The COVID-19 pandemic presented businesses with unprecedented challenges. It was inevitable that litigation would follow, and that the courts would be required to interpret familiar contract terms in light of these decidedly unfamiliar circumstances. Whether parties to a contract could invoke a force majeure clause (sometimes called an “act of God” clause) in response to COVID-19 was the focus of much speculation when the pandemic first hit.
In Porter Airlines Inc. v. Nieuport Aviation Infrastructure Partners GP, the Ontario Superior Court of Justice recently considered whether a force majeure clause relieved Porter from certain contractual obligations. It also considered whether COVID-19 required Porter’s counterparty to act reasonably in exercising certain of its contractual rights. In the result, the Ontario trial Court held that Porter was not entitled to relief from its contractual obligations as a result of COVID-19, and ordered it to pay substantial damages.
Porter Airlines v. Nieuport Aviation concerned a dispute between Porter, the regional, short-haul commercial airline, and Nieuport, the owner of the passenger terminal at Billy Bishop Toronto City Airport out of which Porter operates. Porter and Nieuport have a contractual agreement whereby Porter pays monthly fees to use the terminal. Those fees are calculated by the number of “slots” allocated to Porter at the Billy Bishop terminal.
Before the onset of COVID-19, a dispute arose between the parties about the fees Nieuport was charging. COVID-19 added an extra layer of complexity onto that dispute. Porter announced it would suspend its operations effective March 20, 2020, and those operations did not restart until September 8, 2021.
On March 27, 2020, Porter advised Nieuport that COVID-19 constituted a force majeure event, and accordingly stopped paying its monthly fees. Nieuport disputed that COVID-19 was a force majeure event. On April 1, 2020, Nieuport increased its fees per “slot”. Porter also sought to reduce its number of “slots” without giving the notice required by the contract.
The litigation that ensued focused on numerous issues. This case update focuses on the impact of the COVID-19 public health crisis on the parties’ rights and obligations under their contract.
The Ontario Trial Decision
At trial, Porter advanced two arguments as to why it was entitled to relief as a result of the COVID-19 pandemic. First, Porter argued that the force majeure clause meant it did not have to pay monthly fees to Nieuport during the pandemic, and did not have to provide notice to Nieuport to reduce the number of “slots” it used. Second, Porter argued it was unreasonable for Nieuport to demand payment of fees or increase the amount of fees during the pandemic.
The trial decision set out in detail the trajectory of the pandemic, including the devastating effect it had on the airline industry. Billy Bishop airport was particularly hard-hit because it primarily focused on business-oriented travel that was severely impacted by COVID-19. However, no public health direction required Porter to cease domestic operations in Canada, and Porter was the only airline in Canada that suspended all of its commercial operations from March 2020 to September 2021.
The agreement contained the following force majeure clause:
Whenever and to the extent that either party is bona fide unable to fulfil or is delayed or restricted in fulfilling any of its obligations under this Licence Agreement by an event of Force Majeure, such party shall be relieved from the fulfilment of the part of its obligations affected by Force Majeure for the duration of such event of Force Majeure.
The Court noted that Porter had the burden of bringing itself within the force majeure clause, and that whether such a clause is triggered depends on how the particular words of the clause at issue are interpreted. It also cited a 1976 Supreme Court of Canada decision, Atlantic Paper Stock Ltd. v. St. Anne-Nackawic Pulp & Paper Co., that held a force majeure clause “generally operates to discharge a contracting party when a supervening, sometimes supernatural, event, beyond control of either party, makes performance impossible.” The Court reviewed various cases that held that parties generally could not rely on force majeure to avoid contractual payment obligations simply because conditions had changed and rendered the contract economically disadvantageous or unprofitable, as opposed to impossible to perform.
On the facts of this case, the Court held that, while Porter suffered a “precipitous decline in revenue as a result of the collapse in the demand for its commercial airlines services as a result of the pandemic”, its decision to suspend operations at Billy Bishop was driven by commercial considerations, principally the decline in revenue caused by a collapse in demand resulting from the pandemic. While this may have been a commercially reasonable course of action, Porter was not “restricted” in fulfilling its payment obligations to Nieuport under the contract.
The Court also examined the definition of “Force Majeure” in the contract, which confined it to an “event causing a delay” in performing an obligation under the agreement. The Court noted the lack of a government order requiring Billy Bishop to close or Porter to suspend its operations, and held the government responses to the pandemic were not force majeure events because they did not prevent or delay Porter in performing its contractual payment obligations.
With respect to Porter’s obligation to provide notice to reduce the number of “slots” allocated to it, Porter had evidence that the pandemic made it impossible for it to forecast demand. Accordingly, it argued that the force majeure clause relieved it of its obligation to provide the requisite notice. The Court did not accept that argument. While accepting that the pandemic made forecasting the daily need for “slots” difficult, the Court held that Porter was able, and was not delayed or restricted in its ability, to provide the requisite notice. Accordingly, the force majeure clause was not engaged.
Unreasonable Exercise of Contractual Rights
The contract required that Nieuport act reasonably in exercising its rights and obligations, likely reflecting Nieuport’s role as the operator of a public infrastructure asset. Porter argued that the clause prevented Nieuport from demanding payment of or increasing fees during the pandemic. The Court disagreed with that interpretation. The Court noted it was required to read the contract as a whole, and cited the contractual provisions that required Porter to pay fees. The Court held it was not unreasonable for Nieuport to demand that Porter meet its contractual obligations to pay fees. The contract could not be interpreted to permit a modified fee structure whenever Porter believed it was objectively reasonable that another fee structure should apply.
Important Guidance for Future Disputes
While the decision in Porter Airlines v. Nieuport Aviation turned on its specific facts, including the particular wording in the applicable agreement, force majeure clauses generally address a similar issue, namely what happens when the parties face an unexpected “act of God”. Accordingly, this case offers important guidance when interpreting force majeure clauses, especially in the context of COVID-19. It also cautions that, even when parties to a contract are faced with a “supervening, sometimes supernatural, event, beyond control of either party”, they can still be required to fulfil their obligations, even when that event renders the contract economically disadvantageous or unprofitable.
For more information concerning force majeure clauses or how COVID-19 has impacted businesses, please contact any member of our Dispute Resolution Group.
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