Force majeure clauses in commercial contracts may provide relief to a party who cannot perform their obligations due to the COVID-19 pandemic but what happens when an agreement does not contain a force majeure clause? Such a clause cannot be "implied" in an agreement so it will be necessary to look at other contractual provisions to determine whether delayed performance may be temporarily permitted or the consequences of such non-performance can be reduced. Set out below are the types of clauses that businesses should carefully review in these circumstances.
Timing of Performance and Consequences of Delay - many agreements specify when certain obligations must be performed and what flows from a failure to do so. Often, these provisions will stipulate that the defaulting party has a specific amount of time or grace period to perform after receiving notice of default from the other party.
Termination - most agreements will state the grounds on which a contract may be terminated prior to the expiration of its term. Whether the contemplated non-performance constitutes such a ground must be assessed.
Exclusion of Liability or Limitation of Damages - these clauses may limit the type of non-performance that is actionable and/or the type of losses or damages that may be recoverable from the defaulting party. For example, certain categories of lost profits may not be recoverable even if there has been a default.
Liquidated Damages - some contracts will contain a clause that sets a predetermined amount of money as the amount of damages that the non-defaulting party is entitled to recover upon default. Such a clause may or may not expressly limit recovery to this "liquidated" amount.
Time of the Essence - many agreements will include a clause that expressly states that "time shall be of the essence of this agreement" which generally means that obligations must be performed strictly in compliance with the time periods set out in the agreement. Such clauses are designed to minimize the ability of the defaulting party to assert a given delay or non-performance is minor and does not constitute a material breach of the agreement.
Dispute Resolution - these provisions often set out a step by step procedure and timeline for the resolution of disputes. For instance, good faith negotiation followed by mediation followed by binding arbitration. While these procedures are underway, the consequences of non-performance might be suspended.
Choice of Jurisdiction and Governing Law - many agreements will expressly state the jurisdiction - such as the courts of a specific country or province - which must hear and decide all disputes regarding the agreement and the law to be applied by the decision maker. Procedural and substantive laws vary from state to state and not all contracts being performed in BC are governed by BC law or subject to the jurisdiction of BC courts. The prospect of a dispute being heard by a foreign court applying foreign law must be carefully considered.
The Business Litigation Group at Clark Wilson LLP is ready to assist businesses and their leaders in navigating difficult contractual issues during the COVID-19 pandemic.
Article orignally published on 28 April 2020
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
