Executive Summaries Apr 1, 2020
COVID-19: Will the Pandemic Really Have an Impact on Your Contracts?
In the face of the global outbreak of COVID-19, a question arises: what are the legal implications of a force majeure clause in your contracts or when your contract is silent in this regard?
As further detailed in our last article on force majeure, it seems that the COVID-19 pandemic will have a significant impact on the operations of Canadian companies and the measures they will have to take to respond to such repercussions. Invoking force majeure is a type of relief that companies should consider.
How Is the Concept of Force Majeure Assessed?
The concept of force majeure is a means of exemption from liability provided for in article 1470 of the Civil Code of Québec ("CCQ.") that can be invoked whether or not it is stipulated in your contract. Where applicable, force majeure enables the debtor of an obligation to justify the postponement or termination of his obligation due to an external factor. Since the parties must usually perform their obligations entirely and without delay, force majeure may be only be raised in exceptional circumstances. It is therefore interpreted and applied restrictively by the courts.
In order for this defence to be successfully invoked, the event in question must meet three cumulative criteria:
- be "unforeseeable", that it was not foreseeable to a prudent and diligent person placed in the same circumstances;
- be "irresistible", in other words, that the obligation cannot be performed fully or partly. Thus, the fact that a situation simply makes an obligation more difficult or more onerous to perform does not constitute force majeure;
- cannot be due to a fault, negligence or a fact that is attributable to the debtor, but must be beyond his control, in order to meet the “externality” test.
Also, the concept of force majeure is not a matter of public order. Parties to a contract can negotiate and modulate its scope. It is therefore essential to refer to the specific wording of the clauses provided in each contract in order to verify the existence of such provisions and their scope.
What Is the Effect of an Event of Force Majeure?
Under Article 1693 CCQ., it is up to the debtor to prove force majeure. Under this provision, the debtor may be released from his obligation when an event qualified as force majeure occurs. It will also be the case where a creditor could not, in any event, have "benefited from performance of the obligation by reason of that superior force".
The debtor is therefore not required to perform an alternative obligation or to remedy the damage resulting from such non-performance. Discharge may be total, should performance prove to be unequivocally impossible, or partial, should the obligation be partially performed.
The inability to act may also be temporary, which has the effect of suspending the performance of the debtor's obligations. Examples could notably include certain performances that have been cancelled due to government directives issued in response to COVID-19 and that could (circumstances allowing) take place later in the year, or again, additional delays incurred in the production or shipment of certain goods from a supplier to the distributor.
In such a case - and if circumstances allow it - force majeure can suspend the performance of the debtor’s obligation and release the latter from liability incurred for the delay, without the possibility for the creditor to claim damages. On the other hand, the debtor must resume performance of his obligation when the event that caused the suspension of performance ceases. For instance, this could be at the time when sanitary measures will be lifted.
Moreover, case law is clear that force majeure does not preclude the debtor and creditor to act in good faith and to mitigate their damages. It is therefore important that they take all reasonable measures at their disposal to limit the extent of their loss even in a case of force majeure.
Does the COVID-19 Pandemic Constitute a Force Majeure in Civil Law?
The qualification of a particular event as a force majeure is left to the courts’ discretion, particularly if the terms "pandemic(s)" or "epidemic(s)" are not expressly provided for in a specific exemption from liability clause in the contract in question (force majeure clause).
It is therefore analyzed on a case-by-case basis, depending on the degree and seriousness of the event.
State of emergency decrees, more specifically the Order in Council number 2020-008 of the Quebec Minister of Health and Social Services dated March 22, 2020 ordering the closure of non-essential businesses, could, in our view, constitute an unforeseeable fortuitous event that does not result from the the parties’ conduct.
It is also necessary to analyze whether this event can lead to a total or partial impossibility for the debtor to fulfill its obligation that he is seeking to be be exempted from. It will therefore be necessary to carry out a case-by-case analysis according to the developments of the evolving situation.
Although the outbreak of COVID-19 appears at first glance to meet the force majeure’s criteria of "unpredictability", "irresistibility" and "exteriority", it is difficult to determine at this time when or under what circumstances COVID-19 will be accepted as an exemption of liability.
What If My Contract Contains a Force Majeure Clause?
Each contracting party to a consensual contract governed by Quebec civil law will have to analyze the contractual rights and obligations arising therefrom, specifically with respect to situations or events that may be covered by force majeure. A specific analysis of each contract will be necessary to determine whether a party may, according to such contract, be exempted from performing its obligations in the current state of the global COVID-19 pandemic.
We note that many contracts provide a definition and a restrictive list of circumstances or events that may be considered as force majeure and thus justify non-performance or suspension of the obligation. For example, specific definitions such as "pandemic" or "epidemic" may be stipulated. In such circumstances, a notice mechanism will normally be provided to enable a contracting party to inform the other party of its intention not to perform a correlative obligation within a specified period of time . The parties will therefore have to be particularly attentive to this time limit and try as much as possible to observe it.
What Happens If a Contract Is Silent With Respect to Force Majeure or If There Is No Written Contract Between the Parties?
The concept of force majeure is a legal means of exoneration from liability both in synallagmatic contracts through the application of Articles 1470, 1693 and 1694 CCQ, as well as in extra-contractual relations. In other words, it is not necessary for a force majeure clause to be included in the contract for a debtor to be able to invoke it and potentially be exempted from its performance.
It will therefore be up to the debtor to prove an unforeseeable, irresistible event outside the debtor's control in order to invoke such a defence.
As mentioned, a specific legal and factual analysis of the effects of the COVID-19 pandemic on the contractual situation between the parties will need to be carried out on a case-by-case basis. We invite you to contact a member of our Commercial Litigation team if you have any questions in this regard.
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