Disaster Strikes – Frustration of Contract and Force Majeure

1 février 2011 | Philip A. Carson

( Disponible en anglais seulement )

What happens when disaster strikes a construction project? Have circumstances changed so significantly that the original contract becomes impossible to perform? Can the builder rely on force majeure to keep the contract alive?  Those questions have recently been addressed by the Alberta Court of Appeal.

In Fishman v. Wilderness Ridge at Stewart Creek Inc., 2010 ABCA 345, the plaintiff, Fishman, contracted with a condominium developer to purchase a new condominium to be built in Canmore, Alberta. The plaintiff and the developer entered into the contract in early 2007 with an anticipated completion date in early 2010.

The construction project was on schedule when, in October 2009, the building was destroyed by fire. After the fire, the developer contacted all of the purchasers to advise them of the delay and to advise that the developer was relying on a force majeure clause in the contract. The developer promptly commenced rebuilding and anticipated completion about one year later than originally contracted. The force majeure clause stated that the developer would not be deemed to be in default for any delay due to causes beyond its reasonable control.

The plaintiff took issue with the delay, claiming that the fire undermined the foundation of the contract so fundamentally that the contract was impossible to perform as originally contemplated; in other words that the contract was frustrated. A contract that is frustrated is treated as if it never existed. The plaintiff argued that the force majeure clause was not applicable because it did not cover frustration, only default by the developer. The argument is that a contract that is treated as never existing cannot have a force majeure clause, or any other clause.  The developer relied on the force majeure clause.

In deciding the case, the Court of Appeal explained the interaction between frustration and force majeure.

The doctrine of frustration « involves an unforeseen change to the circumstances underlying the contract, through no fault of the parties, that renders the contract incapable of performance. The change of circumstances must be fundamental in nature, such that it goes to the root of the contract. It is not enough that performance has become more difficult; performance must be impossible. The destruction of the subject of the contract can amount to frustration, but not if the risk of destruction has been allocated in the contract to one of the parties, and not necessarily if the subject of the contract can be replaced…. A contract is only frustrated when it becomes incapable of performance, not just because performance might be more onerous, more costly, or different from what was anticipated. »

In this case, a one year delay to a three year construction project did not go to the root of the contract, especially since the condominium could be rebuilt. « Reciprocity is also important in measuring frustration; if one party to the contract can reasonably and fairly assert frustration, the other should be able to as well. In this case, if the respondents decided to rebuild the condominium, but asserted frustration and the right to sell the condominium to a third party (at a higher price), the appellants would have a legitimate reason to object. »

Ultimately the court ruled that the developer had, through the force majeure clause, allocated the risk of unforeseen and uncontrollable delay to the purchaser. 

For a builder or developer, this decision illustrates the importance of including a force majeure clause in the construction contract and promptly invoking it when disaster strikes. However, the decision did not say that, in the face of a force majeure clause, frustration can never be considered. On different facts, for instance the destruction of a completed condominium that is to be purchased for immediate possession, frustration might come into play.

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