Global supply chains have been significantly impacted by COVID-19 - and by efforts to stop and contain its spread- raising hard questions and complex contractual issues for manufacturers, contractors, service providers and customers across virtually every industry sector. To help our clients navigate this challenging time, Gowling WLG has compiled a webinar designed to give clarity on a range of complex contracting issues arising as a result.
Topics include:
- Force Majeure clauses and the state of Canadian law
- Basic Force Majeure principles and concepts as they apply to COVID-19
- Action to take
- What to do if your contract does not address the current circumstances
- Quebec Law and the civil law approach
Click here to download the presentation slides
Transcript
Cynthia Elderkin: Good afternoon everyone and welcome. Thank you for joining us and hope everyone is staying safe. These certainly are unpredictable and in present times, for all of us. This is the second presentation in Gowling WLG's webinar series, addressing various issues arising from the COVID-19 endemic. Governments all over the globe are taking action to mitigate its spread. The various bans and restrictions are causing disruption to our lives and the way we do business. Every business service provider, consultant and consumer in every sector is feeling the impact. In the webinar today, our panel of speakers will help you understand contract rights and remedies in this COVID-19 world, and share tips and practical considerations.
We are finding that a common approach to this pandemic is early and open empathetic communications between the contracting parties. We are, after all, in this together and everyone is affected by this pandemic to some degree. Perhaps you can negotiate a temporary solution or an amendment to your contract to modify your obligations or service levels, or to allow a temporary reduction or shut down of services. This helps bring certainty to your contractual relationship and may work to preserve your relationship with the other party, for when this pandemic ends and the world returns to some order.
Before I introduce our speakers and topics, we have a few legal disclaimers. We'd like to remind you of the following: this presentation today is not intended as legal advice. Because this is a high-level overview, it is impossible to cover all relevant details and available rights and remedies will depend on the unique facts of each situation. For specific advice, please contact your qualified legal counsel before making any decision or taking any action.
And as you know, the situation is extremely fluid and is changing on a daily basis. As things evolve, your best course of action could also evolve. Follow up-to-date and reliable sources of information.
Every province and territory has its own legal regime. Our focus today is on Ontario and Quebec. Our speakers and topics today, are as follows: First up is my partner Thomas Timmins, who will address Force Majeure in the Canadian context. Tom is the leader of both our energy sector group and our China initiative, as a chief representative in China. As such, he has been steeped in COVID-19-related supply chain issues since late January. Tom is a recognized expert and leading lawyer in energy project development and infrastructure, leading many significant transactions. He represents service providers, lenders, utilities, governments, First Nations, and regulators in the power sector. Tom is also the current Chair of the Canadian Solar Industries Association, and is frequently quoted in top business and news publications.
After Tom, Sahil Shoor will address common law remedies that may be available to you, such as frustration. Sahil is one of our star litigation associates with a focus on construction, infrastructure, P3 and outsourcing projects in all sectors, including real estate, civil works, energy transfer, transit and transportation and service delivery.
Sahil is a member of our Young Advocates Standing Committee, appears before all levels of court, and has been involved in numerous complex mediations and arbitration.
Like Tom, Sahil is immersed in COVID-19 issues. In fact, he spent all last weekend negotiating relief for a service provider affected by the pandemic, resulting in a very favorable result for our client.
Lastly, our Montreal partner Guy Poitras will address force majeure and other contract issues in Quebec.
Guy is a senior commercial and civil litigator, with a focus on complex commercial disputes and product and professional liability claims. This involves frequent contract reviews for clients, who wish to avoid future disputes, or to better position themselves to deal with same. Guy is also the head of the advocacy department in our Montreal office. His vast experience and expertise has led to various speaking engagements and presentations.
Guy was assisted by our articling student Rosalie Munger for the Quebec materials.
And as for me, I'm a commercial contract and transactional specialist, with expertise in telecom transportation, aviation and infrastructure. At the end of the presentation, we will host a brief Q and A session. Throughout the webinar if you have any questions, please use the button on your screen that is labeled Q and A. We will do our best to address these questions at the end. With these preliminaries out of the way, let's begin and I'll hand it over to Tom.
Tom Timmins: Thank you Cyndy, and welcome everyone. I'm going to be moving forward to discuss some Canadian case law, but before I do, I just want to point out a couple of things. One of the points of Cyndy made in their introduction remarks about early, open and empathetic communication between the parties.
I think that's actually crucial here and we've seen that unwind a lot of potentially fraught situations already in the last few weeks. The other thing I just want to point out to people is that Gowling WLG has been working hard, and many, many of the lawyers at Gowling WLG have been working hard, to develop online resources that are available on our website on the COVID-19 resource page, and you can find that pretty quickly just by going to our home page. A lot of different resources [are there] covering a lot of the different topics that have arisen, and as new news items arise virtually every day, we're doing our best to post new resources and help people sort through what is a very quickly evolving situation.
So, unless you've been living under a rock, you're probably fairly well aware of the COVID-19. As Cyndy alluded to, I've been involved with this since January at Gowling WLG, just because of projects and products coming out of China. In particular, in the energy sector, a number of key products are actually manufactured in the City of Wuhan, in Hubei province. And people refer to Wuhan as "Detroit, China", the major manufacturing sector. So shutting down the city of Wuhan, which the government did within a few weeks, actually shut down a very large manufacturing sector. And [they] closed it off, which in turn had subsequent impacts on supply chains going in all different directions, and across many different industries around the world, and everyone very quickly had to put their thinking caps on and figure out how it impacted them, and how it impacted their clients.
So supply chains have been decimated. And the only other thing that I want to leave you, on this slide -- and we can actually go to the next slide, if that's okay -- is I would encourage people to [do] what we refer to as "thinking exponentially". Think of this as a wave, and this wave has not actually reached the shoreline in Canada yet. We're just beginning to see it. And I refer to the "Rule of 42". That actually comes out of Malcom Gladwell's book from a few years back [called] The Tipping Point, where he alluded to the fact that if you were able to fold a piece of paper over and over again, how many times would you need to for that piece of paper, assuming that you could fold if it were a big enough piece of paper, how many times would you need to fold it to get to the Moon?
The answer that is 42 times, and the idea behind that is to help people. Humans have a hard time thinking exponentially. You have to try your best in your business here to think exponentially in terms of the impact that COVID-19 is going to have both on supply chains and on your customers and on your suppliers. It goes in both directions, and you can Google that Rule of 42. That's based on the fact of that measurement of a .01 millimeter thin piece of paper and a distance of 384,400 kilometres from Earth to the moon. It's kind of an interesting fact.
Going to the next slide, before this current crisis, I assume a lot of the business people on the line might not have really known about the Force Majeure clause that's present in their contract, so they probably hadn't given it too much thought. This is one of those areas that lawyers spend a lot more time thinking about these things than non-lawyers, but a force mature clause is, with any type of sophisticated contract, there's generally a force majeure clause present. The idea basically is, to protect the parties, often both parties, from impairments to supply or impairments to performance caused by extraordinary events. Sometimes we'll refer to them as "acts of God". So typically you'll include things like – I'll give examples in the slide -- hurricane, flood, war, political unrest and sometimes you'll even include "epidemic" and then very occasionally, you'll see the word "pandemic" in that clause. So, the key here is that it will relieve the parties from some or all of their obligations or their liabilities under the contract, if, and you'll see I've underscored the word if, the events falling within the definition of force majeure occur
So that makes the definition of force majeure very important. And if you go to the next slide, you'll see there's a quick example, and don't reuse this example, but there's a quick example of a force majeure clause that you might see in any contract.
And before the advent of COVID-19, we really weren't talking about pandemics.
Often you would hear the lawyers talking about whether or not strikes and labor disputes, would be included in the force majeure clause, or in the Canadian context, who had responsibility or who had risk allocation for the Canadian winter, and potentially transportation problems in Northern Canada, those types of things.
Now of course, after COVID-19, we are going to be talking about pandemics more and more. So that's a quick example of a clause. You'll see that the clause breaks out [as follows]: "Neither party shall be liable for any costs or damages due to delay or non–performance... arising out of any cause or event that beyond such party's control including, without limitation.... So there's some encapsulating language or a "basket clause" that reads, "cessation... or any damages resulting there from/to the other party as a result of work stoppage, power or other mechanical failure, computer virus, natural disaster, governmental action or communication disruption."
So the first key point that I want to leave with you is, go to your clause. You have some reading to do. If you have a force mature clause in your contract, that's the place to start.
So can we go to the next slide, please.
Here are some key principles for you to keep in mind as you're beginning your analysis.
The first thing, and I alluded to it earlier, was the idea of qualification. The courts in Ontario and in other parts of Canada, but in Ontario in particular, will first ask this question: Did the event that we're talking about qualify as a force majeure under the contract?
So we'll talk a little bit about that in a few minutes, but, was it described? So, was COVID-19 described in your force majeure clause? was... Is it an epidemic? Is it a pandemic?
A few weeks ago, we might have disputed whether or not this was a pandemic. I think that there's [now] less dispute there, though. It's not black and white. And if you listen to the news media, or read the news media, you'll see that there's still some dispute about that among world leaders -- I'm not mentioning any names – as to whether or not this is a pandemic, but the WHO has declared that this is a pandemic with global impact, so quite arguably, this is a pandemic. Now the other piece that you'll see is the concept -- and I'll come back to this –of the "impossible performance" standard.
And so, that's a test that... And force majeure is very hard for parties to rely on. I can't emphasize that enough. And in Ontario, the party seeking to rely on the force mature clause needs to meet what is referred to as the impossible performance standard, and this is whether or not a performance is or was truly impossible.
The other thing that's kind of like the music playing in the background, is "foreseeability".
So, we've known about COVID-19, arguably since late January. We've known it was coming our way, at least since sometime in February. Here we are in late March. If the force majeure event is being claimed in April or in May, is there an argument to be made that one or both parties should have seen the impact of COVID-19 or the government regulatory and policy changes being made as a result of COVID-19 as being foreseeable?
So foreseeability is kind of just keeping that in mind and then the final element that you need to think about is, what's the remedy? So, okay, we found that COVID-19 does qualify as one of the "force majeure" that's listed in our contract. Check. When you feel that there's nothing that could have been done and that this did meet the impossible performance standards, we could not have foreseen this happening. Okay, what happens now, what are we supposed to do now? And that's the question. Does the party seeking to rely on the force majeure clause, for instance, get a three-week delay, or do they have the right to cancel the contract, or does either party have the right to cancel the contract or is there some sort of arbitration provision that then comes into play?
So what's the remedy? In some cases, you'll see liquidated damages. So you have the right to cancel the contract, but only by paying this amount, or only by taking this action, do those types of pieces come into play. So those are the key elements. Next slide, please.
And for the lawyers on the video conference, these are the key cases in Canada: The Atlantic Paper Stock case from 1975, a Supreme Court case. That was really the main decision that set up the impossible performance standard, which governs Canada. If you want to see a good review of the law, that's a good case to read. The World Land case is the second case listed there. That's the case where the... where we get the first use and acceptance of a "basket clause", where any other causes beyond the control of or all causes of such as... up to and including, dot, dot, dot, ..., that basket clause, application comes into play.
The third case is a bit of an outlier. This is an Alberta case, which does not adopt the impossible performance standard, but adopts something closer to a commercial reasonability standard.
We refer to that as "the Atcor Exception", and that case is still on the books in Alberta, but arguably not the law anywhere else in Canada. The subsequent case [on the slide] after that, Domtar, reinforces the impossible performance standard and takes out the concept of economic reasonability and economic force majeure is extremely difficult to justify. So if your product has being made or manufactured in Milan for 50 years but you can no longer rely on products from Milan, can you get products from Germany or from Michigan? And if you can, you should be supplying that product, arguably, under that standard.
So that's kind of the economic reasonability test and then the final case [on the slide] that we just want to draw everyone's attention to is the CRTC "SARS" decision. This is not binding on the courts in Canada, but this is really one of the only cases where an epidemic/pandemic, the meaning of what that entails, was examined by an arbitral body in Canada.
Can we go to the next slide, please.
So the first question I made mention of earlier is: Does or does this event, this COVID-19 or whatever event you're referring to, does it qualify under your contract?
As I mentioned, occasionally things like plagues, epidemics and pandemics are referred to in force majeure clauses, but often they're unclear. Post-SARs, we started to see some reference to public health emergencies or communicable disease outbreaks. In general, unfortunately, at this time, these terms have not been fully explored by the courts in Canada.
One alternative to pandemic or epidemic is the action or government action which has been taken as a result, so something like a "shelter in place order" which we've referred to down in the States, or the restrictions on non-essential business operations, which came into effect yesterday at 11:59 p.m.
Those are government actions, and often government action is included in a force majeure clause.
So take a look at your clause [because] that might be useful. Of course, you should expect new case law to evolve in Canada and across Canada, unfortunately, as a result of COVID-19. And you should also expect all lawyers and business folks to be re-drafting their force majeure provisions to include things like national health emergency, pandemic, and hopefully wording such as what I put in there at the end... "...Declared as such by the WHO, the Toronto board of whatever, or the Alberta board of whatever". It would be really good to get clarity on what will or will not constitute some sort of an epidemic pandemic force majeure event in future and so you can expect to see wording along that front or the months and years to come. Next slide, please.
So, we've qualified this as a force majeure event. Let's assume that. If we've done that, I guess the next question that you need to ask yourself is: Did this force majeure event actually cause the non-performance or delay? That's an interesting question that you need to think through. Early on in this crisis, we started to see informal communications, letters and emails sent to clients saying, "Hey we think we might have a problem or there could be a problem, we might have a supply problem," and we've often encouraged parties to push back to gain clarity on that. Ask: Do you have a problem or don't you have a problem? And if you are seeking a force majeure clause, please help us understand how this event in China impacts your supply chain coming out of Mexico, because we need to have that line of causation clearly understood.
So the questions that are going to arise: Once again, proving out whether a force majeure event has occurred and can be relied upon is an uphill battle. So, did the product originate in the affected region? Are there alternative sources or locations of supply, even if they're more costly? And then further, was the disruption actually a business decision or were they shut down by ill workers or by government action? So in short, do the circumstances meet the impossible performance standard?
Our next slide please. In this next slide, I just want to come back to this foreseeability concept, and I just want to say that time is not your friend here. Given the notoriety, virtually every news story right now is about COVID-19. Everyone should be aware of IT and everyone should be getting used to the kind of exponential nature of it. The situation is getting more and more complex, and more and more challenging.
So, what we've told clients is that you now have an obligation to begin to prepare for these disruptions. The "foreseeability window" as we call it, is closing. It's going to be harder and harder to rely on COVID-19 as a disruption. You arguably have an obligation to start to prepare for it.
So, we're encouraging people to take steps now to mitigate risk and damage in advance. That of course will play better in the court's analysis, should you and you end up in front of the court at a future stage.
Next slide please. Be proactive; consider whether or not COVID-19 is going to impact your contract obligations. You want to think about the contract obligations that you have coming from your supply chain but you also want to think in the other direction, and think about your obligations going up the supply chain and hopefully those two obligations or the things you can rely on match somewhat, with the obligations that you have to meet.
The final piece of advice that I highlighted in red there is, if you do receive a piece of correspondence from another party, it might not come as a formal letter. It might come as an email. We will strongly encourage you to respond to this promptly, and in many cases, you're going to have to create or you're going to have to clarify, or you might have to correct the written record as to what happened when. In that regard, as you receive materials, you might even want to go so far as to do a screenshot of Google News or Apple news to see what was happening on that particular day, and add that to your file for the day, because it's going to become harder and harder to remember what was happening when as these things have evolved. You want to have a very clear understanding of the exact state of the world because things are changing. Minute by minute.
The next slide please.
The final concept here is what type of force majeure relief is available. I mentioned this earlier. Often the force majeure clause will specify the form or the timing of the relief. The timing of the relief might only be for a limited period of time. So if you have a force majeure event, you might have 30 days, or you might have two days depending on your contract. There might be, as I mentioned, an LD (liquidated damages) remedy. And then the other thing that I also want to draw your attention to is that there may be other provisions in the contract that relate to contract cancellation or damages more generally or potentially a cap on damages, or some sort of liquidated damages in the event of contract cancellation.
And so you'll need to think through the entire contract and how it hangs together. On that note, there are two more points from me. The next slide please.
You'll want to double-check the governing law provision of
your contract, and which law governs if you don't have a clear
governing law provision, because the law regarding force majeure is
very different in Canada, the United States, Great Britain, Europe,
and China. And then, even within Canada, it's different from
province to province, and the governing law of your contract will
become quite relevant. The final point: You will also want to make
sure that if you are providing or receiving notices that the form
of those noises aligns with the notice provisions of your contract.
Because when, how, and who received those notices will become a
very important point. So that's it for me. I'm going to
pass the baton over to Sahil. I've had the pleasure of
presenting regarding this topic with Sahil. And he's been one
of the people at Gowling WLG who has really gotten his teeth into
this, and he's done quite a lot of work, so Sahil, over to you
now.
Sahil Shoor: Thank you very much, Tom. And good
afternoon everyone, or at least everybody in Ontario and across the
country. So I'm just going to continue on from where Tom left
off, in terms of looking at the Canadian case law and the force
majeure provisions. I'm going to be speaking to you about the
concept of frustration and what some of the other avenues of
redress [are that] may be available to you, at least in the common
law jurisdictions, when you do not have a force majeure provision
in your contract or agreement, and if you do have a force majeure
provision and it does not fit in to the current scheme of events as
they are unfolding.
So that's really what I'm going to focus on and I'll even leave you with items to consider in terms of mitigation because I am a litigator and I'm always looking at how this will go in front of a court or an arbitration panel, and what would be some of the evidence that we would need in order to either defend or take the case forward? So next slide please.
I'm just going to talk about what happens when, in your contract or agreement, you do not have a force majeure clause. So irrespective of whatever Tom was saying, what happens then? There are other very important provisions in your contract and you should be looking for those clauses. I've given a few examples on the slide that you see, whether you have excusable conditions or a delay clause. What happens to the rights of the parties to the contract in the event of unforeseen conditions, and relief in circumstances where it is outside the parties' control?
And does your contract or agreement provide relief when there's a local, regional, or federal government exercising a statutory power, which directly affect the execution of work? In the Q and A that I've been looking at, there have been a lot of questions in the construction sector, at least in Ontario. For example, it's been considered as one of the essential services so I suspect that there will be really concerned owners, contractors, sub-contractors and consultants on those projects. On the one hand, the province of Ontario has declared an emergency, and on the other hand has called on construction sites and infrastructure works to continue as essential services. How is that going to mesh? To me it's going to be left to the parties in the contract to really put their thinking hats on to see how they can collectively work together and provide a safe site from an occupational health and safety perspective. As Tom briefly mentioned, and I will mention, the mitigation step is going be something that is really, really important. There's one thing that, if an employee is sick as a result of the site being contaminated and there's a different threshold if the employees of a contractor or subcontractor are simply taking the position that, from a risk perspective, and in order to mitigate the risk, they're not going to attend at the site. So the impossible standard is the standard, at least that we see outside of Alberta and all across the Canadian common law jurisdictions, so that's really, really important to note.
And yeah, moving on then: What happens if your contract does not have a force majeure clause? You then look at what other defenses are available to you, because an event has now taken place, [and] it's an impairing event that nobody thought about at the time of the negotiation of the contract. As a result, you do not have a supporting provision in the contract. What do you do now?
...What we are looking at is narrowly interpreted. Before there's any triggering of event and both the frustration and force majeure provisions have different implications for the contracting parties, like I previously mentioned, primarily: the fact being that a finding of frustration of a contract brings the entire contract to an end rather than if there was a force majeure event excusing a party from a force majeure related obligations.
And in my closing, before handing things over to my colleague in Montreal, Quebec, I really want to leave you with this.
Although you may be relying on a clause, a force majeure clause does not necessarily absolve a party of a possible lawsuit. Therefore taking proper damage mitigation steps by both parties may be a tool that is, I cannot overstate, is, in addition to [being] a necessary one [is] law, because [as I am putting] my mitigation and arbitration lawyer hat on, it is your mitigation steps that are going to become your record.
If you are either commencing a claim or defending a claim for a breach of contract, where the evidence or your mitigation of damages is going to play a key role to support your position on either force majeure or on the doctrine of frustration. So over to my colleague in Montreal.
Guy Poitras: Bonjour a tous. Good afternoon everyone. It's Guy here in Montreal. We are often asked here in Quebec why we are considered a distinct society. Of course, we have the best poutine in the world, and most of the time we have the best hockey team, but we also have a codified force majeure. Indeed, we have two sources of force majeure in Quebec: We have the civil code and we have the contract itself. So unlike in common law [jurisdictions], force majeure here is automatically included in all contracts concluded under Quebec law as per the Civil code. This means that a party in Quebec may invoke force majeure even if it's not contractually provided for. Our two main categories of differences between the legal force majeure, which is a superior force as per the civil code and contractual force majeure.
So these elements are the following. So you have to prove certain elements that have to be proven in order to be exempted from liability, so this is the first difference. And the other difference will be the situations that may constitute force majeure. Clearly, when you have a contractual clause it can be predetermined and much broader than what you will find in the typical legal force majeure.
Next slide. So what if you have no force majeure clause? So if you have no such clause, what the civil code provides is that if the three following elements are proven, you will be facing a force majeure situation So if you look at the event in question, it must be irresistible, it must be exterior and the third criteria or the third element, is that you have to look at the foreseeability of the event. The event must be unforeseeable. When you look at case law, the event or the element that is usually the one that's more disputed is the foreseeability of the event.
What's important to understand is that foreseeability is a very objective test, and it's not about what you foresaw but it's about what a normal person would have foreseen in similar circumstances. So the test for foreseeability is whether a reasonably prudent and diligent person placed in the same circumstances at the time the contract was entered would have foreseen the event.
So two things to remember. It's not what you foresaw, it's what a normal person, a prudent person, would have foreseen, not now, but at the time the contract was entered into. So the situation will of course vary, [depending on] whether the contract was entered into in December 2019 or February 2020, because most of time, situations evolve. It's exactly what we are facing right now with COVID-19. As for the element of irresistability, what it means is that the performance of the obligation is absolutely impossible. This means that if the obligation can be performed at the higher cost, or if it's more complicated to accomplish or to perform, if it's not absolutely impossible, this would of course not constitute force majeure and extra costs under such a scenario would have to be supported by the debtor of the obligation.
Tom referred to the fact that you often have suppliers in foreign countries, and you may have to change suppliers a result of an epidemic.
We have lost supplies from China as it closed its borders. So if you have to resort to other suppliers at higher costs, legally speaking, unless certain events occur, it would the debtor who would have to support these extra costs given it's not an absolute impossibility to perform the obligation.
Next slide, please.
Now if you do have a force majeure clause in a contract, the party that will raise it will have to establish two things. First of all, it will have to establish that the clause itself was negotiated, and then the party will have to confirm or convince the court that the event in dispute meets the definition of a force majeure that is included in the contract.
So there are several elements to contractual force majeure. First of all, it makes the burden of proof less rigorous. We have heard Tom talking about the burden of proof. Same for Sahil. If you do have a contractual force majeure clause, usually the burden will be less rigorous than the burden imposed on you by the civil code.
Of course, the parties can pre-determine the effect on liability, but it will especially allow the party to broaden the scope of a force majeure. So the best example is, you're a manufacturer and you include in your force majeure clause the possibility that your machine breaks down, if you were to rely on legal force majeure, this will not constitute an exterior event and a machine breaking down probably doesn't constitute a unforeseeable event. So using contractual force majeure will certainly help you broaden the scope of your protection of course, if you are the debtor of the obligation.
So this was of course a very brief overview of codified force majeure under Quebec law. It should help you identify the key factual questions because all these issues are really factual. So these are questions you must consider under Quebec law when you deal with force majeure.
And I think we will now move on with the Q & A portion of the presentation.
Thank you I and I paused because I'm madly trying to respond to all the questions as they come along, and thank you everyone for your questions. We will get through as many as we can. You will see, we are posting answers as we're going through them. What I'll do now is run quickly through as many as I can, and I'll just point to the person who I think is best positioned to answer it, but if any of our panelists would like to pop in and say something, please feel free to do so. So as Sahil did note there are a number of them that are construction-based. One of the ones that is an interesting one based on the essential services list that has come out in Quebec and Ontario. It's a question of how or does the provincial government's directive of what has been identified as an essential service, conflict with applying or using force majeure. So for example, construction has been deemed an essential service. So I'll go to Sahil first, and then if anyone else would like to join in, they can...
Sahil: Thank you, I and I was actually typing an answer to that question. You picked it up, but it's a really interesting question and a very intelligent question. I think it goes, like I said, at the outset of my presentation when I give this example, it goes hand in hand is as to what the owner and the general contractor -- I'm taking the two heads of a construction project -- what creative approaches they are taking when business is being labeled essential by the province, but there are concerns as to how they can provide a safe environment, and an environment where employees feel that they can do the work and what mitigation steps are being implemented.
And I also go back to what does the construction contract, whether it's a ... or an .... conditions, and if so, how are those events listed within your contract?
And I suspect the parties working together, trying to find creative solutions because you may have a union involved, you may have a union head, and other members of the union who have different and varied concerns on their part. So go back to the contract, look at your supplementary conditions and really try to work together to see how you can work together in order to minimize the impact on your construction site.
Over to you Cyndy...
Cynthia Elderkin: Okay, again, I'm delayed because I was responding to one. You guys have really good questions and they're coming in, fast and furious. So another question that came up was along that line. The question is: If you have a force majeure clause and you believe it's broad enough that it could cover COVID-19, but it also has a liquidated damage clause, or a rent must be paid clause or anything that has a payment or damage obligation, are you going to have to comply with a liquidated damage or rent payment, if you claim force majeure?
Sahil: I will respond to that because I'm dealing with that right now, and I dealt with it over the weekend as well. It's really important how you frame your notice-giving and putting into play how you give notice of alleging that a force majeure event has taken place and depending on how you intermingle all of the other provisions, including liquidated damages and excusable delay and how it fits in within the entirety of the contract. I see Tom has put up his video. Tom, do you have any further to add?
Tom: Well, it really does depend on how the wording interconnects and how it interplays.
We do see clauses where we'll see wording... where, okay, so a force majeure event has occurred so we no longer have to deliver you product, but you still have to pay for it. So you can see that with any kind of energy product or something like that, where we no longer have to deliver you this resource or any kind of resource because ... You might not be in a position to accept the resource. You might not have room in your location, or staff to accept the resource, but we still expect to be paid or we expect to be paid some portion of the purchase price. So it really does come down to the wording, unfortunately, and how the parts interplay.
Cynthia: Okay, along the same line, some of the questions that are coming up, talk about the timing aspect and I've answered a few of them, but I'm going to pick this one just because it is a frequent question coming up in the Q and A. When you're entering into a contract now for the fall, or for some future time, and assuming that this all ends -- but if it does not end and everything continues -- will you be able to rely on your force majeure clause, if you have one, or should you be more proactive in addressing what happens if things do not play out as we all hope they will?
Tom: I'll give my two cents on that and they pass it over you as well, Guy. If you have the opportunity to draft your clause now, then you should be thinking that this will return in the fall. Just make that assumption for now, start to plan accordingly, and if you can word around that, and ultimately what the force majeure clause comes down to is that this is about the allocation of risk between the parties. Who owns the problem, and how do you divide ownership for the problem?
And that's what the clause is about. We know that COVID-19 is here, [and] a lot of medical professionals are saying that we might expect another bump-up in the fall.
So, let's work on that assumption, and assume the words and hope for the best. Over to you, Guy.
Guy: As explained, under Quebec law you have the issue of foreseeability, so when you enter into your contract is it foreseeable? So if right now, we're in the middle of COVID-19, do we want to take a chance of entering into a contract hoping that this will all be over by October, I think you're taking a great risk. Right now, [with the concept of] foreseeability, we look to a prudent and diligent person and what they would do. I think a prudent and diligent person today would really hesitate before now entering into a subcontract hoping that by October everything will be over
Cynthia: And what I'll add to that. Is that those are for contracts that you're entering into today. If, for example, you had a contract that was entered into previously and you've been waiting it out trying to decide whether it's time to claim a force majeure or do I have enough to claim force majeure? It's evolving day by day by day. It may not still be too late to now claim that something is impossible to perform. You would have to consider what the governments are doing in the jurisdiction where you are trying to perform your services and if you can be deemed an essential service or not. So it's not too late, but you might need to figure out what the right strategy is for you at the time, depending on the facts.
Alright, someone asked a specific question to Guy: Does a purchaser of a property in Quebec have the right to back out of their purchase and get a return on a non-refundable deposit based on a force majeure? They have not closed yet on the purchase, but they placed a non-refundable deposit with the .... This has come up a few times. That's why I raise this one. So let's pass this one over to Guy.
Guy: Again, we would have to look at the offer to purchase, I guess, if there's a written contract already existing, a promise to purchase that has been entered into by the parties with no force majeure clause, no condition, no way to get out of it, then you would have to go to the codified force majeure. I can get into a lot of details, but with a force majeure what you have to look at is the obligation that is at the core of the contract. And what is preventing you from performing your obligation? And the best example is: if you're a sculptor and you lose both of your hands, you won't be able to sculpt any more. So that's an issue. But if you owe money and you're a sculptor and you lose both of your hands, you are still indebted.
So, right now, financially, speaking, maybe someone does not want to purchase a property but is legally bound to buy it and I don't think that the fact that people are less comfortable making the purchase right now means that it is a sound reason to back away from a promise to purchase, if there's no force majeure clause in the contract that would include such a situation, then I think that just a codified legal protection will probably not be enough to back away.
Cynthia: Thank you Guy. A few people have raised questions concerning more economic factors. For example, exchange currency fluctuations, if they can be tied to and directly result from the epidemic and there has been an award of a contract with an LOI, but only in a negotiation or boilerplate are they obligated to cover the additional cost of the fluctuation? Generally, economic pressures are not supposed to be part of the force majeure, but Tom, what are your thoughts on if they can show that currency fluctuations were directly caused by the epidemic?
Tom: Yeah, so that was really the issue in the Atlantic paper case from 1975. That was a case where you had one party that had an obligation to deliver the paper pulp to Atlantic Paper, and it became prohibitively expensive because of market conditions to do so, and so they effectively wanted to get out of the contract, or not have the obligation anymore.
That being said, so you might have a force majeure clause in your contract, you might also have a MAC clause in your contract, depending on what type of contract that is... That's a "material adverse conditions" clause and often, particularly in financial contracts or any type of a corporate commercial contract where we're contemplating the closing taking place, the disruption in world markets, which has occurred over the last week or so that arguably we're looking at anyways, whether or not that would meet the threshold of MAC, and often you'll have to go back to the definition of what constitutes a material adverse condition.
Cynthia: Okay, and then there's a question in connection with hotels and events, and if there's a force majeure clause in the contract, say it's an event convention to be hosted at a hotel and it's going to happen sometime in the future, and the service provider, i.e. the hotel, denies that the force majeure is now applicable and says, it will only consider the issue at the time that's just before the event and argues
now that the event can't be cancelled. It's a whole temporal question again. I think this one is complicated because hotels were deemed essential services, so they don't have to close them down, they can choose to keep them open or not, it'd be better if they were... And I know some hotels are closing based on this, but typically, they're not claiming it's because of the COVID-19. So Tom or Sahil? Any comments on that one?
Tom: Well, I can give you my two cents, just to say that we are seeing this in relation to hotels and venues all around the world at this time. It's a very complex issue, and it is very dependent on the wording of your contract and it's also one of those cases where commercial pressures will come to bear. You're seeing the major hotel chains, and Air B & B, taking different kinds of positions on this and everyone kind of saying, "Okay we might lose profit now but we also do need to protect our brand and protect our reputation in the market," and that's really where the commercial piece comes in.
But from a purely legal point of view, it really depends on the wording of the contract. And many of these contracts are two pages long and so they're not going to have an eight-page force majeure provision in them. They're going to be very simple two–liners, unfortunately. Over to you Sahil.
Sahil: I've got nothing further to add other than what Tom just said, but all that is to say that your notices to hotels, if you're delivering notices to cancel events, have to be really well drafted and if you're a hotel receiving a notice make sure you take the notice very seriously and respond accurately to the notice as promptly as you can.
Cynthia: Sahil, I'll keep you on the line because we're getting near to the end but I'll throw two construction questions at you that are sort of similar.
First: If there's a stop to an existing construction project due to the pandemic when the project resumes, is a contractor obligated to hold to the contract pricing, and second, a sort of similar question: If there's a delay on the project and the parties do agree to delay does a contractor then have the right to claim contract delay fees?
Sahil: Very good questions, and something that we suspect that we will have new law [for], if the parties are unable to agree to as a result of the pandemic and associated delay. Typically in construction contracts, and depending on the sophistication of the parties, you will hope that the parties are able to resolve how long the stoppages of the work will take place and at the same time, also deal with the pricing issues, not only the labour costs, but also, the material costs because, depending on where the material is coming from, you may have implications that the cost on material has gone up.
Having said that, and putting my owner hat on, if I'm representing an owner, one of the questions that I would ask my owner client is [about] whether or not this material that the other side is saying that they have to now purchase at extremely higher price, whether or not they should have ordered more of that material way in advance? Is this, in relation to the project, a delay that has nothing to do with a pandemic? Is it just poor performance and the impacts of all of that on the schedule and the completion? It's really important that you speak and really think about these issues before there's any agreement on the delay, stoppage of work, and associated prices.
Cynthia: Okay, we'll take another question. I know we're at 5:02, but we started a few minutes late. This is a common question that's coming up where, even if you are going to be an essential service, and you have to keep open, or you have to keep performing your obligations, but you're having a difficult time staffing because the employees may not want to come to work, they may have reasons at home, or people at home who are at vulnerable ages and stages that they don't want to potentially infect, so there will be a lack of human resources to perform the work. Could that potentially meet the "impossible standard" in a force majeure?
Sahil: I think it's very important to know that just because your contract has become expensive to perform, it does not satisfy the impossible standard that has been put out by Supreme Court of Canada.
But again, I go back to this: Keep a very good documentary record as to how things are becoming difficult to perform under the contract and have that open, very sophisticated discussion with whoever it is that you're performing the contract for and keep a good documentary record because if you're unable to perform , you say the contract has a force majeure or provision that you cannot perform for X number of months or weeks that you can rely on it and you're not getting into litigation for a breach of contract. Over to you Cynthia.
Cynthia: Thank you. We tried our best to get to all the questions, whether by answering them live or through the Q and A. We have a few more that we have not been able to answer. We will be sending the slides to the attendees and posting the recorded version of this on our website. We will also find out whether or not it is available for professional development credits and we will post it on our site or otherwise communicate to the attendees.
We appreciate all of you joining us today for this session. We found it very interesting to work through the questions and show that this is top of mind for everyone. Your questions were very good.
Please visit our site for more information. We will be preparing other webinars on this topic, and we encourage your feedback and suggestions for future topics, and thank you again for joining. We'll be shutting down shortly. Thank you, thanks everyone, thank you all through the wall.
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