Sometimes an event takes place which makes it impossible to comply with one’s obligations under a contract or makes the fulfillment of performance different from that which was previously undertaken. Failure by one party to comply with their obligations under the contract can quickly lead to a dispute.
If an unforeseen event occurs, relief may be available to the party unable to perform its contractual obligations. This article provides a primer on force majeure clauses and the law on the frustration of contracts. It will also review a recent decision from the Court of Appeal for British Columbia in which the owner of a burned-down mill sought a declaration that it was discharged from its obligation to supply wood chips. The decision shows that a contract is not necessarily terminated when an unforeseen event takes place.
A contract may contain a force majeure clause to deal with the occurrence of events that are outside the control of the parties. The specifics depend on the particular wording of the contract, but a force majeure clause normally sets out:
- the events that trigger the application of the clause, such as acts of God, flood, fire, civil disturbance, government expropriation, epidemic, and possibly a catch-all provision;
- the impact that the triggering event needs to have on the ability of the party to perform its obligations; and
- the effect that the triggering event and inability to perform has on the contract.
In relation to this last point, the force majeure clause may not necessarily terminate the agreement, as this will depend on the specific terms of the clause in question.
The common law doctrine of frustration may occur when:
- a situation occurs that was outside the contemplation of the parties when the contract was entered and was not the fault of either party; and
- the situation renders the performance of the contract radically different from that which was initially undertaken by the contract.
Where the consequences of the frustration of a contract are not contained in the contract itself, these are supplied for most types of contract by the Frustrated Contract Act.
In Interfor Corporation v Mackenzie Sawmill Ltd., the plaintiff contracted with the defendant to purchase wood chips. After a series of fires that damaged and subsequently destroyed the mill, the defendant stopped supplying chips. The defendant relied on the force majeure clause in the contract which stated:
“If, at any time while this Agreement is in force, [the defendant] shuts down or curtails the operation of the Mill due to fire …, or for any reason whether similar or dissimilar to the foregoing and which [the defendant] considers sufficient to justify curtailing or shutting down its operations, then [the defendant], without liability, may discontinue or curtail the production and delivery of Chips to [the plaintiff].”
A new mill was built by other companies associated with the original mill’s owners. The new mill owners began selling wood chips to other purchasers at a higher price.
The plaintiff was not happy as it was obliged to supply the wood chips to another company under a different agreement. To ensure it could do this, the agreement between the plaintiff and defendant only gave the plaintiff a right to terminate the agreement by giving notice. It also mandated the defendant to require any purchaser of the mill to agree to be bound by the agreement.
The plaintiff commenced proceedings for breach of contract, arguing that the defendant’s obligations were not terminated and that it, and the new owners, must continue to supply wood chips. The defendant sought a declaration that the fires constituted a force majeure event or frustrated the contract, and that it was therefore discharged from its obligations.
The summary trial judge decided that the agreement was of indefinite duration to allow the plaintiff to supply the chips from the mill under the other agreement. After reading the contract as a whole, the judge found that the defendant’s right to discontinue supply was limited to the period of the shutdown giving rise to that right.
The Court of Appeal agreed, finding that the judge did not err in his conclusion that the force majeure clause did not provide for the termination of the defendant’s contractual obligations. The clause only allowed the defendant to discontinue supply because of the fire for as long as it considered necessary. The consequences of either a permanent discontinuance or the construction of a new mill had to be determined following a trial.
The summary trial judge found that the fires did not frustrate the contract because the mill’s destruction did not totally affect the purpose of the contract. Instead, the obligations were only suspended while the mill was shut. The possibility of the fire damage could have been foreseen and expressly contemplated by the force majeure clause and the obligations would not be radically different if the defendant chose to rebuild the mill.
A majority of the Court of Appeal agreed that the contract was not frustrated by the fires that destroyed the mill. The defendant’s appeal was dismissed.
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