event

Force majeure provisions will sometimes include ‘pandemic’ as a triggering event. More common, however, is a list of unexpected events such as natural disasters, labour strikes and other events beyond a party’s control.

Even if ‘pandemic’ is not included in the list of force majeure events, it could be caught by ‘events beyond a party’s control’. In any event, it is likely that the restrictions resulting from COVID-19 will fall within many definitions of force majeure.

It is important to note, however, that most force majeure provisions make clear that an inability to pay cannot, by itself, constitute an event of force majeure.

Often, a force majeure provision will require that the party declaring force majeure give notice to the other party with a certain period of time. This is frequently coupled with a requirement for the declaring party to indicate what steps it is taking to mitigate the effects of the force majeure event. Parties should pay particular attention to the timing and form of a notice requirement as failure to comply may prevent the party from relying on force majeure.

Impact on Invoking Party

The party invoking force majeure then has the burden of proving that the event, in this case COVID-19 related travel restrictions, is preventing it from performing its contractual obligations. Generally, these provisions are drafted to require that the event delays or threatens to delay the performance of contractual obligations and that the party seeking to invoke force majeure take commercially reasonable steps to mitigate the effects.

Commercially reasonable efforts do not require a party to make every effort or even efforts to the point of undue hardship. However, the party relying on such clause will need to demonstrate that it has pursued all avenues and undertaken the level of effort that a reasonable business would have used in similar circumstances.

Some force majeure provisions can be quite specific as to the required effect on a party. For example, it would not be unusual to see language in a supply contract that the event of force majeure interfere or disrupt the supplier’s production or supply chains. Narrowing the scope of the force majeure in this manner would require the supplier to demonstrate clearly how the event of force majeure is preventing its performance and may prevent a supplier from declaring an event of force majeure because it is unable to pay their own suppliers.

Effect of Force Majeure Declaration

Generally, the effect of a declaration of force majeure is to suspend the declaring party’s contractual obligations. As noted above, however, there is often a requirement for the declaring party to use commercially reasonable efforts to mitigate the effect of the event of force majeure.

Parties entering into a contract with a force majeure provision may consider giving either or both party a right to terminate the agreement if the event of force majeure prevents the performance of the contract for a certain period of time. That said, an event of force majeure would likely affect potential suppliers of goods and services similarly, so there may be no advantage for a party to terminate only to find there are no other suppliers available.

Nevertheless, given the uncertainty around the duration of the restrictions in the Territories, parties should seek counsel on how to interpret force majeure provisions and when drafting, to find the right balance between flexibility and the predictability of enforcement.