Legislating a suspension of breach of contract due to COVID-19


The provincial government should introduce legislation to prohibit the right to sue for breach of contract when the alleged breach is the failure to supply goods or services or to pay money, and where such failure was caused by the compliance of a party or its employees as the case may be, with "stay at home orders" issued by a governmental authority.

When a party to a contract cannot perform a contract due to circumstances beyond that party's control, the common law allows the person who could not perform their obligations to defend their breach with the doctrine of frustration. However, the common law principle of frustration of contracts will not provide the kind of stability and relief to small and medium-sized businesses, who make up the vast majority of business activity in Canada. Instead, to protect commercial stability, the provincial government must pass legislation to stabilize commercial relationships prospectively.

What is frustration?

The typical common law response to such a situation would be the frustration doctrine. The leading common law tests were expressed in National Carriers Ltd. v. Panalpina Ltd., [1981] 1 All E.R. 161 (H.L.), per Lord Glaisdale at p. 175:

Frustration of a contract takes place when there supervenes an event (without default of either party and for which the contract makes no sufficient provision) which so significantly changes that nature (not merely the expense or onerousness) of the outstanding contractual rights and/or obligations from what the parties could reasonably have contemplated at the time of its execution that it would be unjust to hold them to the literal sense of its stipulations in the new circumstances; in such case the law declares both parties to be discharged from further performance.

Moreover, Lord Radcliffe opined in Davis Contractors Ltd. v. Fareham U.D.C., [1956] A.C. 696, [1956] 2 All E.R. 145 (H.L.) op. 728-9:

So perhaps it would be simpler to say at the outset that 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.......But, even so, it is not hardship or inconvenience or material loss itself which calls the principle of frustration into play. There must be as well such a change in the significance of the obligation that the thing undertaken would, if performed, be a different thing from that contracted for. [Emphasis added]

These tests were adopted in Canada in Peter Kiewit Sons' Co. of Canada v. Eakins Construction Ltd., 1960 CanLII 37 (SCC), [1960] S.C.R. 361.

Generally, for frustration to apply, a person claiming frustration must prove that:

  1. The event in question must have occurred after the formation of the contract and cannot be self-induced.
  2. The contract must, as a result, be totally different from what the parties had intended. This difference must take into account the distinction between complete fruitlessness and mere inconvenience.
  3. The disruption must be permanent, not temporary or transient.
  4. The change must totally affect the nature, meaning, purpose, effect and consequences of the contract so far as concerns either or both parties.
  5. Finally, the act or event that brought about such radical change must not have been foreseeable.
See Folia v. Trelinski (1997), 14 R.P.R. (3d) 5 (B.C.S.C.), at para. 18

This summary of the doctrines demonstrates it as strict and very difficult to prove at trial. It reflects judicial objectives of maintaining and protecting contractual certainty except only in the clearest of cases.

Why is frustration inadequate?

The doctrine of frustration was never designed to meet the needs of providing commercial certainty during a pandemic or other widespread disruption of the social order.

Today's COVID-19 cases will not qualify as frustration

A defendant to a breach of contract case could clearly prove that the various declarations of emergency occurred after the parties formed contracts and were undoubtedly not self-induced. In most cases, except between extremely sophisticated parties to complex, long-term relational contracts, most defendants will not have foreseen the various states of emergencies. The dramatic declines of stock markets provide anecdotal proof of the difficulty in foreseeing this even, mainly if one accepts the ability of liquid markets to price in risk.

However, a suspension of business brought on by "stay at home" orders would likely fail the second, third, and fourth parts of this test. The stay at home orders, generally speaking, do not make the consideration of most contracts that one can think of reasonably as being completely different. The COVID-19 pandemic, one sincerely hopes, is not a permanent state - but a temporary one. A purchaser of landscaping services still expects the supplier of landscaping to continue to supply such services even after the "stay at home" orders are lifted.

Frustration does not encompass mere hardship in performance

The latter statement that the orders hinder the performance of the contract highlights another reason why frustration does not serve as an adequate legal remedy to this situation. Frustration does not apply to relieve a party to a contract form performing it merely because it is costly, say even more expensive to supply or perform than what the parties to the contract reasonably expected when making the contract, or very inconvenient. However, the inability to meet these requirements runs contrary to the public policy objectives of imposing these exhortations and, in some cases, orders to limit persons from being outside their homes during these times. However, under the frustration doctrine, these barriers do not entitle a defendant to claim frustration.

Frustration is not well understood

The practical application of frustration is also hindered by the paucity of cases considering this doctrine. The query: "("frustration" /p ("contract" or "agreement")) AND (pandemic OR epidemic)" entered into the CanLII global database reveals only twelve results across Canada– only one of which comes close to describing the pandemic situation the world now faces: Henuset Bros. Ltd. et al. v. Highland Stock Farms Ltd. et al., 1975 CanLII 998 (AB QB), a case involving an epidemic amongst cattle. A note up of the Frustrated Contract Act, RSBC 1996, c 166 reveals only eleven decisions, only one of which was decided at the Court of Appeal, and eight of which decided at the Supreme Court. The Frustrated Contract Act itself does not necessarily add to the doctrine of frustration substantively. Generally, the Act clarifies and proscribes a scheme of damages akin to restitution and reliance damages. The Act itself does not extend or restrict the application of the doctrine itself.

Frustration terminates, not suspends, contracts

Most importantly, though somewhat modified by the Frustrated Contract Act, frustration results in the termination of the contract. Respectfully, I suggest that most parties do not want or expect contracts to be terminated because they cannot perform the contract during "stay at home" orders. I respectfully suggest that most parties only seek to suspend the operation of such contracts or seek a relaxation of strict compliance with delivery and performance time. Society does not need a remedy that results in termination, or repudiation of contracts; society needs some form of halfway contractual legal remedy. Society should not allow the good faith attempts of persons to comply with public measures to protect everyone's health and safety from giving unscrupulous persons reasons to exert commercial pressure in a contractual relationship.

The need for legislation

The shortcomings of frustration to stabilize commercial relations in society are found not only in the definition of the doctrine itself. Judicial action carries certain disadvantages that make it unsuitable to stabilize commercial relationships relative to legislative action.

Hard facts make bad law

Frustration is a useful doctrine. The courts created the defence for a reason. It works well. However, tomorrow's cases should not be decided based on the very unique, but extensive and far-reaching circumstances of today – turning the healthy development of the common law on its head where today's cases reflect where society is going and how the law adapts to changing social norms.

The courts may apply the doctrine strictly, in which case we may not see the social results consistent with the objectives of the "stay at home" orders. Alternatively, worse yet, the courts will alter the doctrine in a way to fit these circumstances into present cases – but risk altering the law of frustration and create unforeseen circumstances. Indeed, in British Columbia, the doctrine of frustration has been the subject of numerous law reform initiatives and yet its substance has never been modified: Proposals for a Contract Law Reform Act, 1998 CanLIIDocs 113 (BC Law Institute), Report on Proposals for a New Commercial Tenancy Act, 2009 CanLIIDocs 282 (BC Law Institute), Report on Relief Under Legally Defective Contracts, 2008 CanLIIDocs 286 (updated in 2019) (BC Law Institute), Report on Illegal Transactions, 1983 CanLIIDocs 2 (updated in 2019) (Law Reform Commission of British Columbia); Report on Proposals for Unfair Contracts Relief, 2011 CanLIIDocs 340 (updated in 2019) (Law Reform Commission of British Columbia).

Courts are retrospective, not prospective problem solvers

Second, the courts are retrospective in nature and not prospective. Courts adjudicate facts that have already happened. Though the common law guides social actors in the present and future, the norms prescribed by the common law were created in reaction to past events. These norms are useful when society as a whole is stable, and the path and course of relationships can be forecasted within a reasonable range with some reasonable certainty. We do not presently live in that world. Society needs commercial certainty for the foreseeable future. We cannot fix problems after they have occurred. Society should not rely on the courts to fix the widespread commercial challenges that will arise COVID 19. Instead, we need legislation so that commercial actors can make prospective changes.

Other doctrines do not assist

Unfortunately, other doctrines do not assist.  The more obvious candidates include the voiding of contracts for being contrary to public policy and doctrines of illegality.  Neither of these doctrines provides relief.  First, both these doctrines suffer from the same institutional shortcomings borne by the frustration doctrine.  These doctrines are common law doctrines and are prescribed by the courts.  They deal only with past events.  Second, the remedy associated with these defences is similar to that in frustration – the judicial termination or voiding of the contract and potentially some restitutionary or reliance damages.  Finally, the doctrines of these defences preclude ready application.  Even the strictest "stay at home" orders would not make contracts or the performance thereof in and of themselves illegal.

The doctrine of illegality generally applies when the contract itself illegal runs afoul of a law, such as legislation prohibiting rental contracts that discriminate based on an enumerated ground: Transport North American Express Inc. v. New Solutions Financial Corp., 2004 SCC 7.  In some cases, courts have found contracts to be void when the performance of a contract may require a party to perform an action contrary to law.  However, in those circumstances, there is a complicated set of tests as to whether the doctrine will apply in these cases depending on whether the illegality is known to all parties, to the party who must perform the illegal act, or to the party who benefits from the illegal act but does not perform it.  This all complicates the application of illegality as a defence and precludes it from applying to COVID-19 “stay at home” situations.

The defence that a contract is contrary to public policy may have some attractiveness, see for exmapleDouez v. Facebook, Inc., 2017 SCC 33.  However, again, parties in the current circumstances wish, I suggest, temporary relief, not repudiation or termination. Though the courts have recognized that the grounds to use public policy to control contracts is a fundamental principle of common law, courts will use that power very sparingly: Niedermeyer v. Charlton, 2014 BCCA 165.  I have seen no reported decisions on the use of the defence of a contract being contrary to public policy in a social environment similar to the present circumstances. 

Finally, I recognize the use of force majeure clauses in commercial contracts.  However, I respectfully suggest that such clauses are found more commonly in complex contracts, often negotiated between sophisticated parties with the benefit of legal and risk counsel.  I would be surprised to find the force majeure clause in a material number of everyday contracts for the supply of common goods and services. Further, the applicability of force majeure clauses to the present circumstances will undoubtedly be the subject of high stakes litigation amongst the most sophisticated commercial parties, and will likely be uncertain for a long stretch. British Columbia cannot wait.

Help for the other side

Conversely, legislation to suspend the right to sue for breach of contract associated with COVID-19 cases should also provide some relief to innocent counter-parties who may be on the receiving end of such breaches.  Through various legal and equitable doctrines, courts have relaxed strict compliance with contracts when a party has behaved in a manner that would lead a party breaching a contract that the innocent party would not treat the breach as a repudiation or termination of the contract.  These doctrines include promissory estoppel, acquiescence and doctrines of waiver, and various others.  It would be unjust to allow a party who receives a claim of protection under this proposed legislation to then claim that the innocent party had acquiesced to or waived the breach or acted in a manner to engage the promissory estoppel doctrine. 

We need legislative action now

The provincial government seems poised to prescribe several controls on the termination of certain contracts. As of the writing of this article, there are calls for legislation to prohibit the termination of employment on the basis that a worker must self-isolate. There are widespread calls to suspend the right of landlords to terminate residential tenancies when a tenant cannot pay rent – which I forecast would last until the end of the "stay at home" orders. There are further calls from business groups to apply such termination holidays to commercial tenancies.

We need a broader response. We need to look beyond these narrower categories and look at a broader civil response to the uncertainty that is created by a breakdown in these legal institutions. Though we hope that most commercial actors will act with good faith, goodwill, and be responsible corporate citizens, we cannot expect universal goodwill. Some parties will seek to take advantage of these trying times. For the greater public good, I suggest that we need legislation that imposes a temporary prohibition on the right to sue for breach of contract where the compliance of a party, or its employees as the case may be, with "stay at home orders" causes the alleged breach.

Government must establish commercial certainty around how the significantly impaired ability of parties to perform contracts in response to COVID-19 will be treated. Parties must be able to make requests for holidays of payment or deferrals of performance of contracts without fear of triggering an anticipatory breach, to make offers of compromise without fearing that even making the offer would result in the breach of a contract.

No doubt, we must focus on supporting health care workers who are working tirelessly to treat those with the COVID-19 virus and to prevent further outbreak and deaths. However, and I suggest sooner rather than later, society will need to deal with the commercial aftermath of the "stay at home" orders. Society will be dealing with record-high unemployment, financial defaults and bankruptcies, and all its attendant social challenges. We need not add to this burden the challenge of dealing with the rupture of commercial relationships that could have been prevented with appropriate legislation that encourages everyone to preserve the status quo. The legislature must act now. We cannot wait until after the crisis is over. Enacting legislation after the fact to have retroactive effect creates new legal problems since actors cannot have conducted themselves with knowledge such legislation was forthcoming. Instead, the provincial government should act now to enact legislation with prospective effect and give businesses commercial certainty of contractual relations.

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