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Executive Summaries Mar 17, 2020

COVID-19: Contractual and Practical Measures to Be Taken

In early February of this year, we wrote an article about some of the impacts that the coronavirus outbreak – which at the time was mostly in Asia – could foreseeably have on Canadian companies.

At that time, we pointed out measures to be taken by these companies to limit the impact of the crisis on their business, in particular by invoking force majeure with their clients.

Today, the World Health Organization is calling the situation surrounding the coronavirus a pandemic. Since the effects of this virus, now known as COVID-19, are being felt across the country, it is clear that it will have a considerable impact on the business operations of Canadian companies. They will have to take additional measures to respond to these repercussions.

It is expected that the impacts of COVID-19 will take many forms, including the following :

  • plant closures and production slowdowns;
  • business closures and lack of customers;
  • border closures and limits on imports and exports;
  • increased prices for some goods due to rarity;
  • cancellation of orders by customers;
  • increase in payment terms;
  • decrease in the available workforce due to illness or isolation;
  • inability to hold certain meetings, including annual meetings of shareholders, within the time periods required by law.

As a business, you will have to juggle these issues while trying to maintain profitability and meet your own obligations to employees, customers, suppliers, shareholders, investors and bankers, not to mention the government and tax authorities. We refer you to the article for the employment law aspects of COVID-19.

As discussed in our previous article, there is every reason to believe that COVID-19’s impact on business operations meets the conditions for the application of force majeure, which, when defined by the Civil Code of Québec, are elements of unpredictability, irresistibility and externality. Although the current pandemic satisfies the last two criteria a priori, it could be difficult to argue that its effects were not foreseeable for contracts recently concluded or under negotiation.

On the commercial and contractual level, in order to properly target the actions to be undertaken with regard to the modulation of the obligations provided for in your contracts, certain measures are necessary :

1. Review your current contracts, identify the obligations at stake, the deadlines to be met, the penalties, the possible damages in case of delay and identify the force majeure clauses. The Civil Code of Québec defines this concept and its application, but the contract may change the definition or modify the consequences. For example, it is customary to mention that force majeure does not excuse delays in payment. It should be noted that the definition in the Civil Code of Québec will not apply to contracts governed by foreign laws.

2. For any contract under negotiation, clearly identify the elements that could be impacted by the pandemic and make sure not to waive the possibility of invoking force majeure as the situation evolves. An express mention of the situation surrounding COVID-19 in the contract to be entered into and the addition of reservations regarding the fulfillment of obligations that could be affected by it would also be prudent practices in this situation of uncertainty. As previously mentioned, the date on which the contract is entered into is an important element that will necessarily influence the possibility of invoking force majeure as an explanation for a breach of contract due to the more or less unpredictable nature of the effects of the pandemic.

3. You have an obligation to "mitigate" your damages under the law. Notify your clients, keep them informed of the measures you are taking. Don't assume that the pandemic will excuse any delay, you will need to prove that the delay was caused by circumstances beyond your control, not by your business or personal decisions, no matter how laudable they may be. Be sure to document your decisions and the facts involved. For example : Who was working on the deliverable? When did that person stop working? Why? When were the relevant health measures imposed? Was it possible to work remotely? Etc.

4. Also pull out the contracts with your suppliers. Make sure that your suppliers comply with the terms of their contracts and that they justify any delays. Also make sure that they do not abuse the situation and respect the agreed prices; some may try to increase their prices or modulate their obligations. For transportation delays, several international conventions may apply and are usually mentioned in bill of lading vouchers. However, limitations apply and your claims must be made within specific time limits.

5. Check your insurance policies and talk to your financial institution. Be aware of support measures. For example, the Business Development Bank of Canada currently offers a loan that can be accessed quickly and remotely, with a minimum of information, in amounts between $10,000 and $100,000 to support businesses affected by the pandemic. Other measures will undoubtedly follow.

6. Keep your shareholders, investors, bankers and insurers informed. In these turbulent times, they will be valuable allies.

Businesses should not wait until the crisis is over, let alone until problems arise, before taking the necessary steps to protect their business. Not only is their financial viability at stake, but it is also their responsibility to their employees, investors and other stakeholders.

To find out more about contractual issues related to the COVID-19 outbreak, do not hesitate to contact our Business Law team

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