Failure To Close An Agreement Of Purchase And Sale In The Context Of COVID-19 The COVID-19 pandemic has lead to noticeable changes in the real estate market in the GTA as well as to a general recession, according to Statistics Canada. While detached houses and living space in the suburbs in general increased in value, smaller living spaces such as condominiums are in very low demand. Purchasers who entered into an Agreement of Purchase and Sale (APS) may no longer be able to secure financing for the property. This may be due to the recession and/or the purchaser’s loss of employment between signing the APS and the closing date. The consequences of a failure to close on an APS were previously addressed in detail here. Consequences of failure to close In brief, the consequences for the purchaser who fails to close are as follows: the purchaser will likely forfeit their deposit; the purchaser may also be liable for the difference in value between the purchase price agreed upon in the APS and the re-sale price the vendor can obtain, less the amount of the forfeited deposit; the purchaser furthermore can bear liability for the vendor’s costs until the re-sale, for example, gas, hydro, taxes, etc. as well as interest and other consequential losses the vendor suffered if the vendor was relying on the money from the purchase to buy another property. Legal considerations A change in the market conditions or loss of employment does not constitute a legally valid reason not to fulfill the obligations arising from the APS. Generally, there is no frustration of contract or force majeure at work. Frustration A contract is frustrated when a supervening event has occurred after entering into the contract, without the fault of either party, which renders the performance of the contract substantially different than the parties had bargained for (Bang v. Sebastian, 2018 ONSC 6226). The event must have been unforeseeable. The courts have held that parties to an APS know that market prices can go up and down. While the magnitude of the downturn may have been unexpected, that does not render it unforeseen. It also does not alter completely the nature of the APS (Paradise Homes North West Inc. v. Sidhu, 2019 ONSC 1600). Force Majeure In Paradise, the purchaser also argued the defence of force majeure. The court did not assess the merits of this defence. In fact, this defence is rarely litigated. One reason is that there is no common law doctrine of force majeure. This defence can only be brought forward if the contract explicitly provides for it. Such a clause would often provide that the parties are relieved from their contractual obligations when an unexpected, external event has occurred that prevents the parties from performing their obligations. Recent Case Law The recent Ontario case law concerning breach of an APS in the COVID-19 context does not address the defence of force majeure. Since there is no common law doctrine of force majeure and given its relatively low success rate in courts, frustration is predominatly the defence of choice. However, frustration, has not yet been found to relieve a party from the obligations of an APS due to the ongoing pandemic. Two cases before the Superior Court of Justice are illustrative. In FSC (annex) Limited Partnership v. Adi 64 Prince Arthur L.P., 2020 ONSC 5055, a commercial real estate case concerning a condominium project in Toronto, the respondent argued that difficulties obtaining financing during the COVID-19 crisis frustrated the shotgun provision under which the respondent had previously elected to purchase the applicant’s interest in the project. This argument failed. While this case is not a classic APS case, it still clearly demonstrates that the court is not easily persuaded that a recession justifies a finding of frustration. The court said: “If decreased liquidity was tantamount to frustration, it would mean that a large number of contracts for which parties required financing would be frustrated in every recession.” The second case relevant in this context is Burrell v. Burrell, 2020 ONSC 3269. In this case, one of the selling spouses unilaterally decided to refuse to sign the closing documents for the former matrimonial home in the course of the divorce, calling upon the pandemic and the health risks the moving arrangements would involve. The court found that the spouse’s argument would not render litigation successful with the purchasers of the house, implying that the APS would not be frustrated due to the pandemic’s health risks. Therefore, the other spouse was permitted to sign the documents for both spouses, so that the obligations under the APS would be honoured. Lessons to be learned The ideal course of action is to include a clause in the APS that makes the APS contingent on the purchaser’s ability to obtain the necessary financing to close the transaction. In the reality of a competitive real estate market, this option will not always be available to the purchaser. A second option, subject to the same flaw, is to include a force majeure clause in the APS. This needs to be individually negotiated because most real estate agents use the Ontario Real Estate Association’s (OREA) standard APS form for residential transactions, which does not include a force majeure clause. Furthermore, the effects of COVID-19 are raising novel issues that have not yet been fully canvassed by courts, and whether such a clause would be successful in allowing a purchaser to pull out of an APS due to financing issues or other issues relating to COVID-19 would remain to be determined. As mentioned above, the precise language will be important when the buyer has to convince the court that performance was truly impossible and that COVID-19’s impact on the real estate market was unforeseeable. If you require legal advice on a commercial litigation matter, such as the above, feel free to reach out to DSF lawyer Stephanie Turnham under 289-638-3182 or stephanie.turnham@devrylaw.ca “This article is intended to inform. Its content does not constitute legal advice and should not be relied upon by readers as such. If you require legal assistance, please see a lawyer. Each case is unique and a lawyer with good training and sound judgment can provide you with advice tailored to your specific situation and needs.” By Fauzan SiddiquiBlog, Commercial Litigation, COVID-19November 27, 2020December 17, 2020
Weddings & Contract Frustration during Covid-19 WEDDINGS, CONTRACTS & COVID-19 Before entering into a marital contract, couples and newlyweds may enter into a number of other contractual relationships. From vendors for decor & entertainment to catering and venues, there are a number of legal implications to be considered when unforeseen circumstances arise and threaten to disrupt contractual performance. COVID-19 & WEDDINGS With COVID-19’s current impact on the airline industry with restrictions in place on international travel and upon large social gatherings, the wedding industry has experienced significant disruption. So what does that mean for wedding vendors, venues and couples facing wedding cancellations or postponements? FORCE MAJEURE “Force majeure” clauses generally discharge a contracting party from the obligation to perform when an unanticipated event, beyond the control of either party, renders performance impossible or significantly different than what was anticipated. Many commercial agreements contain “force majeure” clauses which provide for parties to be excused of their contractual obligations in the event of serious unforeseen circumstances. These clauses are applicable when unforeseen events, such as an “act of God”, government action or change in legislation takes place, so as to disrupt contractual performance. To be applicable, a force majeure clause has to be contained within the written contract. A party seeking to rely on a force majeure clause must first establish that the intervening event falls within the contract’s definition of force majeure. In most contracts, there typically is a list outlining specific triggering events and terminology that is covered. Some contracts contain broader catch-all phrases such as “other events beyond the reasonable control of the parties.” Such assessments would likely be conducted on a case-by-case basis and will depend on the language of the contract and the facts of each individual case. It is important to note that the party seeking to invoke a force majeure clause must establish that the event sufficiently impacted contractual performance. Some force majeure clauses set out the degree of requisite impact required for applicability, ranging higher standards of performance being “rendered impossible,” to lower standards such as performance being “delayed.” Where the requisite impact is not specified in the agreement, Canadian courts have typically applied a higher threshold. An event that has made the performance more costly or unprofitable is insufficient to trigger the application of a force majeure clause. THE DOCTRINE OF FRUSTRATION Frustration occurs where an event occurs after entering into a contract, which renders performance impossible or radically different than negotiated and goes to the very root of the contract. The doctrine of frustration may apply in situations where there is no force majeure clause contained in the applicable contract. It is not enough for a contract to simply become more onerous or more difficult to perform. Rather, a party must show that the original purpose of the contract has been undermined and it would be unjust for them to be bound to the contract under the existing circumstances. Where the doctrine of frustration is applicable, the effect of the doctrine of frustration is to discharge parties from their contractual obligations. Cases involving frustration are determined by the courts based on their specific facts. Given the significance of its impact, the threshold for establishing frustration is very high. VENUES & VENDORS Venues and vendors facing losses incurred due to business interruption as per COVID-19 are advised to reach out to their insurance providers to see if they are able to claim for any of their losses based on their insurance coverage. MITIGATION & COOPERATION FOR VENDERS AND COUPLES TO CONSIDER In any situation where losses are likely to be incurred, contractual parties have a duty to mitigate. Parties would be advised to consider and discuss any viable options if possible in regards to accommodations, rescheduling or postponements if available. Relying on force majeure and frustration claims should be viewed as a last resort where conversations and negotiations have stalled or broken down. As businesses begin to reopen and restrictions begin to ease, we encourage couples, vendors and venues to stay apprised of updates that impact the wedding industry. (Link here) For more complex issues and questions pertaining to wedding contracts with venues, vendors, or couples in relation to refunds, deposits or monies paid for weddings and other contracts – where performance is now in question as a result of COVID-19, please contact one of the lawyers at our firm to discuss your rights and options. “This article is intended to inform. Its content does not constitute legal advice and should not be relied upon by readers as such. If you require legal assistance, please see a lawyer. Each case is unique and a lawyer with good training and sound judgment can provide you with advice tailored to your specific situation and needs.” By Fauzan SiddiquiBlog, Commercial Litigation, COVID-19July 3, 2020August 20, 2021
Force Majeure in the COVID-19 era. Can it save your business? In these unprecedented times of COVID-19, business owners are facing unprecedented hardship and economic losses. Contractually, how a party defines the parameters of Force Majeure/Act of God will be crucial to the interpretation. Legal consideration is highly recommended before a decision is made to not perform the terms of the contract. Heavy penalties can be granted for failure to live up to contractual obligations. However, if it is a valid Force Majeure event, your company may not be obligated to live up to the agreed upon contract. Similarly, if the party you contracted did not live up to its obligations you may have recourse depending on the wording of the Force Majeure clause. Similarly a company should consider the insurance implications of a contract. Again, depending on how a company has contracted with its insurer, it may be eligible to receive business interruption benefits during this unprecedented time. This could mean the difference between bankruptcy and the survival of a business in these unchartered waters of COVID-19. FORCE MAJEURE According to the Black Law’s Dictionary Force Majeure is defined as an “event or effect that can neither be anticipated or controlled”. It is also referred to as an “Act of God”.[1] This contractual term will help define a company’s obligations under its contracts and whether a company may be entitled to insurance relief in this difficult time. There is little legislative or case law guidance on obligations for epidemics and potential pandemics. Legal advice should be sought to highlight your risks. The Court places the burden of providing Force Majeure on the party intending to rely upon it to establish that compliance was impossible and not merely inconvenient or more difficult.[2] WHERE TO BEGIN The first step is to look at the contract, whether it is a contract with a customer, supplier, vendor, etcetera. Force Majeure clauses are not mandatory. If it is not included in the contract this would not be a viable defence for cancelling a contract. It may be that the Force Majeure clause will grant more time to fulfill a contractual obligation. It may allow a party to back out of the contractual obligation completely. It may provide relief that is contemplated in the contract. The Courts will look at the specific terms of the specific contracts.[3] Once it is established there is a Force Majeure clause, the next step is to determine what types of situations it contemplates. Is it a broad clause? Does it using wording of a health emergency? Does it use wording of a national emergency? Does it include wording of a pandemic? If the answer is that the contract contemplated a pandemic such as COVID-19, was the failure to complete the contract due to COVID-19? It may be that there were other circumstances such as not having put the necessary infrastructure in place at the outset of the contract, irrespective to the COVID-19 circumstances that would have caused the party to default on the contract. In such cases the Force Majeure clause would not be helpful. ACTIONS The type of action taken will be dictated by the terms of the contract. For example, in the case where the contractual terms save the party from its obligations if a legislative authority cancels an event rather than the company itself, the company may wish to work cooperatively with the local authority to have it cancel an event instead of the company itself. This could make the difference between contractual penalties versus a valid cancellation. DUTY TO MITIGATE Does the contract require you to mitigate your damages? Were you cancelled on? Did you cancel? Chances are the contract has a duty to mitigate provision, in order to mitigate the damages caused by the cancellation. This will lead to considerations of what steps were taken instead. Could services be provided but at extra costs? Could some money be recouped for example selling inventory in a different way or for a loss? THE COURTS HAVE CONSIDERED FORCE MAJEURE CLAUSES The Supreme Court of Canada has considered the issue of Force Majeure in a contract in the case Atlantic PaperStock Ltd. v. St. Anne-Nackawic Pulp & Paper Co...[4] The Court considered a clause that contained the words “non-availability of markets” and found it generally operates to discharge a contracting party when a supervening, sometimes supernatural, event, beyond control of either party, makes performance impossible. The Court held that in considering such clauses, the common thread is that of the unexpected, something beyond reasonable human foresight and skill. If markets were unavailable, did they become so because of something unexpected happening? Was the change so radical as to strike at the root of the contract? Could the party, through the exercise of reasonable skill, have found markets in which to trade? In this case, the contract contemplated the following to be frustrating events: an act of God, the Queen’s or public enemies, war, the authority of the law, labour unrest or strikes, the destruction of or damage to production facilities.[5] In that case, it was not sufficient for a party to cancel a contract because it could not complete the work profitably. Similarly, a closed or declining market is not sufficient to trigger the clause.[6] The Ontario Court has found that the Force Majeure clause can be triggered due to unforeseen humidity and a heatwave.[7] The province wide black out in 2003 was also considered a Force Majeure by the Court.[8] The Ontario Court has found, however that the Force Majeure clause was not triggered where there was a dramatic drop in real estate values.[9] In this instance, a party was still required to complete the unconditional agreement of purchase and sale. Similarly the volatility of financing rates is not considered a Force Majeure.[10] Similarly a failure of a courier company to deliver a package on time was not considered a Force Majeure.[11] The Courts do not appear to regard changes in economic or market circumstances itself as a Force Majeure. The Court does not analyze profitability to determine whether an event is a Force Majeure. The Courts require a higher threshold to be met of something unforeseeable in order to trigger the Force Majeure clause. Before relying on a Force Majeure clause, get legal advice to help determine if it is likely to be enforceable. IS THERE INSURANCE AVAILABLE TO HELP WITH LOSSES? Once contractual obligations are considered, you should determine whether your insurance coverage can help compensate for losses. Many businesses carry business interruption coverage. Again, like with contracts between parties, the specific terms of the insurance policy will specify the coverages and exclusions. You should obtain legal advice to help determine whether you have coverage available to you. Courts tend to interpret insurance contracts more broadly so you may be found to have coverage under your insurance policy for COVID-19 losses. CONCLUSION In this COVID-19 era, many businesses face economic difficulties. Looking to your contracts will help the business determine if it has any recourse in its contracts for additional time, or the ability to cancel part or all of a contract. The wording of the contracts will be important. Legal advice is necessary to help guide that decision. Getting it wrong can have expensive consequences so be aware of the risks. Also at this time, consider whether you have any insurance coverage that could be triggered by COVID-19. [1] Black’s Law Dictionary, 11th ed, sub verbo “force majeure”. [2] Evan Bolla, “Force Majeure and Insurance Considerations for COVID-19 Cancellations” (18 March 2020), Risk Management Magazine, online: <http://www.rmmagazine.com/2020/03/18/force-majeure-and-insurance-considerations-for-covid-19-cancellations/>. [3] Ibid. [4] Atlantic PaperStock Ltd. v. St. Anne-Nackawic Pulp & Paper Co., [1976] 1 SCR 580. [5] Ibid at para 4. [6] Ibid at para 6. [7] CAW-Canada, Local 252 v. Maksteel, 2012 CarswellOnt 6790 at para 26 (Ont Arb). [8] Partnership for Public Lands v. Ontario (Director, Ministry of the Environment), 2003 CarswellOnt 5130 at para 12 (Ont Environmental Review Trib). [9] Holst v. Singh, 2018 ONSC 4220 at para 6. [10] Tom Jones & Sons Ltd. v. R., 1981 CarswellOnt 680 at para 15 (Ont HC). [11] Iannuzzi v. Ontario (Ministry of the Environment), 2009 CarswellOnt 7555 at para 32 (Ont Environmental Review Trib), citing Miller v. Ontario (Director, Ministry of the Environment) (2008), 36 CELR (3d) 305 (Ont Environmental Review Trib). “Our articles are intended to inform. Its content does not constitute legal advice and should not be relied upon by readers as such. If you require legal assistance, please see a lawyer. Each case is unique and a lawyer with good training and sound judgment can provide you with advice tailored to your specific situation and needs.” By Fauzan SiddiquiBlog, Commercial Litigation, COVID-19April 17, 2020May 22, 2021
