Impact of Natural Disasters on ContractsNov 17 2021
BC experienced its wettest 24 hours in history this week, resulting in the submersion of several communities under water and isolation of several more with mudslides and severely damaged roads. Particularly hard hit are Abbotsford and the eastern Fraser Valley where the disaster continues to unfold with a catastrophic flood warning that impacts many of our clients and our team members.
If you are unable to re-enter a rental unit or continue operations for an extended period, what happens to your contracts?
Below we outline the legal principles of “force majeure” and “frustration” that may apply if a contract is unable to be performed.
Sometimes “force majeure” clauses are included in contracts to allocate the risk of future events. Force majeure clauses account for situations where one of the contractual parties cannot perform their obligations due to circumstances beyond their control.
Whether you can invoke a force majeure clause depends on the following:
You must review the language in your contract to confirm it covers the type of event(s) we are experiencing. If specific wording like “flood” is not included, it may fall under broader “catch-all” phrases such as “act of God” or “natural disaster”.
You must prove that the natural disaster has sufficiently impacted your ability to perform your contractual obligations. Force majeure clauses often describe the required degree of impact which ranges from “delays” in performance to “impossible” to perform. The fact that an intervening event renders a contract more expensive or slower to perform will likely be insufficient to invoke the clause.
The natural disaster must be the direct cause of your inability to perform your contractual obligations.
It is important to understand what happens in relation to the force majeure. There could be specific terms requiring you to mitigate possible losses by doing what you can to lessen the damage.
Where there is no applicable force majeure clause in your contract, the doctrine of frustration may apply to relieve contractual obligations. This does not need to specifically be written into a contract; it occurs where an unexpected situation arises beyond anyone’s reasonable control that makes it impossible to meet the terms of the contract, or the terms can only be met in a significantly different manner than was intended. If a contract is frustrated, it is considered at an end and all contractual obligations cease.
Application to Residential and Commercial Leases
The current natural disaster will certainly be considered as unforeseen. If it has caused damage to a rental unit so that it cannot be occupied for an extended period of time and the lease does not have a force majeure clause, the tenancy will likely be considered frustrated. Unless the lease says otherwise, in such circumstances, it is likely that neither the landlord nor the tenant has to give notice to end the tenancy.
Typically, the tenant is not required to pay rent after the unit became impossible to occupy and the landlord should return any pre-paid rent for that time period. The Frustrated Contract Act sets out more details about who is entitled to what.
Application to Employment Relationships
It is important to review the terms of any written employment contract you may have. Typically, an employee is entitled to notice or payment in lieu of notice (often referred to as “severance”) if their job is ending. An exception is provided in Section 65 of the BC Employment Standards Act where an employment contract is “impossible to perform due to an unforeseeable event or circumstance”. This mirrors the legal requirements for frustration.
Again, our recent unprecedented natural disaster should be considered unforeseeable. It will take time to assess the scope of damage and what that means for operations. Depending on the extent of damage to workplaces and the type of work, the disaster may have rendered some jobs impossible to perform.
It is the responsibility of the employer to prove it is impossible for the employee to perform their work, including there is no way to perform the work in a different way (working from home, for example). Significant business losses resulting from the economic impacts of the natural disaster will not be enough to demonstrate impossibility. Permanent closure or closure for at least 13 weeks is likely to meet the impossibility test.
If a job is impossible to perform due directly to the physical consequences of the natural disaster, severance will not be owed to employees.
Currently, there are a lot of unknowns and your safety is most important. Taking any steps relating to ending tenancies or employment relationships requires careful consideration. If you would like to speak to a lawyer about your options, we can help. Please contact our office at 604.853.0774 and we will set up a consultation.
*Feature image released yesterday from Air 1 by Abbotsford Emergency Operations Centre