Weathering the COVID-19 storm: Legal considerations for your business and its existing contracts
Updated: Apr 1, 2020
By Christophe J. Shammas B.A. (Hons), J.D.
LOOPSTRA NIXON LLP
It is difficult to overstate the effect that the COVID-19 outbreak is having on businesses in Ontario. The economy has ground to a halt as only businesses deemed essential by the provincial government continue to operate. Consumers are spending less, travel is restricted and there is a general apprehension about how long the effects of this public health authority will last.
In this time of great uncertainty, it is more important than ever for businesses to review their legal rights and obligations and to plan for the coming months. How businesses face these issues will determine whether they can weather the storm and put themselves in a position to recover afterwards.
The purpose of this post is to highlight some key considerations regarding existing contracts and to provide guidance to readers.
Be proactive and spot issues early
Businesses will have existing contracts that are difficult or impossible to perform because of the COVID-19 pandemic. These contracts could include leases, supply agreements, construction contracts, loan agreements or agreements of purchase and sale.
Businesses should be proactive and review their material contracts to determine whether they contain any obligations, representations, warranties or covenants that could be engaged as a result of the COVID-19 pandemic. It is better to know the issues that could be coming down the pipeline than to be blindsided when a landlord, lender or some other party sends a notice that your business is in default of its obligations under the contract.
Depending on the situation, the best approach will likely be to be forthcoming about any issues that you see with your existing contracts. Almost every business and individual in Ontario will be feeling the effects of the COVID-19 pandemic in some fashion. Everyone is going to want to mitigate their risk, especially given the uncertainty of how long this pandemic will last. As such, parties to a contract should be communicating to one another to see whether issues can be resolved, and if accommodations can be granted.
What to do if the contract is impossible to perform
Businesses should also determine if their key contracts contain a force majeure clause. A force majeure clause is a provision that provides that when certain events occur, a party may be excused from having to perform the contract. The key considerations when reviewing a force majeure provision are: (a) is the COVID-19 pandemic covered by the provision? (b) has the COVID-19 pandemic had the requisite level of impact? and (c) what other requirements there are to engage the provision?
A force majeure provision will typically list the events that will engage the operation of the clause. For example, some clauses will expressly include pandemics or epidemics that would cover the COVID-19 outbreak. However, it is arguable that the COVID-19 pandemic could be included within the scope of broader phrases such as an “act of god” or “circumstances beyond a party’s reasonable control”.
A force majeure provision will also typically state what level of impact is required to engage the provision. The level of impact can vary from “renders impossible” to “substantially hinders”. Whatever the standard, businesses will want to consider whether its business has been sufficiently impacted by the COVID-19 pandemic and whether a causal link can be drawn between the pandemic and the impact on the business.
There may be other provisions that a party would have to comply with such as giving notice and taking reasonable steps to prevent the event from happening. Parties also have to show that you mitigated the impact. Courts will not release parties from their contractual obligations if they have not exhausted the options available to them to perform their obligations under the contract.
Even if an agreement does not contain a force majeure clause, all is not lost. Parties can rely on the common law doctrine of frustration. Frustration occurs where a situation has arisen for which the parties made no provision in the contract and the performance of the contract becomes “a thing radically different from that which was undertaken by the contract”. Like the force majeure provisions, performance of the contract must become impossible. It is not enough that the contract become more onerous, or even significantly more difficult to perform.
It should be noted that Courts will generally interpret force majeure clauses and the doctrine of frustration narrowly as they usually favour holding parties to their contractual obligations. As such, businesses will want to consider what the downside risk is if they fail to perform the agreement but cannot rely on the force majeure clause. Contracts may specify exactly what the remedy is for non-performance or, alternatively, the other party would be entitled to any damages they have suffered as a result of the non-performance.
This post is a general discussion of certain legal and related developments and should not be relied upon as legal advice. If you require legal advice, please contact the author.
Christophe J. Shammas B.A. (Hons), J.D.
LOOPSTRA NIXON LLP
135 Queens Plate Drive, Suite 600, Toronto, Ontario, Canada M9W 6V7