How to Minimize the Impact of your Contracts in Connection with COVID-19?

Most likely, you are beginning to feel a slowdown in your operations because the suppliers you deal with outside of the Canadian border have supply and/or production problems. Another possibility is that you have contracts with clients, distributors or partners that impose penalties in case of delays in delivery or production. It is quite possible that your business is already closed at the moment or that it will be forced to do so by tomorrow. Behind these legitimate questions lies the question of how you can lessen the impact of this crisis on your business. 

It should not be forgotten that several contracts include a force majeure clause allowing businesses to be released from their commitments for a certain period in case of an event beyond the control of the signatories of the contract. It is therefore strongly recommended in these uncertain economic times to have your contracts binding you and your partners reviewed in order to better understand the scope of these clauses as well as the necessary reasons to meet in order to invoke their necessity.

In the absence of a force majeure clause in your contracts, the Civil Code of Québec explicitly provides that a person may free themselves from their liability for injury caused to another by proving that the injury results from superior force, unless they have undertaken to make reparation for it.¹  However, the situation and its effects must qualify as force majeure. Some decisions of the court have already recognized the principle that an epidemic must meet the criteria of the law in order to be subject to the principle of force majeure.² Although there is currently no case law regarding the qualification of the current COVID-19 pandemic as being a case meeting the criteria of force majeure provided for in the Civil Code of Québec, it is necessary to specify with a fairly high degree of certainty that the effects on both sides of the contractual obligations of this pandemic will pass the test for qualification as force majeure by the courts later on.

When your contracts emphasize the notion of force majeure, it usually requires you to give written notice to your co-contractor to advise them of an event of force majeure and your willingness to use this as a reason for not complying with the entire contract.

Now, do all the obligations arising from a contract cease to apply when one of the parties invokes a case of force majeure? Not necessarily, because it is a case by case situation and it is more than recommended to analyze the full scope before systematically pleading force majeure.

In all cases, it is necessary that the wording of the clause and its effects be analysed in order to determine its application or non-application and the consequences of its application.

It is relevant to verify your insurance contracts in parallel with your commercial contracts that may currently be problematic, in order to validate before taking any action whether the commercial insurance you took out when you signed your contract covers the losses you have suffered. Commercial liability insurance policies generally do not cover force majeure, but rather liability arising from a fault or wrongful act of the insured. Pure economic loss resulting from a breach of contract is generally not covered or is generally excluded from most liability insurance policies. It is, however, advisable to declare to your insurer any loss that may jeopardize your cover as soon as you become aware of it.

It must also not be forgotten that the concept of force majeure has not been treated in the same way in all jurisdictions around the world. In particular, the other Canadian provinces have treated the concept of contractual force majeure differently under common law. It is therefore recommended to analyze the applicable regime for your contract in order to make the best business decision when the time comes to invoke contractual force majeure. For example, if your contract currently binds you to an Ontario business and it originated in Ontario, the principles discussed above will not apply in the same way.

In closing, if you are about to sign new commercial contracts, the notion of force majeure has never been as high a priority as it is in these times of economic instability. We strongly recommend that you consult a professional before signing a new commercial contract, even with a local company, because the issues surrounding COVID-19 can have serious consequences right now if you do not have good contractual protection. Furthermore, we also consider that identifying the elements of force majeure and the process for enforcing the elements that may allow this ground to be used in a contract are very useful, but it is strongly recommended that each of the clauses of this nature be specified and adapted to the different types of contracts and to each situation.

For any additional questions and for advice on how to properly manage your contracts in relation to the current situation with COVID-19, we invite you to contact our Business Law team. The team remains on the lookout for you.