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Bulletin | Covid-19

COVID-19 (Novel Coronavirus): Legal and Business Considerations Relating to Contractual Obligations

Fasken
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Litigation and Dispute Resolution Bulletin

Legal and business concerns arising out of the recent outbreak of COVID-19 include the following:

  • What are the disclosure obligations for public companies affected by the outbreak with respect to impact on financial performance?
  • What measures should a company maintain to deal with the risk of being affected by the outbreak?
  • Are there specific provisions that a company should incorporate in its commercial contracts to guard against the risk that those contracts may be affected by the outbreak?
  • Could the outbreak provide parties with a legal basis to relieve a party from performing contractual obligations under a commercial contract?

The focus of this article is on the impact of the outbreak of COVID-19 on the performance of contractual obligations. The outbreak has the potential to cause significant impact on commercial contracts, including non-performance, suspension of performance, cost relief, termination, frustration of contract and damages for breach of contract. In this article, we will specifically discuss force majeure clauses and the doctrine of frustration in common law, as well as the applicable civil law provisions. We will then provide key points to be considered by parties to commercial contracts impacted by the outbreak.

COMMON LAW

Force Majeure Clauses

Many commercial contracts contain a force majeure clause. These clauses may expressly excuse a party from performance of its contractual obligations (or suspend performance of a party’s obligations) as a result of circumstances specified in the contract. Whether or not the outbreak of COVID-19 constitutes a force majeure under a particular contract will depend on the specific wording of that contract, and on the governing law in the jurisdiction applicable to the contract.

Commercial contracts that contain force majeure clauses often include notice provisions. In this context, a notice provision imposes an obligation on the party seeking to be excused from performance (or seeking to suspend performance) to provide notice to the other party to the contract. Such notice provisions typically contain strict timelines within which notice must be provided, and often require that notice be provided in writing. Failure to comply with the notice provisions, its timelines, or its requirements of form may result in severe consequences, and could lead to inapplicability of the force majeure clause.

The Doctrine of Frustration

If a particular commercial contract does not contain a force majeure clause, or if the outbreak of COVID-19 does not constitute a force majeure under a particular contract, then parties may still seek to rely on the doctrine of frustration.

In Canada, frustration arises when a supervening event occurs, without the fault of either party, for which the parties have made no provision in the contract, and which renders performance of the contract a thing radically different from that which was to be undertaken by the contract.[1] When a contract has become frustrated, the contract is brought to an end, in the sense that both parties are released from any further performance of the contract.[2]

A careful contractual and factual analysis is required to determine whether or not a particular commercial contract has been frustrated by the outbreak of COVID-19. This will depend on the nature of the services to be provided under the contract and the severity of the impact that the outbreak has on a party’s ability to perform its obligations under a contract.

CIVIL LAW

The concept of force majeure in Quebec is codified at art. 1470 of the Civil Code of Quebec, “C.c.Q.”, which reads as follows, with the English version using the term “superior force”:

1470. Toute personne peut se dégager de sa responsabilité pour le préjudice causé à autrui si elle prouve que le préjudice résulte d’une force majeure, à moins qu’elle ne se soit engagée à le réparer.

La force majeure est un événement imprévisible et irrésistible; y est assimilée la cause étrangère qui présente ces mêmes caractères.

1470. A person may free himself from his liability for injury caused to another by proving that the injury results from superior force, unless he has undertaken to make reparation for it.

Superior force is an unforeseeable and irresistible event, including external causes with the same characteristics.

 

It is important to note that the definition of force majeure in art. 1470 C.c.Q. above is not of public order and parties may adopt a definition of force majeure that is either broader or narrower than that of the Civil Code. Where the contractual definition of force majeure is not sufficiently precise, courts will supplement it with that of the Civil Code. Where there is no contractual definition, the definition of art. 1470 C.c.Q. will apply.

Pursuant to paragraph 2 of art. 1470 C.c.Q., to constitute force majeure, an event must be both unforeseeable and irresistible.

Un-foreseeability means that the parties could not have, at the time of the conclusion of the contract, foreseen the occurrence of the event. This does not mean that the event cannot have ever occurred previously. The standard is whether a reasonable person in the same situation could have foreseen the event. For example, a tornado may not be a force majeure event in Florida, but could be considered to be one in Montréal.[3]

Irresistibility consists in the impossibility for a reasonable debtor to take reasonable measures to avoid the occurrence. In addition, the case-law and the commentators agree that irresistibility also means that the harm-causing event must render absolutely impossible the performance of the debtor’s obligations. The irresistibility condition is not met when the performance of the debtor’s obligation simply becomes more difficult, perilous or onerous.[4]

Art. 1693 C.c.Q. specifically addresses the impact of a force majeure event on contractual obligations. It reads as follows:

1693. Lorsqu’une obligation ne peut plus être exécutée par le débiteur, en raison d’une force majeure et avant qu’il soit en demeure, il est libéré de cette obligation; il en est également libéré, lors même qu’il était en demeure, lorsque le créancier n’aurait pu, de toute façon, bénéficier de l’exécution de l’obligation en raison de cette force majeure; à moins que, dans l’un et l’autre cas, le débiteur ne se soit expressément chargé des cas de force majeure.

La preuve d’une force majeure incombe au débiteur.

1693. Where an obligation can no longer be performed by the debtor, by reason of superior force and before he is in default, the debtor is released from the obligation; he is also released from it, even though he was in default, where the creditor could not, in any case, have benefited from the performance of the obligation by reason of that superior force, unless, in either case, the debtor has expressly assumed the risk of superior force.

The burden of proof of superior force is on the debtor. 

 

Thus, pursuant to art. 1693 C.c.Q., the debtor may be released from an obligation by the occurrence of a force majeure event and may also be released where the creditor could not have, in any case, benefited from the obligation of the performance due to the event. The burden of proof that the event, in this case, the outbreak of COVID-19, constitutes a force majeure, lies with the debtor.

KEY CONSIDERATIONS

In the immediate term, it is important for parties to commercial contracts to consider their rights and obligations if they have been or expect to be impacted by the outbreak of COVID-19. Some key factors to be considered include the following:

Does the commercial contract contain:

  • a force majeure clause which provides for relief or suspension of contractual performance and, if so, are there notice requirements and timelines?
  • other contract termination or suspension provisions which may be triggered by the outbreak?
  • representations or warranties which may be affected by the outbreak?
  • continuing disclosure obligations and, if so, has the outbreak triggered those obligations?

If the commercial contract contains a force majeure clause:

  • will the declaration of a force majeure impact a party’s financing agreements or disclosure obligations thereunder?
  • will the declaration of a force majeure impact a public company’s disclosure obligations?

Has the outbreak of COVID-19:

  • prevented, delayed, or adversely impacted the performance of a contract?
  • resulted in increased costs for the performance of a contract?
  • created the potential for breach of contract and, if so, what are the consequences of a breach under the contract?
  • resulted in the performance of the contract becoming a thing radically different from that which was undertaken by the contract?
  • rendered impossible the performance of one or several obligations under the contract?

Parties to commercial contracts that have been impacted by the outbreak should also determine whether or not they have insurance coverage for losses resulting from a party’s inability to perform its contractual obligations due to a supervening event. If so, it is imperative to comply with any notice requirements and timelines under the insurance policy.

CONCLUSION

Companies are being impacted by the outbreak of COVID-19 in various ways and to varying degrees. It is important for them to analyze the impacts or potential impacts on their businesses, including on their contractual relationships, by reviewing their own specific circumstances and contracts internally or with legal counsel.

To determine whether or not a contracting party may be relieved from performance of its contractual obligations as a result of the outbreak will involve a factual and legal analysis on a case-by-case basis. In anticipation of being impacted by the outbreak, contracting parties should carefully analyze their contractual rights and obligations, review their financing agreements and insurance policies, and consider any disclosure obligations which may arise.

Check out our other (COVID-19) Coronavirus bulletins titled Pandemic Planning For Employers: Responding to the Coronavirus Disease 2019 (COVID-19) and The Novel Coronavirus: Preparing Employers to Respond.


[1] Naylor Group Inc v Ellis-Don Construction Ltd, 2001 SCC 58 at paras 53-55.

[2] Klewchuk v Switzer, 2003 ABCA 187 at para 23, citing H.G. Beale, ed., Chitty on Contracts, 28th ed., vol. 1 (London: Sweet & Maxwell, 1999) at 24-069.

[3] Jean-Louis Baudouin, P.-G. Jobin et N. Vézina, Les obligations, 7th ed. 2013, Motifs légaux d’exonération, EYB2013OBL128, par. 845, Didier LLUELLES et Benoît MOORE, Droit des obligations, 3e édition, 2018, L'impossibilité d'exécution, EYB2018THM244, par. 2733, 2739

[4] Jean-Louis Baudouin, P.-G. Jobin et N. Vézina, Les obligations, 7th ed. 2013, Motifs légaux d’exonération, EYB2013OBL128, par. 846 Didier LLUELLES et Benoît MOORE, Droit des obligations, 3e édition, 2018, L'impossibilité d'exécution, EYB2018THM244, par. 2734.

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