

The coronavirus disease 2019 (“COVID-19”) global pandemic and the government responses being implemented to seek to slow its spread have caused many individuals and organizations to consider the impact COVID-19 will have on their business and their ability to meet obligations under their commercial agreements.
As a general rule, parties are required at law to comply with their contractual obligations, unless certain exceptions apply. Exceptions may be specifically contemplated in written agreements or in some cases may be implied by a court as a result of exceptional circumstances.
This article considers the following questions:
Many commercial agreements include language which provides that in the case of an extreme and unforeseeable event beyond the control of either party (called a “force majeure”) one or both parties may suspend, delay or even terminate the agreement.
Force majeure clauses are about allocating risk for future events that could affect the ability to carry out contractual obligations, and are meant to protect against events outside normal business risk and beyond the parties’ reasonable foresight and control.
Whether or not a party can successfully claim a force majeure in connection with COVID-19 will depend on a number of factors, including:
Before invoking a force majeure clause in a commercial agreement, a party should closely review the language of the agreement, consider the factors discussed above and seek legal advice as to the likelihood of success of relying on the clause. Terminating or delaying performance of an agreement can involve a high risk of a legal claim by the other party that an event was not a force majeure, and potentially significant damages if such claim were successful.
Where a commercial agreement does not include a force majeure clause, a party will not be able to claim force majeure in connection with COVID-19, although it may be able to rely on the legal doctrine of frustration or impossibility (discussed below) in attempting to terminate or delay the contract.
Many purchase agreements in M&A transactions include the concept of a “material adverse effect” (or “material adverse change”) to measure the negative effect certain events may have on the transaction, to qualify the representations and warranties a party is making in the agreement, and/or to provide that a party may terminate the agreement before completing the transaction if such a material adverse effect occurs.
Some agreements specifically define what constitutes a “material adverse effect” while others do not. Definitions often refer to a material adverse effect as being generally any effect or change that has a materially adverse effect on the business or asset being purchased, or on the ability to complete the transaction, but may also specifically exclude certain changes, such as those relating to changes in general economic conditions, applicable law or as a result of disasters or acts of God.
Whether a party can invoke a material adverse effect provision in response to COVID-19 is highly dependent on the facts of the specific M&A transaction, and the language of the purchase agreement.
That said, invoking a material adverse effect clause at this point in time carries the risk that doing so could very well result in a lawsuit with the other contracting party. In some circumstances it will be difficult to show clearly that the negative effect is “material” given that the long-term effects of the COVID-19 pandemic on the operations of a particular business, and the economy in general, are likely uncertain at this time. In others, the negative effect may more clearly constitute a material adverse effect, such as where operations of the business to be acquired have been shut down.
Where commercial agreements do not include express contractual provisions for force majeure or material adverse effect, there is some relief available at common law, as in certain circumstances a court may find that an event has frustrated or made the performance of the contract impossible. These legal doctrines apply in the case of exceptional circumstances, and courts typically take a narrow approach to their interpretation and application.
The doctrine of frustration excuses the performance of a contract where extreme events have made the purpose of the contract substantively different than what the parties had originally intended at the time that they entered into the contract. Impossibility will apply where such events have made performance of the contract objectively impossible (not just more difficult or less feasible in terms of time or resources required).
The extreme event that is at the centre of the frustration or impossibility claim cannot be the fault of either party and cannot be something that was contemplated or reasonably foreseeable at the time the parties entered into the agreement.
Where the circumstances of the COVID-19 pandemic have made performance of the agreement objectively impossible, or radically different than what was originally intended, these legal doctrines may apply, although in both cases the legal bar is high and will be driven based on the specific facts of the situation and agreement in question.
In evaluating the impact of COVID-19 on a commercial agreement, a number of other factors may be relevant:
EKB’s Business Law team is experienced and knowledgeable in all areas of drafting, negotiating and disputing commercial agreements and is here to assist business owners navigating contract and other issues in the context of the ever-changing COVID-19 pandemic.
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