Written By Richard Swan, Preet Gill and Phoebe Goldig

Early on in the COVID-19 pandemic, many businesses began to scrutinize force majeure clauses in their commercial contracts and leases. Such contractual clauses, when engaged, either permanently or temporarily relieve the affected party(ies) from the performance of some or all contractual obligations, and from the consequences of a failure to perform those obligations, where performance is rendered effectively impossible by unforeseen, extraordinary events or circumstances beyond the control of the affected parties. The significant commercial impact brought on by the COVID-19 pandemic—and resultant government shutdowns and restrictions—appeared ripe to trigger these clauses and spawn significant litigation.

Three years after we first considered this issue in our blog entitled, Force Majeure Clauses and Risk Management in the Face of COVID-19, we have now seen a number of these cases make their way through the judicial system. What we have seen is that each case remains to be interpreted on its own facts and contractual language, and the high threshold for triggering a force majeure clause—genuine impossibility of performance—has been maintained, despite the significant impacts that many businesses suffered as a result of COVID-19 shutdowns and restrictions. However, as demonstrated by recent Ontario cases, such clauses can be triggered by events related to COVID-19 when appropriately drafted.

Force Majeure Clauses

Force majeure clauses provide a mechanism by which a party can claim relief from its obligations under a contract due to the presence of circumstances beyond the contracting parties' control. Most force majeure clauses define the circumstances beyond the contracting parties' control that can render the performance of the contract impossible, and then provide for the suspension, deferral and/or release of the obligation to perform the contract based on that event.

The party seeking to rely upon a force majeure clause for relief from its contractual obligations bears the burden of demonstrating both that the clause applies based on the extraordinary circumstances, and that there are no reasonable alternative means to perform its obligations under the contract. If the contract is simply more difficult or more expensive to perform, a force majeure clause is very unlikely to apply. Canadian courts have set a relatively high threshold for the application of a force majeure clause, often requiring a supervening event beyond the control of either party rendering performance impossible. It should be noted that different considerations apply where "material adverse effect" or similar clauses contain language relating to disasters, acts of god and pandemics, and those considerations are beyond the scope of this post.

Ontario Court of Appeal Decisions

Niagara Falls Shopping Centre Inc. v LAF Canada Company¹

In the recent Niagara Falls case both the landlord and the tenant sought to rely on a force majeure clause in a lease to their advantage. The tenant was the owner and operator of a fitness facility that leased a unit in a shopping plaza owned by the landlord. When the Ontario government mandated the closure of all non-essential businesses in late March 2020 the landlord and Tenant entered into a rent deferral agreement, whereby 50 percent of the base rent was forgiven and 25 percent was deferred for April 2020 to June 2020.

In December 2020, the Ontario government imposed a lockdown for a second time. This time, the tenant refused to continue paying rent. In response, the landlord brought an action for all unpaid rent and charges under the lease. The tenant counterclaimed for the rent it had paid while the government-mandated closures were in effect. The landlord and tenant each moved for summary judgment on their respective claims.

Both the landlord and the tenant relied on the force majeure clause in the lease to support their respective positions. The landlord submitted that, due to the operation of the clause, it was exempted from its obligation under the lease to provide the tenant with the leased premises during the government-mandated closures. The tenant, on the other hand, relied on the clause to claim that it was under no legal obligation to pay rent during these periods, and that the lease was extended by a period equivalent to the length of the closures. The Ontario Superior Court Judge accepted the landlord's position and rejected the tenant's.²

On appeal, the Ontario Court of Appeal identified two components of the particular force majeure clause that the parties had to satisfy in order to rely on it: (1) a party had to be "delayed or hindered in or prevented from the performance" of an act required under the lease, and (2) the failure to perform had to be due to a type of event amounting to a "Force Majeure Event", as that term was defined in the lease. Importantly for this case, the definition of Force Majeure Event in the lease included "restrictive laws". The Court of Appeal re-affirmed that whether an event triggers a force majeure clause depends on the nature of the event and the language of the clause. In this case, the government-ordered closure of the leased premises triggered the clause because the government's "restrictive laws" prevented the landlord from performing its obligation under the lease to provide the premises for use as a fitness facility.

As such, the landlord had established the application of both components of the clause: it was prevented from performing its obligation under the lease to provide the tenant with the leased premises, and its failure to perform was a result of restrictive government laws. In addition, there was no language that might exclude the operation of the clause. As a result, the force majeure clause operated to excuse the landlord's performance for the period of delay caused by the closures. However, the force majeure clause provided that, in such circumstances, the period for performance was extended for an equivalent period. As such, having been triggered, the lease was extended for the period of closure pursuant to the force majeure clause.

In the tenant's case, however, the clause did not apply to excuse payment of rent during the lockdown. While the first element to engage the clause was met (the tenant's ability to meet its obligations during the closures was hindered by restrictive laws mandating a shutdown), the second element was not. The force majeure clause expressly excluded "financial inability" as a Force Majeure Event. Accordingly, the tenant could not rely on the clause to excuse it from paying rent during the lockdown period. However, and importantly, the tenant did not have to pay rent during the "extension period" dictated by the force majeure clause of the lease (having been found obligated to pay it during the lockdown period of equivalent length).

The Court allowed the appeal and held that: (1) the landlord was excused from performance under the lease for the periods in which the premises were closed due to government-imposed closures; (2) the lease was extended for the period equivalent to the closure periods; and (3) the tenant was required to pay monthly rent during the closure periods, but was not required to pay rent during the extension period. The outcome flowed from the particular language of the force majeure clause.

Windsor-Essex Catholic District School Board v. 2313846 Ontario Limited o/a Central Park Athletics³

In this case, the Ontario Court of Appeal upheld the application judge's decision interpreting a force majeure clause in a lease.⁴ The applicant school board leased athletic facilities from the respondent, a commercial landlord. As a result of pandemic-related lockdowns, the landlord was unable to open its doors from March to August 2020 and the school board was unable to use the facilities. The school board argued that the force majeure clause in its lease should relieve it from the obligation to pay rent during that time.

The force majeure clause provided that rent would not be payable ("abate") during a force majeure event "until the Landlord has restored the ability of the Tenant to use the Leased Premises". The force majeure clause expressly included "restrictive governmental laws or regulations" as a triggering event. The application judge found the clause applied and abated the rent. First, he held there was a triggering event—the COVID-19 pandemic-caused government lockdowns; notably, COVID-19 itself was not the triggering event, but rather the lockdowns imposed as a result. Second, because of the lockdowns, the landlord could not provide the leased space.

The key issue was the effect of this on the parties' obligations under the leases. The Court held that, on the plain wording of the provision, there were two impacts: (1) the landlord was excused from its contractual obligation to provide the leased space; and (2) the contractual rent obligation of the tenants was abated or ended during the lockdown period. The Court emphasized that the specific language of the force majeure clause drove the interpretation and the outcome in this case.

On appeal, the Court of Appeal agreed with the application judge and upheld the decision.

Superior Court Decisions

Generally, Ontario courts have refused to deviate from pre-existing authority and continue to uphold the high bar that a force majeure clause will only apply to situations where carrying out contractual obligations becomes impossible, rather than commercially impracticable. That said, in keeping with the holdings in Niagara Falls and Windsor-Essex, courts have also emphasized that each clause must be interpreted in light of the facts of the case and the language of the agreement.

RT Twenty-Sixth Pension Properties Limited v Precise Parklink Inc.,⁵ Braebury Development Corporation v Gap (Canada) Inc.,⁶ and Porter Airlines Inc. v Nieuport Aviation Infrastructure Partners GP⁷ provide three examples of how the Ontario Superior Court Judges have addressed attempted reliance on a force majeure provision for reasons related to COVID-19 restrictions.

RT Twenty-Sixth Pension Properties Limited v Precise Parklink Inc.⁸

The contract at issue in this case required the defendants, two entities which operated a parking garage in a downtown Toronto office tower, to pay a fixed monthly fee to the plaintiffs, the owners of the building. In March 2020, as a result of COVID-19 restrictions and shutdowns, this fee began to substantially exceed the revenue that the defendants earned from operating the garage. As a result, the defendants initially stopped paying the fee, then later made partial payments for some months. The plaintiffs brought a motion for summary judgment for the unpaid fees.

One of the arguments presented by the defendants was that non-payment was excusable under the force majeure clause. They argued that the clause was sufficiently broad to capture the situation and that an implicit assumption of the agreement was that the monthly fee would be paid out of revenues received from operating the parking garage, which both parties believed would exceed the amount of the fixed fee for the duration of the contract. Accordingly, where an unexpected event caused revenues to drop below the amount of the monthly fee, the defendants asserted that their failure to pay was excusable under the force majeure provision.

The Ontario Superior Court disagreed. Although the Court accepted that the pandemic and resulting government restrictions were the types of events that might trigger the application of the clause, when the clause was read in light of the rest of the agreement, it did not excuse non-payment in the circumstances. The Court found that the structure of the agreement, in providing for a fixed monthly fee, clearly placed the risk of loss on the defendants, and that nothing in the language of the force majeure clause re-allocated that risk to the plaintiffs. The Court concluded that the parties intended the section to apply only to situations where carrying out contractual obligations became genuinely impossible.

Braebury Development Corporation v Gap (Canada) Inc.⁹

The facts in this case are somewhat similar to Precise Parklink. The defendant, Gap, operated a retail clothing store from leased premises in Kingston. Starting in March 2020, Gap was required to close its store pursuant to government shutdown orders. Gap did not pay rent for April 2020 or May 2020, and only made partial rent payments from June 2020 to September 2020. The plaintiff landlord brought an action to recover arrears of rent for this period.

The force majeure clause in the lease excused the parties from performance of certain obligations in the event that they were prevented from doing so or hindered by "restrictive governmental laws or regulations" or similar events beyond the parties' control. However, the lease also expressly provided that if the force majeure clause was triggered, it did not excuse the tenant from prompt and timely payment of rent. As such, even though this clause contemplated restrictive governmental laws (similar to the clause in Niagara Falls) and therefore operated to relieve Gap of its other obligations under the lease that it could not perform as a result of the government restrictions, it expressly did not apply to the payment of rent. Gap was therefore unable to rely on the clause to excuse its failure to pay rent.

Porter Airlines Inc. v Nieuport Aviation Infrastructure Partners GP¹⁰

Porter Airlines, a regional commercial air carrier based at Billy Bishop Toronto City Airport, and Nieuport Aviation, the owner of the passenger terminal at Billy Bishop, were parties to a Licence Agreement. Under this agreement, Porter agreed to pay fees to Nieuport in exchange for the ability to operate an air carrier business at the terminal. In March 2020, Porter suspended its operations in support of ongoing public health efforts to contain COVID-19. Porter did not pay monthly fees owed to Nieuport from March 1, 2020, to September 8, 2021, when it recommenced operations.

Nieuport commenced an application to, among many other things, determine whether the force majeure clause in the Licence Agreement was triggered. On this issue, the question before the Court was whether, during the relevant period, Porter was delayed or restricted in fulfilling its obligation to pay monthly fees to Nieuport because of a loss of revenues during its suspension of service. Porter argued that the Licence Agreement contemplated that Porter would pay the monthly fees from the revenues it generated from operating an air carrier business at Billy Bishop. Given that Porter could not generate revenue during the period of non-payment, it followed that it was "restricted" from fulfilling its obligations under the Licence Agreement. Porter also argued that the clause "applied where performance has become commercially unpractical or unreasonable or where there is, in commercial terms, a real and substantial problem." In other words, it was not just financially more onerous but it became entirely unviable economically.

The Court disagreed and, consistent with prior authorities, concluded that "the fact that a contractual obligation has become more expensive to perform, even dramatically more expensive, is not a ground to relieve the party of its obligation on the ground of force majeure." In addition, unlike in Niagara Falls, there was no government order or directive that required Porter to suspend its operations. While the Court accepted that Porter had acted in a commercially reasonable manner, a precipitous decline in revenue (even though caused by the pandemic) was not a triggering event and the force majeure clause was not engaged in these circumstances.

Takeaways

The case law in Ontario continues to confirm that the question whether impacts felt as a result of the COVID-19 pandemic and associated lockdowns and effects will trigger a force majeure clause remains to be determined through a contractual interpretation of the specific language of each clause and the factual circumstances before the Court. Further, it remains the law in Ontario that performance must become impossible (rather than merely commercially impracticable or unreasonable) in order for a party, especially a party seeking to avoid paying regular fees or rent, to successfully invoke a force majeure clause.

Parties in the process of negotiating agreements containing a force majeure clause will want to consider the specific language of such clauses to address, or exclude, specific events and impacts. While the consequences of unexpected future events may not always be readily foreseeable, as a general rule parties hoping to obtain relief from regular payment obligations under contracts and leases may seek a more forgiving form of force majeure clause, whereas parties such as landlords seeking to exclude the application of such clauses in the event of financial impairment may look to exclude inability to pay as an excuse for non-performance. These cases highlight the importance of prudent drafting to avoid later unintended consequences.

If you have questions or require further information about force majeure clauses, please contact the authors or a member of the Bennett Jones Commercial Litigation or Commercial Real Estate practice groups.

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