COVID-19 cases on the rise, more turbulence for new and small businesses ahead; force majeure?
Covid-19 Cases Are A Surgin’
Yesterday active COVID-19 cases reached all-time highs in Alberta and Ontario. Effective last week Ontario’s Ottawa, Toronto, York, and Peel regions moved back to a modified Stage 2 to stop the spread and contain the second wave. These are no doubt uncertain times. But for new and small businesses, there is unquestionably more uncertainty. One report from Bloomberg detailing the effect of the pandemic on small businesses claimed that 56% of Canadian small businesses won’t easily survive a second COVID lockdown.
Until there is a vaccine it would seem as though the tightening and loosening of government restrictions will occur on a rolling basis and in response to increases and decreases in case numbers. For the foreseeable future then, businesses will be operating in less than normal capacities. This is likely to make the performing of obligations under contracts difficult.
So, what happens if your biggest customer tries to cancel their order? Or if your suppliers cannot deliver goods on time? Who should bear the liability, the risk, or loss of income for non-performance or delayed performance? While these times are certainly uncertain, in the eyes of the law, they are not unprecedented. Thus, in mitigating the impact of the crisis on your business consider reviewing your contracts to understand your legal obligations and others’ obligations to you. A force majeure clause may be something you encounter. The following provides some insight into the force majeure clause:
The Force Majeure Clause
The purpose of a force majeure clause is to protect the parties of a contract from unforeseeable events that are agreed to be outside normal business risk. Force majeure clauses can free parties of contractual obligations if the events are outside parties’ control and have prevented or hindered performance. And if used properly, the clause would excuse a party’s performance of its obligations under the contract, ultimately allowing a breach of contract to be avoided.
Not all contracts contain a force majeure clause. If you have a contract that does, it is important to know that there is no cookie-cutter form of the provision. Therefore the applicability of a force majeure clause is understood on a case-by-case basis. The Canadian courts typically apply a high threshold when determining the applicability of a force majeure clause and consider the following elements:
- whether the scope of the contract’s force majeure clause (since force majeure clauses are not standardized) captures the event being invoked;
- whether non-performance was foreseeable and whether the risk of non-performance could be mitigated; and
- whether the contractual performance in question has truly been prevented or rendered impossible, rather than merely more expensive.
Learn more about the scope of force majeure clauses, the obligation to mitigate, and the possibility of contractual performance here.
Before relying on a force majeure clause to suspend performance, or to otherwise understand one’s exposure under a force majeure clause carefully review key agreements and consider the following:
- In light of the COVID-19 outbreak, force majeure may or may not be an excuse for non-performance. The applicability of the force majeure clause will depend on how it was negotiated and drafted.
- Does your contract explicitly include “public health emergencies,” “communicable disease outbreaks,” or “pandemic” in its force majeure clause? If not, the government declaring a state of emergency or closing its borders to neighbours and trade partners might fall under the definition of a force majeure that includes “government or administrative action.”
- Can mitigation steps or alternative means of performance reasonably be taken in respect of the contract?
Check back next Wednesday for information about how the doctrine of frustration might be relevant to you and your business in the age of COVID-19.
Disclaimer: The information in this article is not (and is not intended to be) legal advice. This is legal information only. Reviewing information about the law may help you understand whether you need legal assistance. Whether and how this information applies to your circumstances requires the assistance of legal counsel who can apply the information to your needs. Do not rely on this article to make decisions.