The Interpretation of Force Majeure Clauses in an Increasingly Frustrating World: The Need for Reform

  • October 13, 2022

by Jacob Lokash, winner of the 2022 Atrium Law Student Essay Contest

At its simplest, a contract is a legal instrument used to allocate risk between parties. When supervening events are such that performance no longer falls within that allocation of risk, however, performance is said to be impossible and the contract frustrated at common law. Although the circumstances which lead to a finding of frustration are few and far between, a contract that is found to have been frustrated is treated as at an end from the date of impossibility – excusing both parties from further performance. The doctrine of frustration, therefore, is one of limited applicability and one which, when applicable, has serious legal consequences.

At least in part response to these limits, force majeure clauses – which expressly allocate risk for supervening events – have become increasingly popular in commercial contracts, especially long term building contracts. Force majeure clauses work either to displace the doctrine of frustration or to provide for relief in respect of non-frustrating events. Courts, however, have allowed their understanding of the doctrine of frustration to colour their interpretation of force majeure clauses with the result that contracting parties remain unable to completely allocate risk for supervening events contrary to freedom of contract.

The practical significance of this fact is augmented by the increasing number of supervening events that affect parties, such as owners and contractors, in the performance of their contractual obligations. This past year alone has seen major public-health crises, the acute effects of climate change, global supply chain issues and political unrest both at home and abroad.

By accurately outlining the doctrine of frustration and highlighting the issues that arise in the jurisprudence with respect to the interpretation of force majeure clauses, parties will certainly be better able to draft contracts courts will enforce; and yet even the most carefully worded force majeure clauses represent an incomplete solution to the inability of parties to completely allocate risk for supervening events. For this, courts will have to fundamentally shift their thinking on the interpretation of force majeure clauses.

DOCTRINE OF FRUSTRATION

Traditionally, contracts were absolute. Parties were bound to perform even if performance became impossible. The source of this absolute liability is often associated with the leading case of Paradine v Jane. There, the plaintiff sued the defendant for rent in arrears. In turn, the defendant argued that it had been ousted from the property by enemy forces, that it received no benefit from the lease and, therefore, that it was not liable for any rent owing. The Court of King’s Bench disagreed. By promising to rent the plaintiff’s property without express qualification, the defendant was by that very act bound to perform “notwithstanding any accident by inevitable necessity”.1 The contract could have provided against enemy forces but did not. Pacta sunt servanda. Agreements must be kept.2

Gradually, the common law turned away from absolute liability toward the doctrine of frustration. In this respect, Taylor v Caldwell is seen as the turning point. There, the plaintiff contracted to rent the defendant’s music hall for the purpose of holding a series of concerts. Before the first concert, and without default of either party, the music hall unexpectedly burned to the ground. The plaintiff sued the defendant for the losses it incurred as a result of having to cancel the concerts.3

The Court of Queen’s Bench began its decision by restating the traditional common law rule: parties must perform or pay damages for not performing, although in consequence of unforeseen circumstances performance becomes impossible. This rule, it can be said, represents the baseline assumption of risk inherent in every contractual undertaking, and yet “it is only applicable” the Court notes “when the contract is positive”.4 Where it is clear that the parties at contract formation must have known performance would be impossible unless, at the time for performance, some particular state of affairs continued to exist, the contract is not to be construed as positive but as subject to an implied term that the parties are excused from further performance where, as a result of the state of affairs ceasing to exist without default of either party, performance becomes impossible. For a contract to be frustrated, therefore, there must be something which limits the baseline assumption of risk as between the parties such that performance can no longer be said to fall within that assumption of risk.5

When the music hall burned unexpectedly, the grounds for performance changed. To hold the defendant liable for breach of contract would be to impose upon it an obligation radically different from that which it must reasonably have contemplated at contract formation. Non haec in foedera veni. It was not this that I promised to do.6

It is important to note that the contract in Taylor was deemed unenforceable because performance ‘as contractually contemplated’ was impossible. It may well have been physically possible to rebuild the music hall in time for the first concert. Such performance, however, was not of a kind within the allocation of risk the defendant assumed – an allocation of risk based on the assumption that the music hall would continue to stand at the time for performance as it did at contract formation.7

Indeed, this concept remains central to the doctrine of frustration. In Summers Transport Ltd v GM Smith Ltd, the plaintiff undertook to deliver a transformer to the Newfoundland and Labrador Hydro Generating Station. The transformer was to be sent by rail from Winnipeg to Montreal and transported by ship from there to St. John’s. To load the transformer at Montreal, the plaintiff contracted to rent a lowbed trailer from the defendant. The space within which the trailer had to be maneuvered aboard ship, however, was far more restricted in area and configuration than planned. The Supreme Court of Newfoundland and Labrador held that the contract had been frustrated. Performance as contractually contemplated was impossible. Importantly, the plaintiff could have physically loaded the transformer at Montreal – but not without great risk. Had the trailer become stuck, it would have been impossible to free it without dismantling it piece by piece. Had the transformer been damaged in the process, it would have been necessary to return it to Winnipeg for inspection.8

In the century and a half since Taylor, courts have tried to set down one concise statement of the doctrine of frustration. The House of Lords (“HL”) did exactly that in Davis Contractors Ltd v Fareham Urban District Council when it wrote: “frustration occurs whenever the law recognizes that without default of either party a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract”.9

Davis Contractors Ltd contracted Fareham Urban District Council to build 78 houses within eight months for a sum of £85,000. Owing to shortages in labour and materials, however, it took 22 months and £115,000 to complete construction. In an attempt to recover its costs, Davis Contractors argued that the contract had been frustrated and, therefore, that it was entitled to payment on a quantum meruit basis. The HL disagreed. The doctrine of frustration is not called into play simply because performance is made more onerous or costly. Rather, there must be a change in the significance of the obligation such that the thing undertaken would, if performed, be a thing radically different from that which the parties must reasonably have contemplated at contract formation. The Court continued, “the data for decision are, on the one hand, the terms of the contract, read in light of the then existing circumstances, and on the other hand the events which have occurred”.10

The delay was not the result of any new state of affairs which the parties could not reasonably have foreseen. The contract was entered shortly after World War II. The possibility of shortages in labour and materials was well before the parties and could have been made the subject of express qualification. More importantly, the contract contained a liquidated damages clause. It would be a misuse of legal terms, therefore, to say that the contract had been frustrated when Davis Contractors had expressly assumed risk for delays.11

This approach was explicitly endorsed by the Supreme Court of Canada (“SCC”) in Peter Kiewit Sons Co v Eakins Construction Ltd. There, the British Columbia Bridge Authority contracted Peter Kiewit Sons Coto build the substructure of a bridge. In turn, Peter Kiewit subcontracted Eakins Construction Ltd to drive certain piles. At the time of tender, the plans specified that the piles were to be driven to a safe bearing capacity of 20 tons. Prior to construction, however, the plans were amended by the Bridge Authority, adding the requirement that the piles be driven past the sheet piling. Eakins protested that the amended plans provided for pile driving outside the terms of its contract. Peter Kiewit disagreed and ordered that the work be done at no extra cost. Eakins complied, but argued that it was entitled to payment on a quantum meruit basis; namely, because the contract had been frustrated by the amendment. “How can a dispute over a question whether a certain item of work is an extra bring about frustration of the whole contract when the question of extras is covered in elaborate detail by the contract itself?” the Court asked rhetorically.12 The risk of “overdriving” was fully contemplated by the contract. As such, the circumstances in which performance was called for (i.e. in accordance with the amended plans) did not render it a thing radically different from that which was undertaken by the contract.13

More recently, in Naylor Group Inc v Ellis-Don Construction Ltd, the Oakville-Trafalgar Memorial Hospital contracted Ellis-Don Construction Ltd to build an addition to its hospital. In turn, Ellis-Don subcontracted Naylor Group Inc to complete the electrical portion of the work. Prior to construction, however, the Ontario Labour Relations Board released its decision concerning the ongoing dispute between Ellis-Don and the International Brotherhood of Electrical Workers. The Board found that Ellis-Don had committed to using electrical subcontractors whose employees were affiliated with the International Brotherhood. Ellis-Don was required, therefore, to terminate its subcontract with Naylor Group whose employees were not so affiliated. Naylor Group sued Ellis-Don for breach of contract. In defence, Ellis-Don argued that the contract had been frustrated by the Board’s decision. The SCC disagreed. The Board’s decision simply recognized and affirmed Ellis-Don’s obligation to the International Brotherhood – it did not create it. Accordingly, when Ellis-Don subcontracted Naylor Group to complete the electrical portion of the work it was promising work it had already bargained away. That is to say, there was no change in the significance of the obligation (i.e. subcontracting Naylor Group to complete the electrical portion of the work) such that the thing undertaken would, if performed, be a thing radically different from that which the parties must reasonably have contemplated at contract formation.14

What the cases above illustrate is that there is no such thing as a “classic” frustration case; it is always a question of degree. Nevertheless, it may be said that the doctrine of frustration is one of limited applicability and one which, when applicable, has serious legal consequences.15

FORCE MAJEURE CLAUSES

Force majeure clauses – which have developed at least in part response to these limits – are intended to expressly allocate risk for supervening events that affect parties in the performance of their contractual obligations.

Typically (but not invariably), force majeure clauses will specify the supervening events that trigger relief followed by catch-all phrasing designed to cover events not specifically listed, the impact those events must have on the ability of the party invoking the clause to perform its contractual obligations and the legal effect the clause will have if successfully invoked.16

The triggering events, requisite level of impact and legal effects specified in force majeure clauses are often unique to the circumstances in which the contract was entered such as the industry in which the parties operate. For example, force majeure clauses in building contracts often list labour disputes, unusual delay by common carriers, exceptionally adverse weather conditions, wars, riots and natural disasters such as wildfires, earthquakes and floods as triggering events; require that the party invoking the clause be prevented in its performance as a result; and make clear that the clause entitles the party only to an extension of time (as opposed an increase in contract price).17

Compared to the doctrine of frustration, then, force majeure clauses have two principal benefits. First, they can be used to displace the doctrine of frustration by dictating that the contract is to remain in effect notwithstanding the occurrence of some frustrating event. Second, they can be used to provide for relief on the occurrence of some event which would otherwise have had no effect on the contractual obligations of either party because the change in circumstances was not so radical as to frustrate the contract at common law.18

If, then, force majeure clauses allow parties to expressly allocate risk for supervening events,  freedom of contract dictates that that risk, having been so allocated, will not to be reallocated by the courts (concerns of duress and unconscionability aside). A review of the jurisprudence reveals, however, that this is not always the case. Rather, courts have allowed their understanding of the doctrine of frustration to colour their interpretation of force majeure clauses – enforcing them only insofar as the two accord.

Most force majeure clauses operate to discharge a party from its contractual obligations when a supervening event beyond the control of either party makes performance impossible. While this is by no means true of all force majeure clauses, courts have nevertheless been quick to import these requirements – requirements which can only be explained by reference to the doctrine of frustration – where they are otherwise absent.

The leading case on the interpretation of force majeure clauses in Canada is Atlantic Paper Stock Ltd v St Anne-Nackawic Pulp & Paper Co. There, Atlantic Paper Stock Ltd contracted to sell St. Anne-Nackawic Pulp & Paper Co ten thousand tons of secondary fibre a year for ten years. Just after a year, St. Anne advised Atlantic that it would no longer accept secondary fibre. Accordingly, Atlantic sued St. Anne for breach of contract. In defence, St. Anne pleaded non-availability of markets for pulp or corrugating medium within the meaning of cl. 2(a):

“St. Anne warrants and represents that its requirements under this contract shall be approximately 15,000 tons a year, and further warrants that in any one year its requirements for secondary fibre shall not be less than 10,000 tons, unless as a result of an act of G-d, the Queen’s or public enemies, war, the authority of the law, labour unrest or strikes, the destruction of or damage to production facilities, or the nonavailability of markets for pulp or corrugating medium [emphasis added]”.19

Noting that force majeure clauses generally operate to discharge a party from its contractual obligations “when a supervening event beyond the control of either party makes performance impossible”, the SCC found that cl. 2(a) was inapplicable. There were no available markets for pulp or corrugating medium because St. Anne lacked an effective marketing plan. In other words, St. Anne was the author of its own misfortune and, therefore, could not rely on cl. 2(a) for relief.20

In Tom Jones & Sons Ltd v R, the Province of Ontario invited bids for the construction of an office tower. Shortly after winning the bid, Tom Jones & Sons Ltd notified the Province that it was unable to arrange financing for the project and, therefore, could not complete construction. The Province sued Tom Jones for breach of contract. In defence, Tom Jones relied on para. 7.11 which provided for relief in the event that it was “prevented or delayed in construction or completion”.21 Citing Atlantic Paper Stock Ltd for the proposition that supervening events, to constitute force majeure,must both be beyond the control of either party and make performance impossible, the Ontario High Court of Justice found that para. 7.11 was inapplicable. There was no evidence that Tom Jones was unable to arrange financing. Rather, owing to high interest rates, Tom Jones was unable to arrange financing at a price which would have made the project profitable. While the rise in interest rates was beyond the control of either party, it did not make performance impossible. Tom Jones could have arranged the financing necessary to complete construction, however unprofitable it may have been.22

Both Atlantic Paper Stock Ltd and Tom Jones & Sons Ltd stand for the proposition that courts will enforce force majeure clauses only insofar as they accord with the doctrine of frustration. There was nothing in the wording of cl. 2(a)or para. 7.11,or the context in which either contract was entered, that required the supervening event be beyond the control of either party or make performance impossible, respectively.

Notably, both Courts recognized that force majeure clauses are a legitimate way for parties to allocate risk for supervening events. Where that allocation of risk is not qualified, however, Courts have been quick – contrary to freedom of contract – to reallocate that risk by limiting the circumstances under which the clause may be invoked.

What is particularly worrisome is how little either Court justifies its interpretation. In Atlantic Paper Stock Ltd, the Court reads cl. 2(a) ejusdem generis to find that the triggering events listed are limited to events over which St. Anne has no control. Ejusdem generis dictates that where specific items precede more general items in a list, the general items are to be interpreted as applying only to the same kind or class as those previously listed. As such, the Court interpreted the words “nonavailability of markets for pulp or corrugating medium” to mean nonavailability of markets for pulp or corrugating medium over which St. Anne has no control because they are preceded by the words “act of G-d”, “Queen’s or public enemies”, “war”, “authority of the law”, “labour unrest or strikes” and “destruction of or damage to production facilities”.23

There are two issues with the Court’s use of ejusdem generis. First, “nonavailability of markets for pulp or corrugating medium” is no more general than the other triggering event listed in cl. 2(a). Second, while it may seem clear that parties have little to no control over acts of G-d, the Queen’s or public enemies, war, or the authority of the law, it is by no means self-evident that the same is true with respect to labour unrest or strikes or the destruction of or damage to production facilities. Labour unrest or strikes, especially if initiated by a party’s employees, may certainly be within a party’s control; a party may choose to meet the demands of its employees and thereby avoid a dispute. Likewise, destruction of or damage to production facilities may certainly be within a party’s control; a party may choose not to make necessary repairs.

The Court’s use of ejusdem generis to limit the triggering events listed in cl. 2(a) to events beyond St. Anne’s control, therefore, is more likely the result of preconceived notions regarding the interpretation of force majeure clauses than thorough and impartial analysis.

More troublesome is Tom Jones & Sons Ltd. Although the Court begins its decision by noting that every force majeure clause “must be considered having regard to its own precise language”, it quickly turns to Atlantic Paper Stock Ltd for guidance in interpreting para. 7.11.24 Here, again, ejusdem generis does little to justify the Court’s interpretation. Paragraph 7.11 lists strikes, lockouts, government restrictions, acts of G-d, non-availability of labour or materials, unavoidable casualty, civil commotion, war, fire, adverse subsurface conditions, extreme weather conditions and any other cause beyond the control of either party as triggering events. None of these events, however, make performance impossible as a matter of necessity. But for the fact that Atlantic Paper Stock Ltd is binding, therefore, the Court’s interpretation of para 7.11 is unjustified.25

Even when the force majeure clause in question seeks to displace the doctrine of frustration, courts have been cautious to rule out its application entirely. In Metropolitan Water Board v Dick Kerr and Co, the plaintiff contracted the defendant to build a reservoir. Two years after the start of construction, and as a result of war, the defendant was required by government order to stop work. Despite the existence of a force majeure clause which expressly contemplated delay “whatsoever and howsoever occasioned”, the defendant refused to agree to an extension of time, instead treating the contract as frustrated.26 The HL agreed. The force majeure clause applied only to temporary delays; it was not intended to “cover the case in which the interruption is of such a duration that it fundamentally changes the conditions of the contract”.27

In Metropolitan Water Board, as in Atlantic Paper Stock Ltd and Tom Jones & Sons Ltd, the Court allowed its understanding of the doctrine of frustration to colour its interpretation of force majeure clauses – in essence, ruling that the risk of supervening events had not been contemplated (and therefore allocated) by the parties despite the existence of an express provision to the contrary.

THE NEED FOR REFORM

To say that parties are unable to completely allocate risk for supervening events is not just to raise an important academic point; it is also to highlight a gap in the ability of parties to contract freely, the practical significance of which is augmented by the increasing number of supervening events that affect parties in the performance of their contractual obligations.

This past year alone has seen the sustained effects of COVID-19 (including onerous and costly safety measures and government stop work orders), massive shortages in building materials and skilled labour, floods and wildfires, political protests and, most recently, war. That is to say, in the past year, nearly every supervening event in standard force majeure clauses has occurred. The inability to completely allocate risk for these events, therefore, poses a large problem for commercial parties – especially owners and contractors on long term building projects.

To close this gap courts must fundamentally shift their thinking with respect to the interpretation of force majeure clauses. Such a shift in thinking, however, is not as far-fetched as may first seem. In Atcor Ltd v Continental Energy Marketing Ltd, the Alberta Court of Appeal articulated what may be called the “commercial reasonableness standard”.28 There, Atcor Ltd contracted to supply Continental Energy Marketing Ltd with natural gas through a pipeline run by Nova. Due to breakdowns and repairs beyond the control of both Atcor and Continental, Nova curtailed its supply of natural gas. Unable to fulfill its contract with Continental, Atcor sought relief under cl. 9. Continental refused to accept that the force majeure clause applied and instead sued Atcor for breach of contract.29

Under cl. 9, “force majeure” is defined as any event not within the control of the party claiming relief “and which, by the exercise of due diligence, such party is unable to overcome”.30 In interpreting the clause, the Court held that “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 [emphasis added]”.31 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 that solution, in all the circumstances, is not reasonable”.32 With little evidence concerning whether or not it would have been commercially reasonable for Atcor to find another supplier in the circumstances, the Court referred the matter back to trial.

On first read, the Court’s approach to the interpretation of force majeure clauses is refreshing; and yet it can also be explained by reference to the doctrine of commercial impracticability as outlined in American caselaw.

In Mineral Park Land v Howard, the leading case on commercial impracticability, the Supreme Court of California held that “a thing is impossible in legal contemplation when it is not practicable; and a thing is impracticable when it can only be done at an excessive and unreasonable cost”.33 There, Mineral Park Land contracted to excavate a fixed quantity of gravel from Howard’s property. Having excavated only half of the gravel promised, Mineral Park stopped work. When Howard sued Mineral Park for breach of contract, Mineral Park argued that the contract had been frustrated by the fact that the remaining gravel was below the property’s waterline. The Court agreed. Mineral Park had excavated all the gravel financially practicable. The remaining gravel could not have been excavated except at excessive and unreasonable cost. In legal contemplation, therefore, it was impossible for Mineral Park to excavate any more gravel than it already had.34

If the Court in Atcor Ltd was persuaded by the American doctrine of commercial impracticability rather than the precise language of cl. 9 and the industry in which Atcor and Continental operate, its interpretation is equally problematic as the cases outlined above despite it having reached a different conclusion. So long as courts import requirements from the doctrine of frustration into their analysis of otherwise silent force majeure clauses – whether from Canada, the United Kingdom or the United States – parties will remain unable to completely allocate risk for supervening events.

CONCLUSION

Frustration occurs whenever the law recognizes that without default of either party a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract. At least in part response to this high threshold, and to the significant legal consequences which follow, parties have written force majeure clauses into their contracts with the intention either to displace the doctrine of frustration or to provide for relief in respect of non-frustrating events.

Courts, however, have allowed their understanding of the doctrine of frustration to colour their interpretation of force majeure clauses – ultimately depriving them of their full effect. The unfortunate result is that contracting parties remain unable to completely allocate risk for supervening events contrary to freedom of contract – a point of great practical significance to the construction industry given the increasingly “frustrating” world in which it operates.

The need for reform is real; courts must fundamentally shift their thinking on the interpretation of force majeure clauses, looking only to the precise language of the contract and the unique circumstances in which it was entered for guidance.

Endnotes

1 Paradine v Jane, [1647] EWHC KB J5.
2 Ibid; Michael P Theroux and April D Grosse, “Force Majeure in Canadian Law” (2011) 49:2 Alberta Law Review, at pg 398; and Peter Benson, “Justice in Transactions: A Theory of Contract Law” (Cambridge: Harvard University Press, 2019) at pg 145.
3 Taylor v Caldwell, [1863] EWHC QB J1 and Guenter Treitel, “Frustration and Force Majeure” (London: Sweet & Maxwell, 1994) at pg 35. See also Benson, “Justice in Transactions”, at pg 147.
4 Ibid.
5 Ibid.
6 Benson, “Justice in Transactions”, at pg 148, citing Davis Contractors Ltd v Fareham Urban District Council [1956] AC 696.
7 Benson, “Justice in Transactions”, at pg 148.
8 Summers Transport Ltd v GM Smith Ltd, 1990 CarswellNfld 142, at paras 4, 14-19 and 45-46.
9 Davis Contractors Ltd v Fareham Urban District Council [1956] AC 696.
10 Ibid.
11 Ibid.
12 Peter Kiewit Sons Co v Eakins Construction Ltd, 1960 CarswellBC 143, at para 11.
13 Ibid, at paras 1-4.
14 Naylor Group Inc v Ellis-Don Construction Ltd, 2001 CarswellOnt 3340, at paras 2, 10, 17, 25 and 52.
15 See Angela Swan and Jakub Adamski, “Canadian Contract Law” (Toronto: Lexis Nexis, 2012) at pg 814.
16 Theroux and Grosse, “Force Majeure in Canadian Law”. See also Atcor Ltd v Continental Energy Marketing Ltd, 1996 CarswellAlta 642 [Atcor Ltd].
17 See CCDC and FIDIC standard form contracts.
18 Treitel, “Frustration and Force Majeure”, at pg 415.
19 Atlantic Paper Stock Ltd v St Anne-Nackawic Pulp & Paper Co, 1975 CarswellNB 26 [Atlantic Paper Stock Ltd], at para 1.
20 Ibid, at paras 4-5.
21 Tom Jones & Sons Ltd v R, 1981 CarswellOnt 680 [Tom Jones & Sons Ltd], at para 13.
22 Ibid, at paras 3, 4 and 14-15.
23 Atlantic Paper Stock Ltd, at para 4 and Theroux and Grosse, “Force Majeure in Canadian Law”.
24 Tom Jones & Sons Ltd, at para 14.
25 Ibid, at para 13.
26 Metropolitan Water Board v Dick Kerr and Co [1918] AC 119 as summarized in Ewan McKendrick, “Force Majeure and Frustration of Contract” (New York: Routledge, 1995) at pg 35.
27 Ibid.
29 Atcor Ltd, at paras 1-3.
30 Ibid, at para 3.
31 Ibid, at para 11.
32 Ibid, at para 35.
33 Mineral Park Land v Howard, [1916] 172 Cal 289.
34 Ibid.