As explained in a recent article in our Legal Beacon resource centre, the Conference Board projects the unfolding tariff landscape may result in exports dropping by a third. Tariffs may also result in price adjustment demands within established contractual arrangements.
Every aspect of business, whether it be food and ag production, manufacturing, wholesale, services or retail, will feel the effects of a recessionary trend where demand for products and services is diminished. The implications for businesses include, among other things, vendor management (including managing proposed price adjustments) and contract interpretation and enforcement.
Where contracts cannot be renegotiated, a party may seek to avoid its obligations by relying on force majeure clauses or the legal doctrine of frustration of contract.
Force majeure ("FM") clauses and frustration of contract
If a contract contains an FM clause, it may excuse a party from performance of contractual obligations when certain extraordinary events prevent it from doing so. The key considerations are whether:
- the event in question triggers the application of the FM clause based on its wording,
- the event has sufficiently impacted performance of contractual obligations,
- everything has reasonably been done to mitigate the impact of the event; and
- all conditions for reliance on the FM provision, such as notice, have been complied.
The gist of the law of frustration is that it applies when an unforeseen situation has arisen for which the parties made no provision in the contract and performance of the contract becomes a thing radically different from that which was undertaken by the contract.
The party seeking to invoke the doctrine of frustrated contracts must demonstrate that the disruption is a permanent one, and that performance of contractual obligations is impossible – not simply impractical, not profitable or difficult.1
FM and frustration where tariffs impact contractual arrangements
The application of a FM clause or the frustration doctrine will heavily depend on the particular wording of the contract and the factual circumstances of the contracting parties.
Some insight into how they might operate within tariff situations can be gleaned from their treatment during the COVID-19 pandemic. Government shutdown orders made during the pandemic resulted in a number of court decisions concerning the application of FM clauses and frustration of contract.
In some instances they were found to be applicable. For example, two school boards who were tenants of a community sportsplex successfully relied on a FM clause to avoid paying rent during a portion of the pandemic. The FM clause included "restrictive government laws or regulations" and the Court found the government orders prevented the landlord from offering the space as the lease had contemplated. As a result, the rent was not payable during the time in which government orders prevented the landlord from allowing the tenants to use the premises.2
In other instances they were found to be inapplicable. For example, a FM clause did not allow a party to keep a deposit made for a wedding reception that had to be cancelled during the pandemic. The FM clause included events akin to government shutdown orders, but the reception could have been rescheduled for a later date so the contract was not impossible to perform. Given that the parties had foreseen the possibility of a government shutdown order in the FM clause, the law of frustration could not apply. Further, the same conclusion concerning the possibility of performing the contractual obligations applied.3
Other Courts note that even where government shutdown orders rendered businesses such as parking garages or airlines significantly unprofitable for periods of time, this was not sufficient to excuse non-payment pursuant to FM clauses.4
Relying on the law of frustration was generally an uphill battle during the pandemic. As noted by Justice Angoitti, "Canadian courts have consistently rejected the Pandemic as a basis for frustration in different contractual contexts. While the Pandemic is a unique event, the consequences of it are not necessarily so. Both the triggering event and its consequences must be considered to determine if the supervening event is unforeseen. As well, there is a distinction between an event that renders performance radically different and one that increases the cost of performance or makes performance less economically desirable." The Courts often conclude that the performance of the contract does not become "radically different" simply because it becomes unprofitable.5
The facts of each case drive the analysis but, generally speaking, economic difficulty alone may well be insufficient to trigger FM clauses or the law of frustration.
Footnotes
1. For other insights into the specific legal requirements of FM clauses and frustration of contract see this article from Tristan Culham
2. Windsor-Essex Catholic District School Board v. 231846 Ontario Limited, 2021 ONSC 3040, appeal dismissed, 2022 ONCA 235 but also see Durham Sports Barn Inc. Bankruptcy Proposal, 2020 ONSC 5938 where a tenant was not excused from paying rent even where the business could not operate in the leased premise due to government order.
3. Christine v Bellvue Manor Inc., 2025 CanLii 17321 (ON SCSM)
4. See RT Twenty-Sixth Pension Properties Limited v. Precise Parklink Inc., 2023 ONSC 1199 ("RT") and Porter Airlines Inc. v. Nieuport Aviation Infrastructure Partners GP, 2022 ONSC 5922
5. See RT for example, "I was referred to no authority where a contract was found to be frustrated because of events that did no more than eliminate its profitability, and this would be in my view an unreasonably broad conception of the defence."
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
