Force majeure clauses: Ontario Superior Court clarifies COVID-19 impact on contract performance obligations

The COVID-19 pandemic created new and unanticipated operating challenges for businesses around the world. The pandemic caused many businesses to significantly scale down operations, or to cease operations all together. It was no surprise to litigators that contracting parties would invoke force majeure clauses in their contracts in response to the pandemic's significant effect on business operations.

On Oct.19, 2022, the Ontario Superior Court of Justice released its decision in Porter Airlines Inc. v. Nieuport Aviation Infrastructure Partners GP, 2022 ONSC 5922, where it considered whether the pandemic engaged the force majeure clause in a License Agreement between Porter Airlines Inc. ("Porter") and Nieuport Aviation Infrastructure Partners ("Nieuport"). The Court also considered whether Nieuport acted in a "commercially reasonable" manner in exercising its contractual rights under the License Agreement.

The Court ultimately held that the consequences of the pandemic did not engage the force majeure clause entitling Porter to relief from its obligations under the License Agreement. Further, the Court held that Nieuport did not act in a commercially unreasonable manner, as it simply exercised its rights under the License Agreement.

Background

Porter is a regional short-haul commercial aircraft carrier, based out of Billy Bishop Toronto City Airport ("Billy Bishop"). Nieuport is the owner, manager and operator of the passenger terminal at Billy Bishop. When Nieuport became the owner of the passenger terminal at Billy Bishop it entered into a License Agreement with Porter. Under this License Agreement, Porter agreed to pay fees to Nieuport, including fees for use of the terminal, in exchange for privileges as granted by Nieuport, including the right to operate as an aircraft carrier in the terminal. Prior to the pandemic, Porter and Nieuport were already engaged in a dispute regarding fees as charged by Nieuport.

On March 20, 2020, Porter announced that it would be suspending its operations at Nieuport. Porter's operations did not resume until Sept. 8, 2021. Soon after this announcement, on March 27, 2020, Porter notified Nieuport that it considered the pandemic to be a force majeure event, which entitled it to cease its monthly fee payments to Nieuport. Despite the pandemic, Nieuport increased its fees on April 1, 2020. Subsequently, Porter sought to reduce its number of terminal "slots" without giving proper notice to Nieuport as required by the License Agreement.

While the Court addressed eight issues in its decision, the following focuses on the pandemic's impact on the rights and obligations of the parties under the License Agreement.

Issue one: The force majeure clause

Porter argued that the pandemic engaged the force majeure clause, and thereby relieved Porter from (1) the obligation to pay terminal fees; and (2) the obligation to provide proper notice of intention to reduce terminal "slots" in its carrier allocation.

The Court detailed the trajectory of the pandemic in Canada, and the responses from various levels of government. The Court recognized that the pandemic resulted in an "extraordinary and unprecedented drop in passenger levels for airlines in Canada, including Porter."^[1]

Although Porter was significantly impacted by the pandemic, as 60 per cent of its passengers travel for business-orientated purposes, there was no government directive requiring Porter to cease domestic flight operations. Porter was the only commercial aircraft carrier to cease domestic operations in Canada, from March 2020 to September 2021. Billy Bishop remained open for business at all times, and did not prohibit Porter from operating domestic flights.

With the pandemic's impacts on operations at Billy Bishop outlined, the Court stated that a party who claims that a force majeure clause is triggered bears the burden of bringing itself within such a clause to obtain its protection.^[2] Accordingly, the determination of whether a force majeure clause is engaged depends on the interpretation of the impugned clause. In other words, there is no universal rule; the interpretation is contextual. The force majeure clause under the License Agreement reads:

5.1 Force Majeure

(a) Whenever and to the extent that either party is bona fide unable to fulfil or is delayed or restricted in fulfilling any of its obligations under this Licence Agreement by an event of Force Majeure, such party shall be relieved from the fulfilment of the part of its obligations affected by Force Majeure for the duration of such event of Force Majeure.

(b) Notwithstanding an event of Force Majeure, the party affected shall proceed with the performance of its obligations not thereby affected.

The Court first looked at whether Porter was (i) delayed; or (ii) restricted in fulfilling any of its obligations under the License Agreement due to the pandemic or government responses to it. The Court accepted evidence that although the pandemic virtually eliminated the domestic travel market, there was no impediment that precluded, delayed, or restricted Porter from paying monthly terminal fees. The Court noted that Porter continued to pay its other creditors, and that it received a $135-million loan from Export Development Canada, as emergency funding.

As to principles of interpretation regarding force majeure clauses, the Court reviewed case law setting out the principle that parties cannot rely on force majeure clauses to avoid contractual obligations due to circumstances which may render a contract commercially undesirable, or unprofitable, rather than impossible to perform.

The Court looked to the Supreme Court of Canada's decision in Atlantic Paper Stock Ltd. v. St. Anne-Nackawic Pulp & Paper Co., 1975 CanLII 170 (SCC) which held that a force majeure clause "generally operates to discharge a contracting party when a supervening, sometimes supernatural, event, beyond control of either party, makes performance impossible."^[3] The Supreme Court held that the non-availability of markets did not engage the force majeure clause to relieve it of contractual obligations—unavailability of markets did not render performance impossible, but rather undesirable.

Further, the Court noted the British Columbia Supreme Court's decision in Domtar v. Univar Canada Ltd., 2011 BCSC 1776 in which that Court held that "the fact that a contract had become more expensive to perform, "even dramatically more expensive", is not a reason to relieve a party on the grounds of force majeure."^[4]

The Court then reviewed the Alberta Court of Appeal's decision in Atcor Ltd. v. Continental Energy Marketing Ltd., 1996 ABCA 40 ("Atcor"), which Porter submitted stands for the principle that a force majeure clause is triggered where performance under a contract becomes commercially unpractical or unreasonable. The Court was quick to distinguish this case.

In Atcor, the obligation under the impugned contract concerned a supply obligation not a payment obligation. Additionally, the supplier was physically unable to meet the supply requirements of its customers.^[5] In contrast, Porter was not able to show that it was restricted, either physically or legally, from fulfilling its obligations under the License Agreement. The Court emphasized that there is a stark difference between a force majeure clause which is concerned with "failure" to perform obligations as opposed to a force majeure clause which is concerned with the "restriction" of performance regarding obligations. The force majeure clause in the License Agreement fell within the second category, and Porter failed to show such a restriction.^[6]

Furthermore, the Court examined whether the alleged restriction in fulfilling obligations under the License Agreement was, in fact, caused by the COVID-19 pandemic. On this point, the Court looked to the definition of force majeure in the License Agreement, which constrained the triggering of the clause to events which cause "delay."^[7]

On the sub-issue of events which cause delay, the Court stated that the definition was clear in that for an event to qualify under the clause it must be more than merely such an event that is beyond the control of the parties subject to the License Agreement. On this point, the Court noted that the decision in Windsor-Essex Catholic District School Board v. 231846 Ontario Ltd., 2021 ONSC 3040; aff'd 2022 ONCA 235 ("Windsor-Essex"), is of no import because it was clearly noted that although the pandemic can be considered an Act of God, the pandemic itself is not the reason for the prevention of performance under a contract; rather, it is the associated government and regulatory responses.

Unlike the scenario in Windsor-Essex where the government directives triggered non-performance under the contract, Porter was not subject to a government order or directive that required Billy Bishop to close or that required Porter to cease operations. As such, the Court rejected Porter's argument that the pandemic was the reason for Porter's ceasing of business operations.

Issue two: "Unreasonable" exercise of contractual rights under the License Agreement

The License Agreement required Nieuport to act in a commercially reasonable manner in exercising its contractual rights. Porter argued that Nieuport acted unreasonable by (i) demanding payment of terminal fees despite Porter's shutdown of operations; and (ii) increasing its terminal fees during the pandemic.

The Court reviewed clause 6.22(b) of the License Agreement which states that Nieuport "shall, at all times, act reasonably in the exercise of its rights and obligations pursuant to the License Agreement …".^[8] In Porter's view, demanding payments, and increasing fees, at a time when Porter was not generating revenue was unreasonable—or, in other words, unfair and unequitable.

The Court also rejected this argument. The Court looked to section 4.1 of the License Agreement which required Porter to pay all fees as they became due. It was open to Porter to negotiate that a price adjustment clause be inserted in the License Agreement, which would have allowed it to revisit fees if circumstances changed—Porter chose not to do so. Also, there were no "benchmarks" in the License Agreement setting out the standard for which a judge could determine whether an act was "reasonable" or not.

Given the above, the Court held that the entirety of the License Agreement could not be interpreted in such a way which would give Porter carte blanche to modify the fee arrangements whenever it thought it was necessary to do so.

Key takeaways

The Superior Court's decision in Porter illustrates the importance of force majeure drafting in commercial contracts. The Court made it clear that although all such clauses seek to address similar issues and scenarios, their interpretation is contextual, and each case will turn on its unique set of facts. Nonetheless, this decision provides important insight into how courts will interpret the COVID-19 pandemic's effects on commercial operations. Parties to such contracts should be cautioned that despite an event which is beyond the control of the contracting parties, they may still be required to fulfil their obligations, even if doing so would be commercially undesirable.