April 30, 2020
The disruptions caused by the COVID-19 pandemic have created an unprecedented level of uncertainty that could fundamentally impact businesses and business owners for the foreseeable future. Contracts of all types - purchase and sale agreements, event agreements, employment agreements, to name a few- will be the subject of heavy debate. Welcome to Part Five our seven-part series: Are Contracts Enforceable Despite COVID-19?
Last week, in our weekly publication in this series, our colleagues discussed notice requirements in force majeure (“FM”) clauses and outlined the potential consequences of failing to comply with these requirements. This week’s article focuses on the requirement to mitigate the duration and effects of an FM event. In essence, we answer the question: “If an event triggers an FM clause, do I have a duty to mitigate the duration and effect of that event?”
In short, absent express contractual language to the contrary, the answer is yes. A party seeking to rely upon a FM provision will usually have to show that it has taken reasonable steps to mitigate the event and its consequence.[1] What constitutes effective mitigation efforts will depend on all of the circumstances, including the nature and subject matter of the contract in question, the facts regarding the FM event, and what could reasonably have been done by the party seeking FM relief, to minimize the time period or magnitude of the effects of the FM event.
In Atcor for instance, the Alberta Court of Appeal emphasized that the real purpose of a FM clause is to deal with, or respond to, unexpected events beyond reasonable human foresight and skill.[2] The Court held that an FM clause is about the effect of an event and not simply the occurrence of an event. Accordingly, those who wish to rely on a FM clause typically cannot simply sit back and claim absolution; rather, absent express language to the contrary, there is generally a duty to use all reasonable efforts to mitigate the effects of the FM event on the ability to perform the obligations under the contract.[3]
Practically speaking, those wishing to rely on a FM clause in the context of the COVID-19 pandemic must be able to demonstrate steps taken to mitigate the reasonably foreseeable impacts of a FM event on their ability to perform. Affected parties should be proactive. Decisions should be carefully considered with regard to all of the circumstances and be updated if, and as, the scenario changes. The factors being considered, the decisions being made, and the reasons for those decisions should be memorialized as the events unfold. This is important because mitigation efforts are generally evaluated based on the circumstances in existence at the time, not with the benefit of hindsight.[4]
Parties seeking to evaluate or challenge FM claims will likely be well-served by requiring contemporaneous records of mitigation efforts to be provided on a real-time basis. Those parties may in fact want to take a more active role, questioning whether certain steps have been considered and why certain steps have or have not been taken.
If COVID-19 is a triggering event for the FM clause in a contract, the duty to mitigate will be shaped by the nature of the contract, the affected obligation to perform, the specific circumstances that gave rise to the FM event, and the reasonably available options for the affected party.
As just one example, COVID-19 may have caused suppliers to miss contractual deadlines in the delivery of products or materials. The duty to mitigate would generally require the supplier to demonstrate its continued efforts to find reasonable alternative means to perform the obligation to deliver, as soon after the deadline as possible. In the construction field in particular, COVID-19 may have caused supply chain disruptions that impacted the ability to complete the project on time. A contractor claiming FM relief will need to demonstrate that it took reasonable efforts to seek alternate suppliers perhaps from alternative locations.
Some contracts specifically outline the extent to which, or manner in which, a party claiming a FM event is required to mitigate. For those contracts that do not have these specifications, the Court of Appeal in Atcor provided some guidance by implying a standard of commercial reasonableness.[5]
There is not a wealth of jurisprudence in Canada that fulsomely analyzes the duty to mitigate in the context of FM clauses.[6] This may well change as a result of disruptions caused by COVID-19.
Regardless of whether you are attempting to rely on a FM clause or are responding to a FM claim, your chances of success can be influenced by acting proactively, based on the specific requirements of the applicable FM clause. JSS Barristers has extensive experience relating to contractual disputes arising from the interpretation of FM clauses and the duty to mitigate.
Next week we will provide you with further guidance in the FM field, focusing on causation including the effects of simultaneous events, when some qualify as a force majeure event, and others do not.
Stay tuned and stay safe.
Bryan C. Duguid QC, FCIArb is a partner at JSS Barristers. Click here for Bryan’s bio.
William Katz is an associate at JSS Barristers. Click here for William’s bio.
[1] Atcor Ltd v Continental Energy Marketing Ltd, 1996 ABCA 40, [1996] 6 WWR 274 (“Atcor”) at paras 29-30; Cortina Foods Inc v Bari Cheese Ltd, 1996 CanLII 1470 (BCSC) (“Cortina”) at paras 53-54; Roberge v 1102940 Alberta Ltd, 2012 ABQB 717 (“Roberge”) at paras 68-70 and 90-100.
[2] Atcor at para 29.
[3] Atcor at paras 29-30.
[4] Tangye v Calmonton Investments Ltd, 1988 ABCA 206 (CanLII) at para 24; Forsberg v Naidoo, 2011 ABQB 252 at para 494; West Edmonton Mall Ltd v McDonald's Restaurants of Canada Ltd, [1993] AJ No 765, 144 AR 331 at para 44.
[5] Atcor at para 30; see also Roberge at para 90 and Cortina at paras 53-54.
[6] For instance, see Atcor at para 30.
DISCLAIMER: This publication is not legal advice and should not be relied upon as legal advice. While we intend to provide generalized information that is accurate as at the date of publication, it is possible that the information contains errors or omissions. We disclaim any liability for errors or omissions. Actions taken, or not taken, in response to legal concerns should be guided by individualized legal advice provided within a solicitor client relationship. The creation of a solicitor client relationship can be discussed upon direct contact with a lawyer.