In Interfor Corporation v Mackenzie Sawmill Ltd (“Interfor”),[1] the British Columbia Court of Appeal (the “BCCA”) dismissed an appeal from a summary trial decision ordering declaratory relief. Interfor confirms that the presence of a force majeure provision does not displace the doctrine of frustration; rather, a force majeure provision can signal whether the parties foresaw the events alleged to have frustrated the contract. Interfor also teaches that a force majeure provision that permits a party to “discontinue or curtail delivery” without liability does not permit the party to terminate its obligations permanently.

Background

In this case, Interfor Corporation (“Interfor”) sued Mackenzie Sawmill Ltd. (“MSL”) and other related parties (collectively, the “Defendants”) alleging that MSL breached a 2006 Chip Supply Agreement (“CSA”) to supply wood chips to Interfor.

After fires destroyed its mill (the “Mill”), MSL stopped supplying chips to Interfor. After the fires, one or more of the Defendants (but not MSL itself) built a new mill. When the new mill began operations, its owners sold chips to third parties at prices higher than those in the CSA.

The Defendants claimed that MSL’s obligations to Interfor under the CSA were terminated under a force majeure provision in Article 8.5 of the CSA that provided that if MSL “shuts down or curtails” the Mill’s operation due to fire, MSL “may discontinue or curtail” the production and delivery of chips. The Defendants also asserted that MSL’s obligation to supply chips had been frustrated.

The Defendants applied for summary trial seeking a declaration that MSL was discharged from its obligations under the CSA as a result of the fires that destroyed the Mill.[2] Conversely, Interfor sought a declaration that MSL was not discharged from its obligations as a result of the fires.

The Summary Trial Decision

Gomery J. concluded that Article 8.5 provided only for the suspension, not the termination, of MSL’s obligations. He also found that the fires did not frustrate the CSA because the Mill’s destruction by the fires did not totally change the CSA’s “nature, purpose, meaning, and effect”: if MSL rebuilt the Mill, the obligation to supply chips would be the same as before.

Gomery J. declared that MSL’s obligations under the CSA were not permanently discharged as a result of the fires that destroyed the Mill, whether pursuant to Article 8.5 or the doctrine of frustration.[3]

The Appeal Decision

On appeal, the Defendants submitted that Gomery J. erred in his interpretation of Article 8.5 and his frustration analysis.

The BCCA dismissed the appeal. The majority upheld Gomery J.’s conclusions that (i) Article 8.5 of the CSA did not provide for the termination of MSL’s obligations as a result of the destruction of the Mill by the fires; and (ii) the CSA was not frustrated by fires that destroyed the Mill. It held that the ultimate determination of both issues would depend on whether the new mill that was later built is found to have revised MSL’s obligations under the CSA, and that these matters must be left for trial.

Willcock J.A. dissented in part on whether declaratory relief was suitable. He would have set aside Gomery J.’s declaration concerning frustration.

Force Majeure

The BCCA found no error in Gomery J.’s interpretation that Article 8.5—specifically, the phrase “discontinue or curtail”—did not permit MSL to terminate its obligations under the CSA. It also observed that the implications of discontinuance or curtailment were to allow either event to occur “without liability” to MSL, not to terminate its obligations under the CSA.[4]

Frustration

The BCCA then applied the test for frustration of contract. That test holds that the supervening event alleged to have frustrated the contract must: (i) have been unforeseeable at the time of entering into the contract and not the fault of either party; and (ii) make performance “a thing radically different from that which was undertaken by the contract.”[5]

The BCCA accepted the Defendants’ submission that the presence of a force majeure provision does not displace the doctrine of frustration. Rather, a force majeure provision can impact the court’s assessment of whether the parties foresaw the specific event alleged to have frustrated the contract. The BCCA, however, rejected the Defendants’ submission that Gomery J. erred in concluding that Article 8.5 encompassed fires that completely destroyed the Mill. In other words, because Article 8.5 covered such fires, the possibility of their occurrence was foreseeable to the parties.[6]

Next, the BCCA rejected the Defendants’ submission that Gomery J. failed to identify the root of the parties’ contractual relations in analyzing whether MSL’s obligations radically changed. The Defendants argued that the root of the contractual relations was a larger asset purchase in which the CSA arose, not the CSA itself. The BCCA found that this characterization called for a broader inquiry than required. It also observed that the Defendants did not challenge Gomery J.’s findings that the CSA’s purpose was to secure supply of chips, and that the Mill’s destruction might not end its business if rebuilt. Therefore, the existence of the Mill was not the CSA’s fundamental purpose.[7]

Declaratory Relief

A further issue was the suitability of declaratory relief. Declaratory relief is a pronouncement on parties’ rights or a legal question, not an order that something be done.

The majority and the dissent agreed declaratory relief may be appropriate where: (i) the court has jurisdiction to hear the issue; (ii) the dispute is not theoretical; (iii) the party raising the issue has a genuine interest; and (iv) the responding party has an interest in opposing the declaration. In addition, a declaration must have practical utility in that it will settle a “live controversy”.[8]

However, the majority and dissent split on whether Gomery J.’s declarations had practical utility. For the majority, Fisher J.A. noted that a declaration is uncommon on summary trial, and those ordered were largely theoretical. Even so, she viewed them as useful in narrowing the issues for trial and upheld them.[9]

In contrast, Willcock J.A. would have set aside Gomery J.’s declaration about frustration. He worried about the impact of “declarations of uncertain effect” where, as here, an action would be continuing to trial. In his view, the limited scope of Gomery J.’s inquiry precluded him from deciding whether the fires radically changed MSL’s obligations.[10]

Key Takeaways

  • Interfor reminds commercial parties to pay attention to the specific consequences entailed under a force majeure A provision that entitles a party to “discontinue or curtail” delivery “without liability” does not necessarily entitle the party to terminate its contractual obligations permanently.
  • The doctrine of frustration still operates where a contract contains a force majeure The mere fact that a contract addresses events of the same nature or class as the alleged supervening event does not mean the contract addresses every event in that class.
  • Parties with contractual relations beyond a single contract should be aware that the court’s focus in assessing whether a party’s obligations have radically changed is on the contract alleged to have been frustrated, not any broader contractual relations in which the contract may arise.
  • A declaration to be validly made must have practical utility and settle a live controversy between the parties or clarify their rights. Practical utility may consist in narrowing the issues left for trial.