Force Majeure and COVID-19 – Appeal Decision in Niagara Falls Shopping Centre Inc. v. LAF Canada Company

Although it has been three years since the COVID-19 pandemic hit Canada with full force in March 2020, the courts continue to address the fallout. In November 2022, we published a case update about a trial decision that interpreted a force majeure clause in a commercial contract, which did not relieve an airline from certain contractual obligations. The Court of Appeal for Ontario, in its recent decision in Niagara Falls Shopping Centre Inc. v. LAF Canada Company, addressed another force majeure clause, this time in a commercial lease agreement. The Court of Appeal held that the force majeure clause excused the landlord from its obligation under the lease to provide the tenant with the premises during the periods of COVID-19-related closures, but did not excuse the tenant’s obligation to pay rent during that same time. However, the Court of Appeal extended the lease term for a period equivalent to the closures, and did not require the tenant to pay rent during this extension.

Force majeure clauses (sometimes called “act of God” clauses) are meant to temporarily relieve a contracting party from performing its obligations when an event beyond the control of either party makes performance impossible. However, as the Court of Appeal noted, “[t]he term itself has no set or specialized meaning and whether an event triggers the operation of a force majeure clause depends on the nature of the event and the wording of the clause.” This is perhaps the central lesson from these force majeure cases: courts interpret them like other contractual provisions and give them the meaning required by the particular wording used and the factual matrix of the case.

Background and Lower Court Decision

In our previous case update, we described the trial decision in Porter Airlines Inc. v. Nieuport Aviation Infrastructure Partners GP where the Court held that, based on the wording of that force majeure clause and the facts, the clause was not engaged.

Conversely, in Niagara Falls Shopping Centre Inc. v. LAF Canada Company, there was apparently no dispute that the force majeure clause was triggered for the landlord. The clause read, in part:

22.3 FORCE MAJEURE. If either party is delayed or hindered in or prevented from the performance of any act required hereunder because of […] restrictive laws […] beyond the reasonable control of the party delayed, financial inability excepted (each, a “Force Majeure Event”) […] performance of such act shall be excused for the period of delay caused by the Force Majeure Event and the period for the performance of such act shall be extended for an equivalent period […]. Delays or failures to perform resulting from lack of funds or which can be cured by the payment of money shall not be Force Majeure Events. […] [Emphasis added]

The clause did not contain express language about the payment of rent in the event of a Force Majeure Event for the landlord.

In this case, the government-ordered closures of non-essential businesses during the COVID-19 pandemic affected the building in a shopping plaza that the landlord leased to the tenant operating a fitness centre. Accordingly, the landlord’s failure to provide the tenant with the premises resulted from “restrictive laws”, and was a “Force Majeure Event” for the landlord.

The motion judge at first instance held that the Force Majeure Event exempted the landlord from performing its obligations during the periods of government-mandated closures. The motion judge also rejected as being “commercially absurd” the tenant’s submission that the lease term should be extended for a period equivalent to the closures. The motion judge further held that the wording in the force majeure clause providing that “failures to perform […] which can be cured by the payment of money shall not be Force Majeure Events” meant the tenant was not relieved of its obligations to pay rent during the closures; the tenant’s failure to pay rent, reasoned the motion judge, could be “cured by the payment of money”.

Court of Appeal Decision

The tenant appealed the motion judge’s decision on the interpretation of the force majeure clause. The Court of Appeal examined what the force majeure clause required both with respect to the obligations of the landlord, and the obligations of the tenant.

Effect of the force majeure clause on the landlord’s obligations

The Court of Appeal held that the motion judge erred when she held the force majeure clause exempted as opposed to excused the landlord’s inability during the closure periods to provide the tenant with the premises for the intended use as a fitness facility. The Court of Appeal said it was necessary to give effect to the wording of the force majeure clause, which stipulated that, in the event of a Force Majeure Event, “the period for the performance of such act shall be extended for an equivalent period”. Accordingly, the Court of Appeal extended the term of the lease for a period equivalent to the closures.

Effect of the force majeure clause on the tenant’s obligations

The Court of Appeal agreed with the motion judge that the tenant was obligated to pay rent during the closure periods, and that the force majeure clause did not apply to excuse paying rent. While the Court of Appeal held that the tenant was hindered in meeting its obligation to pay rent during the closure period, it did not result from a “Force Majeure Event”. The Court of Appeal noted that during the closure periods, the tenant did not require its members to pay membership fees, and that was what hindered the tenant’s ability to pay rent. The Court of Appeal noted the force majeure clause excluded “financial inability” from being a “Force Majeure Event”. Moreover, the wording in the clause stated that “[d]elays or failures to perform resulting from lack of funds or which can be cured by the payment of money shall not be Force Majeure Events”. Accordingly, the Court of Appeal held that the tenant’s failure to pay resulted “from lack of funds”.

While the Court of Appeal held that the tenant could not rely on the force majeure clause to excuse it from paying rent during the closure periods, the tenant was not obligated to pay rent during the equivalent time period when the lease was extended, since it has already paid rent during the closure period.

Guidance for Drafting and Interpreting Force Majeure Clauses

The Court of Appeal’s decision in Niagara Falls Shopping Centre Inc. v. LAF Canada Company offers direction that when interpreting force majeure clauses, including in the context of COVID-19, the precise words used in the clauses will be of paramount importance. When drafting force majeure clauses, parties need to be clear about what they intend to happen – for all parties to the contract – when events beyond the control of any party delays or prevents performance.

For more information concerning force majeure clauses or how COVID-19 has impacted contractual relation and performance, please contact any member of our Dispute Resolution Group.