Force Majeure Provisions in the Context of Outbreaks and Protests

Jackie van Leeuwen, Student-at-Law

Force majeure provisions are often overlooked, but when drafted and invoked properly, they can be useful risk allocation tools. In the construction context, they can be used to allocate risk in case of a shortage of raw materials, extreme weather or a labour strike, among other events. Force majeure clauses excuse a party’s performance under a contract in full or in part, to the extent that the failure to perform is due to certain circumstances outside of the party’s control. Generally, reliance upon a force majeure clause requires that one or more of the following conditions be fulfilled:

1. the specified event is beyond the control of the claiming parties;
2. the event prevents or delays, in whole or in part, the performance of the contract;
3. the event makes performance of the contract imprudent, substantially more difficult or substantially more expensive;
4. the event was not due to the fault or negligence of the claiming party; and
5. the claiming party has exercised reasonable diligence to overcome or remove the specified force majeure event.^[1]

In the case of number 3, it is important to note that parties typically cannot avoid their contractual obligations solely because performance has become more costly or time-consuming than anticipated.^[2] There would likely need to be another factor working to prevent performance of the contract in order for a party to rely on a force majeure provision. There is a difference between a contract that can no longer be performed, where the doctrine of frustration is applicable, and a force majeure clause. If a contract becomes impossible to perform, it may be open for a party to argue that it has been frustrated and the obligations of the parties are at an end. However with a force majeure clause, the contract is not at an end. There are ongoing obligations, although the parties may be excused from penalties or damages due to delayed performance or reduced supply as examples.

When interpreting a force majeure provision, the court will look to the circumstances and the relevant contractual provision to determine whether the clause applies to excuse the party seeking to rely on it from performance of a contractual obligation. In the leading Canadian force majeure decision, Atlantic Paper Stock Ltd. v. St. Anne-Nackawich Pulp and Paper Company Limited (“Atlantic Paper”), the Supreme Court of Canada applied a strict interpretation of the force majeure clause in the contract between the parties and determined that reliance on a force majeure clause requires that the event be beyond the control and reasonable foresight of the contracting parties, and that the event renders performance of the contractual obligations impossible.^[3]

In Atlantic Paper, St. Anne had contracted with Atlantic to purchase waste paper to be used for corrugating medium, subject only to, among other things, “the non-availability of markets for pulp or corrugating medium”. St. Anne subsequently advised Atlantic that the paper was no longer needed and tried to rely on the “non-availability of markets” portion of the force majeure clause to argue that its inability to find a profitable market for its finished product constituted an event of force majeure. The Court rejected this argument because the markets for waste paper remained materially unchanged from the time the parties contracted. In addition, the parties were aware of the state of the markets at the time the contract was entered into and the primary cause of the failure of St. Anne’s corrugating medium was lack of an effective marketing plan. Therefore, the event was foreseeable and St. Anne was not allowed to rely on a condition it had brought upon itself. Although performance would have caused St. Anne commercial hardship, performance would not have been impossible.

While Atlantic Paper introduced the impossibility standard, a 1996 decision out of the Alberta Court of Appeal, Atcor Ltd. v. Continental Energy Marketing Ltd. (“Atcor”), emphasizes the need to look at the specific circumstance of the party invoking force majeure.^[4] Atcor contracted with Continental to supply natural gas through a pipeline operated by a third party. The agreement had a force majeure clause which listed force majeure events as including breakages of pipelines. Due to breakdowns and repairs, the third party was unable to provide the usual quantities of gas to Atcor, who was in turn unable to perform its contract with Continental. Atcor selectively declared force majeure with its customers so that some received a full supply and others, like Continental, received none and had to purchase elsewhere at a higher rate. At trial, Atcor was allowed to rely on the force majeure clause in its contract with Continental.

On appeal, the Court of Appeal articulated the general principle that is sometimes referred to as the ‘commercial reasonableness standard’: “A supplier need not show that the event made it impossible to carry out the contract, but it must show that the event created, in commercial terms, a real and substantial problem, one that makes performance commercially unfeasible.”^[5] Put differently, “… in the absence of clearer words to the contrary, a supplier is not excused from non-performance by a force majeure event if the sole consequence of that event is to drive him to buy from another supplier and make a smaller profit. He is excused, however, if the solution in all the circumstances is not reasonable.”^[6] The Court of Appeal set aside the lower court’s decision and ordered a new trial on the basis that there was not enough evidence as to how onerous it would be for the supplier to meet its obligations. The parties settled before trial.

Despite the ‘commercial reasonableness’ standard articulated in Atcor, it appears that the impossibility standard prevails in Canada. There is no statutory concept of force majeure in Canadian common law. The common law doctrine of force majeure may have arisen in part to overcome the narrow scope of the doctrine of frustration.^[7] Although force majeure is a popular topic in academic literature, it is rarely dealt with by Canadian courts. This may explain why force majeure has not displaced the doctrine of frustration.

The “Outbreak” Example

‘Standard’ force majeure clauses may not adequately capture the risks present in the modern world. In “Is SARS an ‘Event’ that Triggers a Force majeure Clause?”, Mario Nigro and Marianna Smith discuss how outbreaks like SARS are treated in the context of force majeure clauses.^[8] Such events may fall under the phrase “epidemic” or “emergency”, but there is difficulty in identifying the “unexpected” event that triggered the force majeure. The SARS outbreak was not instantaneous, but was evidenced over a period of several weeks. In order for a party to rely on a force majeure clause in the case of an outbreak like SARS or COVID-19, the clause will have to be properly drafted to include such outbreaks and the parties will have to demonstrate that they acted reasonably over the development of the outbreak to mitigate its effects on performance of the contract.

In “Ebola outbreak: is it a force majeure event? A regional pandemic”, Paul Giles and Julian Berenholtz write that while an Ebola outbreak may be considered a force majeure event in some circumstances, such an outbreak may fall short of a force majeure event because it could be considered foreseeable due to the fact that in recent history and in certain parts of West Africa, there have been Ebola outbreaks, although occasional, confined and not necessarily in the same countries as where outbreaks have previously occurred.^[9] Companies should consider which types of risk events have already occurred in the geographic region that construction, supply and/or trade will be taking place. Such risks may be considered foreseeable and can be addressed with other risk allocation provisions in a contract, even if they do not qualify as force majeure events.

Recently, Chinese authorities have closed factories and ordered lockdowns in the wake of COVID-19. Companies that buy and sell goods in the Chinese market are considering the legal defence of force majeure, including China’s biggest importer of liquefied natural gas. The China Council for the Promotion of International Trade (“CCPIT”) has issued over 1,600 “force majeure certificates” to companies in over thirty sectors to shield them from legal damages arising from COVID-19.^[11] According to the CCPIT, the certificates are recognized by government, customs, trade associations and enterprises of more than 200 countries and regions. For companies who do not have the benefit of relying on a certificate, if a force majeure clause provides relief in the event of unforeseen “acts of government”, this may allow a party to invoke force majeure in the case of government ordered closure of factories.^[12] Unlike SARS or Ebola, COVID-19 is a “new” outbreak and thus, may be less likely to be deemed foreseeable, depending on when the contract containing the force majeure provision was executed. When it comes to health-related force majeures, contract drafters can consider words such as “outbreak”, “epidemic”, “plague”, and “quarantine” to capture both an outbreak itself and the effects of the outbreak.

With any claim of force majeure, the court will look to whether the circumstances of the force majeure were known to the parties at the time the contract was entered into. With the outbreak example, this raises the question of the level a virus or disease had reached when the contract was entered into – had 10 people been infected? 100? How many infected people raise an illness to the level of an “outbreak” or an “epidemic”? This is akin to the issue of climate change – at what point will the events and material shortages caused by our changing climate cease to be considered force majeures and be considered “foreseeable”? How about major changes to the environmental laws or regulations which apply to a project?

Steel Tariffs and Material Shortages

On March 23, 2018, the U.S. government imposed new tariffs on steel and aluminum under Section 232 of the Trade Expansion Act of 1962. The tariffs became effective on March 23, 2018 and impose a 25% tax on steel and a 10% tax on aluminum imported into the United States from any country other than Canada and Mexico. Numerous state and federal courts in the U.S. have refused to enforce or apply force majeure clauses where governmental action only affects the profitability of a contract, but does not actually prevent a party from performing.  Accordingly, in the context of steel and aluminum tariffs, it seems likely that force majeure would not be applicable unless the tariffs create market conditions that drastically decreased the supply of steel and/or aluminum so as to make performance under the contract virtually impossible.^[13]

The steel industry has formulated risk allocation clauses to specifically address steel shortages, so as to avoid reliance on a force majeure clause. For example, a provision written on behalf of the American Institute of Steel Construction provides as follows:

The subcontract price is based upon the agreed prices and surcharges for the steel types and shapes necessary for the project and posted and made publicly available by [steel mill] on [date]. Notwithstanding anything herein to the contrary, any increases or decreases in the price of the steel ordered by subcontractor for the project, or any additional surcharges imposed on the steel ordered by subcontractor for the project, after [date] shall result in a corresponding dollar-for-dollar increase (or decrease) in the subcontract price.

In the Supreme Court of Nova Scotia decision M.A. Hanna Company v. Sydney Steel Corporation, Sydney Steel Corporation (“Sysco”) was a buyer of iron ore pellets under a long-term supply contract with M.A. Hanna Company (“Hanna”).^[14] Hanna claimed damages for Sysco’s refusal to accept the quantities of iron ore pellets specified in their contract. Sysco argued, among other things, that the crash in the steel market and Sysco’s plan in response to the crash, which was to change its steelmaking technology so as to reduce its demand for pellets, was a force majeure event, and also argued frustration. The Court rejected the frustration argument on the basis that although performance of the contract by Sysco had become commercially unprofitable, the changed market did not render performance physically or legally impossible. However, the Court interpreted the force majeure clause, which was drafted generally and broadly, as applying to the changed circumstances of the steel industry.

The Singapore Court of Appeal decision Holcim (Singapore) Pte Ltd. v. Precise Development Pte. Ltd. articulates a ‘commercial practicability’ approach to interpretation of force majeure clauses in commercial contracts. The case involved a supply contract for ready-mixed concrete (“RMC”). A shortage of the raw materials needed to manufacture RMC was caused by a government-imposed ban on the export of sand from Indonesia to Singapore.^[15] The court found that an event of force majeure was made out in the circumstances because the sand ban constituted a disruption to the availability of sand that placed the manufacturer in a commercially impracticable situation. The events were also found to have been beyond the control of the manufacturer as it had taken reasonable steps to mitigate the effect of the sand ban on its production of RMC.^[16] Notably, the clause interpreted as a force majeure clause did not include the words “force majeure”. In relation to a commercial contract, Andrew Phang Boon Leong JA determined [emphasis added]:

[W]here a commercial transaction is involved, the process of ascertaining whether or not a particular set of circumstances constitutes a ‘disruption’ or ‘hindrance’ within the meaning of the force majeure clause concerned ought to be informed by considerations of commercial practicability (bearing in mind, of course, the particular context in which the contract had been entered into (including any relevant commercial practice in the trade and/or resultant dislocation in the trade)). Hence, if, for example, events occurred which, whilst not preventing literal performance of the contract as such, were such as would render continued performance commercially impractical, there would, in our view, generally be a ‘disruption’ or ‘hindrance’ within the meaning of the force majeure clause in question.^[17]

In an International Chamber of Commerce case, the Tribunal concluded that a seller’s temporary suspension of deliveries was justified based on force majeure.^[18] The seller had procured a certificate from the local Chamber of Commerce stating that a drought had led to a decrease in raw material yield and that those circumstances were “beyond human control” and prevented the seller from performing its contractual obligations. The force majeure provision at issue did not specify drought as a force majeure event, but it was determined that drought fell under the categories of “natural catastrophes” and “other circumstances outside control” in the force majeure provision.

In Fishery Products International Ltd. v. Midland Transport Ltd. (“Midland”), Midland was transporting fish to Ontario and Quebec and became stranded on a highway because of a trucker protest.^[19] The fish became unfit for consumption. Midland attempted to rely on the “strike” portion of the force majeure clause to  be excused from performance. However, the argument was rejected because “strike” has a precise legal meaning and the trucker protest did not fit within it.

What happens if a supplier is able to supply some of the contracted-for raw material to its purchasers, but not enough to supply it to everyone it has contracted with? In Androscoggin Energy LC v. Producers Marketing Ltd., a large number of Producers’ gas wells were shut-in by an Alberta regulatory board and force majeure was declared by Producers.^[20] The Alberta Court of Queen’s Bench found a duty to mitigate the effects of the force majeure event, writing “If the seller is unable to supply gas due to an event of force majeure, any reduction in supply is to be apportioned among the various purchasers who share similar contracts as the buyer on a pro rata basis.”^[21]

There are current supply chain issues in Canada, both a result of COVID-19 and due to another potential force majeure event which is occurring. At the time of writing, protests are being held in solidarity with a blockade of the Coastal GasLink pipeline in northern British Columbia by members of the Wet’suwet’en Nation. The protests have blocked roads and port terminals, caused major rail shutdowns and impacted the trucking industry. In some cases, trucks are being used to ship goods and materials instead of rail. However, shipping by truck tends to cost more. The effects of the protests are being felt by the construction industry as shipments, and in turn projects, are delayed. Shortages of materials and other supply chain issues can make it difficult for parties to construction and supply contracts to negotiate a favourable price. However, this does not necessarily mean that a party can avoid its contractual obligations by invoking force majeure. Protests have frequently been recognized as force majeure events but, as Midland demonstrates, the wording of the force majeure provision is critical.

Duty to Mitigate

Even if an event is considered unexpected, courts will impose a duty to mitigate the event and its effects. The extent of that duty is unclear. Some contracts specify that a party must exercise “due diligence”. In Atcor, the duty to mitigate was limited to an implied standard of “commercial reasonableness”. Such standards are difficult to clearly define and can result in litigation. Parties should specify in their contracts the extent to which a party declaring force majeure is required to mitigate and can also specify what they are not responsible for mitigating in terms of the effects of a force majeure event, for example the settlement of strikes. Parties can also determine whether the party declaring force majeure has a duty to mitigate only the force majeure event itself or both the event its effects. If parties wish to contract out of the duty to mitigate, clear and unequivocal language should be used.

Drafting Suggestions

Force majeure provisions can be an important part of a risk allocation plan. When drafting, use specific and concise language and sufficient detail to ensure risk is being allocated as intended. There is a fine line between a provision that includes everything the parties intended and one that is too broad to be useful, as articulated by the Alberta Court of Appeal in Atcor:

…a broad list of force majeure events offers the risk of turning the bargain on its head if it can be used as an escape clause. When the list is broad, one reasonably expects to see in the contract that the event is tied to meaningful consequences. A good contract would expressly deal with several possible results, and different levels of obligation to mitigate, as did some samples from the trade put before the trial judge. This unfortunately did not. We are told only that, as a prerequisite to invocation, the invoking party must show a causal tie and also show it did not “fail to remedy the condition”. Those terms, unfortunately, are not very specific. It was a choice of words that assured litigation.^[22]

Parties who feel that they may need some flexibility down the road will often seek to expand the ambit of force majeure clauses, while those who want to hold others to the strict terms of the contract will try to limit the clause to extraordinary circumstances.

Each construction project carries its own set of risks, depending on the type of project and its location. Boilerplate force majeure provisions are not sufficient to capture the risks present on every project or in every supply chain. Rather than taking a “cut and paste” approach to force majeure provisions, parties to construction contracts should seek legal advice and draft with their specific region and project in mind each time a new contract is entered into. Be sure to include and clearly describe trigger events, duration, notice requirements and what the effect of the events described in the clause are to have on contractual obligations. Parties should also consider how the force majeure provision interacts with other risk allocation provisions in their contracts. In terms of a project’s supply chain, think about where materials and supplies are coming from and plan accordingly. Avoid reliance on single sources where possible. Consider proactive procurement or built-in float for materials susceptible to interruption by force majeure events. While force majeure clauses can be used to mitigate the effects of extraordinary circumstances, they do not take the place of a resilient supply chain. Properly drafted force majeure clauses can help manage parties unexpected events, while maintaining their contractual relationship.