Force Majeure Clauses: An important reminder that the clause is only as strong as the language contained within it

The impacts of the COVID-19 pandemic as it relates to force majeure clauses in contracts is continuing to be felt by parties as Ontario courts are working through the backlog of cases. In late 2022, the Ontario Superior Court released a decision in Porter Airlines Inc. v. Nieuport Aviation Infrastructure Partners GP, 2022 ONSC 5922 ("Porter Airlines") holding that despite there being an event beyond the control of the contracting parties (i.e., COVID-19) they may still be required to fulfil their obligations, even if doing so would be commercially undesirable.

Most recently, the Ontario Court of Appeal in Niagara Falls Shopping Centre Inc. v. LAF Canada Company, 2023 ONCA 159 ("Niagara Falls") also dealt with a force majeure clause in the context of COVID-19. Notably, this case did not concern whether a force majeure event occurred (the parties agreed COVID-19 constituted such an event under the clause), rather the issue before the court related to the contractual remedies flowing from the clause.

Both decisions in Porter Airlines and Niagara Falls illustrate the importance of drafting force majeure clauses to include both triggering events and accompanying remedies. These decisions reinforce the notion that a force majeure clause is merely a contractual provision and not a standalone legal doctrine — it is purely defined by the language used within such a clause.

This brief bulletin speaks only to the Court of Appeal's decision in Niagara Falls. For a summary of the decision in Porter Airlines, please see our firm's bulletin here.

Background

Niagara Falls Shopping Centre (the "Landlord") owns a shopping plaza in Niagara Falls, Ontario. LAF Canada Company (the "Tenant") entered into a long-term lease agreement (the "Lease Agreement") with the Landlord, specifically to operate an indoor health club and fitness facility (the "Club").

On March 17, 2020, the Ontario government declared a provincial state of emergency due to COVID-19 and this declaration mandated the closure of non-essential business, including fitness facilities. The restrictions declared by the Ontario government prevented the Tenant from operating the Club or allowing it to open with capacity limits.

Soon after the declaration, the Tenant entered into a rent deferral agreement with the Landlord. Pursuant to this agreement, 25 per cent of the rent was forgiven and 50 per cent was deferred. However, in late December 2020, the Ontario government re-imposed a provincial-wide lockdown. In response, the Tenant refused to continue paying rent. The Landlord brought an action for all unpaid rent and related charges. The Tenant argued that the common law doctrines of unjust enrichment and abatement and the contractual force majeure clause provided it with relief from paying rent. To read the full force majeure clause, please click here.

The Landlord moved for summary judgement and the Tenant cross-moved for summary judgement on its cross-claim. The motion judge rejected the Tenant's defence. The motion judge agreed that the government-imposed lockdowns constituted "restrictive laws" therefore exempting the Landlord from providing the Tenant with quiet enjoyment of the leased premises. Among other findings, the motion judge found that the curative provision under the force majeure clause did not relieve the Tenant from paying rent due to the closures.

Court of Appeal decision

The Court of Appeal found that the motion judge made "extricable legal errors" in her interpretation of the force majeure clause. The Court reiterated that such a clause is designed to "discharge a party when an event beyond the control of either party makes performance impossible."^[1]

The government-imposed lockdowns were "restrictive laws" that prevented the Landlord from performing its obligations under the Lease Agreement — the motion judge made no error on this point. However, the Court found that the motion judge first erred by not considering the "excusing provision" within the force majeure clause: this provision did not exempt the Landlord from its obligation to perform but rather excused its obligation to provide the Tenant with the premises for the period of delay caused by the force majeure event (i.e., COVID-19). The Court thus found that the excusing provision was clear in providing that the period for performance of such act shall be extended for an equivalent period — there was nothing excusing the Tenant from paying rent.

Most importantly, the Court found that the force majeure clause contained two components for it to be triggered:

1. A party must be "delayed or hindered in or prevented from the performance" of an act under the Lease Agreement.
2. The failure to perform must be because of a type of event amounting to a force majeure event, as defined within the clause.^[2]

As it concerned the Tenant, the Court found that it satisfied the first component: the closures hindered its ability to pay rent. However, the second component was not satisfied because its inability to pay rent did not flow from the force majeure event. The force majeure clause specifically excluded "financial inability" as a force majeure event. The Tenant's inability to pay rent stemmed from its lack of funds from the lack of membership fees — lack of funds was not covered under the force majeure clause.

In summary, the financial inability exclusion provided for under the force majeure clause precluded the Tenant from relying on the clause to excuse its obligation to pay rent during the closures. In other words, the force majeure clause provided the Landlord but not the Tenant with a remedy.

Takeaways

The Court of Appeal's decision in Niagara Falls provides an important reminder to contracting parties of the importance of force majeure drafting. Parties must consider whether there are commercially desirable reasons for providing one party but not the other with relief stemming from a force majeure event.

Further, contracting parties must also consider whether there are specific events they wish to exclude from the operation of a force majeure clause, such as financial inability in this case, and what they intend to happen for all parties to the contract.

Should you have any specific questions about this article or would like to discuss it further, please contact any member of our global Construction & Engineering Group to begin a conversation.