The COVID-19 pandemic has resulted in much uncertainty around how rarely invoked legal doctrines, legislation and contractual provisions are interpreted by the courts. Among these, the 1990 Frustrated Contracts Act , RSO 1990, c F.34, which has only been litigated a few dozen times, has become a common tool for litigants facing a breach of contract claim.
For financial institutions, cases interpreting this legislation will be of great interest. While the jury is still out, the first reported decision involving standard loan and security agreements,
The decision
In 2018, the
In
To be successful, the Bank had to demonstrate there was no genuine issue for trial with respect to the defendants' obligation to repay the loan. The Company and the guarantor relied, among other arguments, on the doctrine of frustrated contracts in support of its position.
What is frustration of contract?
As outlined in the decision, in
any contract that is governed by the law of
The "law of frustration" applies "when a situation has arisen for which the parties made no provision in the contract and performance of the contract becomes "a thing radically different from that which was undertaken by the contract"".1 Where a party's obligations are extinguished as a result of frustration, the obligations of each party under the contract are terminated.
Importantly, the party seeking to invoke the doctrine of frustrated contracts must demonstrate that the disruption is a permanent one, and that performance of contractual obligations is impossible - not simply impractical, not profitable, or difficult.2
The outcome
In
Accordingly, summary judgement was granted in favour of the Bank.
Key takeaways
The Court's decision reaffirms that debtors who want to rely on such doctrines to excuse non-performance of their obligations under standard loan and security agreements will have a steep hill to climb.
A note of caution: as always, it will be important to consider the specific provisions in any contract in order to assess the strengths and weaknesses of this argument in any given circumstance, and whether it is possible to invoke this piece of legislation. Indeed, where the contract has anticipated the circumstances, such as by the inclusion of a force majeure clause, the Frustrated Contracts Act cannot apply, as confirmed by the Court in
Footnotes
1. 2021 ONSC 4401, citing Divisional Court in Cowie v.
2. 2021 ONSC 4401 citing The Law of Contract in
3. 2021 ONSC 4401, at para 17.
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