What if I Can’t Deliver on my Contract?

When you sign a contract, one of the most worrisome questions is “What if I simply can’t deliver? What happens if I physically cannot perform my contractual obligations through no fault of my own?”

Although they apply in only the most strictly interpreted, limited situations, the doctrine of frustration and force majeure clauses can come to the rescue. The first relies primarily on the courts, while the second relies on careful contract drafting.

But what exactly are the doctrine of frustration and force majeure clauses?

1. The Doctrine of Frustration

As a general rule, contracts require “perfect performance”. In other words, performance must conform fully to the obligations as they are stated in the contract. But what about situations that you either did not or could not anticipate? Under such circumstances, the doctrine of frustration might apply. This doctrine states that an (i) unforeseen, supervening event that (ii) renders performance of the contract impossible will set the contract aside, so long as (iii) neither party is responsible for the event.

Let’s break this down:

• The event must be unforeseen and supervening. This means that the event must occur after the agreement has been entered into and must not have been known or knowable.

• The event must render performance impossible. This requires actual impossibility – expense, inconvenience, etc. are insufficient.

• Neither party may be responsible for the event. This includes indirect responsibility.

For this doctrine to apply, the frustrating event must defeat the purpose of the contract. To determine whether the purpose has been frustrated, the purpose must first be identified. As such, it is important to include a statement outlining the purpose of the agreement, or else risk the court coming to its own conclusion. This is often found in the background or recitals of an agreement.

What’s the result?

Under Ontario’s Frustrated Contracts Act, if you can establish frustration, you’re (a) entitled to recover any payments made and (b) cleared from any existing debt under the contract. This is applicable to most commercial contexts.

It is important to remember that the common law holds that this doctrine will not be easily invoked and will require truly exceptional circumstances in order to apply. As well, this will only help if you are already in court and the court agrees with you that the contract has been frustrated. It is important to add the protection of a force majeure clause to your contract.

2. Force Majeure Clause

A Force Majeure Clause, may be easier to invoke than the doctrine of frustration. For a force majeure clause to be applicable, the party must typically show that:

• the event is within the scope of the clause, and the event occurred;

• the event was outside the control of the party;

• the event prevented or delayed the party’s performance of its contractual obligations;

• the party did its best to mitigate (i.e. minimize) the effects of the event; and

• the affected party gave timely notice according to the terms of the contract.

By: Farrah Rahman

This article describes how a force majeure clause functions and provides some further elaboration on the types of events often listed in such a clause. The effect of invoking a force majeure clause can be described in the clause itself.

3. Conclusion

“What if I simply can’t deliver? What happens if I physically cannot perform my contractual obligations?” The answer may depend on why you can’t perform your obligations.

If the purpose of the contract has been frustrated, a judge may side with you and find that you can’t deliver. Alternatively, a force majeure clause can help if a superseding, catastrophic event occurs that prevents you from fulfilling your contractual promises.

Key Takeaways: Try to come to an agreed upon contract “purpose” and negotiate the inclusion of a force majeure clause. It’s critical that you consider the promises you’re making and all potential events that could occur. In most situations, the law will hold you to your promises because, as they say, “your word is your bond!”

This blog was co-written by Samita Pachai.

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This article is provided for informational purposes only and does not create a lawyer-client relationship with the reader. It is not legal advice and should not be regarded as such. Any reliance on the information is solely at the reader’s own risk. Clausehound.com is a legal tool geared towards entrepreneurs, early-stage businesses and small businesses alike to help draft legal documents to make businesses more productive. Clausehound offers a $10 per month DIY Legal Library which hosts tens of thousands of legal clauses, contracts, articles, lawyer commentaries and instructional videos.

Orginally posted at Clausehound.com.