The arrival of the COVID-19 pandemic has brought mass disruption to all aspects of our lives. In the midst of this many questions are arising surrounding contracts signed before the pandemic.
Do parents have to continue to pay for daycare when the daycare centre is closed?
When do ticket holders have a right to a refund?
Does a tenant have to pay rent if they have no income?
If a business is required to close, do they have to refund deposits on cancelled events/services?
As usual, the legal answer may not always line up with the customer’s expectation. Sometimes the initial response of a business, based in financial considerations, doesn’t line up with legal principles. Both consumers and businesses are stuck wanting to be fair, but scrambling in a financially challenging situation.
Frustration of Contract
When a contract cannot be completed through no fault of either party, the legal principle that applies is frustration of contract. It means that the contract cannot possibly be completed. It is not the same as a party choosing to cancel the contract.
Some contracts include a clause to address the possibility that unforeseen circumstances might make it impossible to complete the contract. These clauses also set out the obligations of each party if the contract cannot be completed. These clauses are normally only found in contracts between large, sophisticated businesses entering into contracts for large, expensive, and complicated projects. It is unlikely that a small business or a company using a template contract would have such a clause.
As always, each contract must be reviewed on its own. This article discusses general themes – it does not provide legal advice about any specific situation. To confirm your specific legal rights and obligations, contact a legal professional such as Carr Paralegal. Most questions we have encountered have been related to business/consumer transactions, so those terms are used in this article. In a contract between businesses, the consumer is the party paying for goods/services and the business is the supplier.
In Ontario, frustrated contracts are governed by the Frustrated Contracts Act
For a contract to be considered frustrated, it must truly be impossible to complete. If the contract can be partially completed or delayed, it will not likely be considered frustrated. If the contract could be completed but with additional costs (i.e. extra cleaning and sanitation measures) or a party decides to cancel the transaction “out of an abundance of caution” the contract will not be considered frustrated. The reason the contract cannot be completed must be unforeseen by all parties at the time the contract was signed. The COVID-19 pandemic would be an unforeseen circumstance. However contracts signed at the beginning of 2020 when the virus was known may still be enforceable.
A party who does not complete a contract that is not legally frustrated would be in breach of contract.
If your contract is considered frustrated, your next question is probably what happens next?
If you are the consumer, you are likely entitled to a refund. The Frustrated Contracts Act (full text here) specifies that no further amounts are due, and any monies paid are to be returned. The only limitation to this is where the business has already incurred costs related to the contract, or if the consumer has received a partial benefit. These scenarios would usually result in a partial refund. The exact amount would be determined by a Court, or ideally through a negotiated settlement.
If you are a business, you will likely have to refund significant amounts of money to consumers. A business can reduce these refunds if they have already started the project or can complete it a later date. For example, if an event can be rescheduled or a service can be provided at a later date you can likely argue that the contract is not actually frustrated – simply delayed. If you have already sourced materials to complete the contract which is now frustrated, the amount spent can likely be charged to the consumer. You may not be able to recover your total expenditures if the materials can be returned or used to fulfill another contract.
Expenses charged to consumers must be directly related to the contract, and do not typically include general operating expenses that would exist whether or not the contract was in existence (i.e. rent or utilities)
Let’s return to some of our frequently asked questions.
Daycare centres have been ordered to close. They cannot provide the child-care services that parents contracted for. This is a clear example of frustration of contract. A daycare centre may have some expenses that are unrecoverable, such as perishable food purchased before the order to close. During the closure there is no benefit conferred on parents, unless perhaps the centre is providing access to learning materials or pre-packaged activities. It is common for daycare contracts to include a clause for extended illness of a child. However unless there is a clause specifying that parents remain responsible for fees if the centre is closed for unforeseen reasons, there is no legal basis for the centre to require continued payment.
One potential benefit to parents is maintaining a space for their child(ren) when the centre re-opens. However, as it is currently illegal (See Ontario Ministry of Education) to charge for being on a daycare waiting list in Ontario there would appear to be no basis for charging parents for this “benefit”.
If tickets have been sold to an event which is cancelled, ticket holders are typically entitled to a refund. If the event can be rescheduled then the event producer may be within their rights to refuse a refund and simply honour the previously sold tickets on the new date. Depending on the nature of the event, the event producer may have incurred expenses that are non-recoverable. However, if the producer wishes to retain these funds the cost would have to be spread over all ticket holders. Most large event producers have well established procedures for issuing refunds in the event of cancellations.
Both commercial and residential tenants have expressed concern about their ability to pay rent while their income is reduced or eliminated by COVID-19 related issues. In determining whether the tenant should be eligible for relief, the question is not the ability of the tenant to pay but whether or not the landlord is providing the service. This means that legally the tenant will be required to pay rent. There may be exceptions – if you believe your lease has a clause that does not require you to pay rent, contact a legal representative for assistance.
Do businesses have to return deposits or refund cancelled goods/services
This question is the same as daycare centres and ticketholders. If the consumer has not received any benefit from the service, then any monies paid must be returned – minus any expenses directly related to the performance of the contract. If the completion date of the contract is not absolutely essential to the contract, the business may be entitled to retain any deposit paid and enforce any cancellation policy if the consumer does not wish to reschedule.
In summary, if you have paid for a product or service which cannot be provided because of the COVID-19 pandemic you are likely entitled to a refund of any monies paid minus any costs incurred by the provider that are directly related to performing your contract. Businesses forced to close find themselves in the unfortunate position of having to return deposits and forego planned revenues while continuing to cover overhead expenses such as rent and utilities. These losses may not be charged directly to consumers. Affected businesses should research government assistance programs being announced to help offset these losses.
If you are unsure of your rights or obligations, speak to a licensed paralegal about your specific situation. Carr Paralegal is available to provide advice and assist in resolving disputes. We focus on informal processes where possible and legal action when required.