The Effects of COVID-19 on International Contracts

How to handle the case in which a supplier or customer within an international supply chain defaults on a contract? When can Force Majeure be invoked? What are the consequences on contracts? How to minimize risks to the company’s business?

To answer these questions, it is necessary to analyze the content of the contracts and understand what the law applicable to the individual agreements provides for.

Our experts explain how to manage the effects of the Covid-19 pandemic on industrial and commercial activities and share operational advice for managing international contracts during the emergency.

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Canada

Update on April 18, 2020

On April 18, the Investment Review Division of Innovation, Science and Economic Development Canada announced that it is adjusting its regulatory policies in response to the COVID-19 pandemic.

Under the new policy, the Government of Canada (“Government”) will subject certain investments by non-Canadians in Canadian businesses and entities, and the establishment of new Canadian businesses and entities, to enhanced scrutiny under the Investment Canada Act. The policy applies to investments in Canadian businesses “related to public health or involved in the supply of critical goods and services to Canadians or to the Government”. However, it does not define or describe what businesses fall under the scope of “public health” or “critical goods and services”. In this respect, the policy applies broadly. The policy also sets out enhanced measures applicable to investments made by state-owned enterprises (“SOEs”) or investors working under the influence or direction of a foreign government.

The enhanced scrutiny that such investors may receive could include, for example, the Minister of Innovation, Science and Industry requesting additional information or extensions of timelines for review “in order to ensure that the Government can fully assess these investments”. It is to be seen whether the new policy also will result in the Minister requiring certain classes of undertakings that have not been requested in the past.

Finally, the policy does not have a set end date, other than applying “until the economy recovers from the effects of the COVID-19 pandemic”. It remains to be seen when and whether the Minister will formally repeal the enhanced measures or whether the policy portends a more restrictive environment for certain classes of investments by non-Canadians into Canadian businesses and entities in the future.

How is Force Majeure defined and regulated in Canada?

In common law jurisdictions like Canada (with the exception of the province of Quebec), a Force Majeure clause must be an express clause in a contract. Given the underlying principle of freedom of contract, parties are free not to include a Force Majeure clause in their agreements, or to structure any Force Majeure clause which they do include in the manner they see fit (subject to basic limitations on contractual freedom such as illegality, public policy, etc.).  As a result, the application of any particular Force Majeure clause will depend on both the wording of the clause itself, and the circumstances in which it is invoked.  Courts emphasize that “[w]hether a Force Majeure clause is triggered depends on a proper interpretation of the particular clause”.[1]

The Supreme Court of Canada described the general function of Force Majeure clauses as follows:

An act of God clause or Force Majeure clause generally operates to discharge a contracting party when a supervening, sometimes supernatural, event, beyond the control of either party, makes performance impossible. The common thread is that of the unexpected, something beyond reasonable human foresight and skill. … Was the change so radical as to strike at the root of the contract? …[2]

Such provisions share a common underlying structure and seek to address three principal issues:

  1. How broad should be the definition of triggering events?
  2. What impact must those events have on the party who invokes the clause?
  3. What effect should invocation have on the contractual obligation?[3]

Most Force Majeure clauses also require that the event be: (a) unforeseeable; and (b) outside the control of the parties. To the extent that the clause does not specifically provide for this, courts may still be willing to read in such a requirement.[4]

The notion of “unforeseeability” in this context can be the subject of contractual definition. Where the parties have not included such a definition, courts are inclined to use the notion of “something beyond reasonable human foresight and skill.”[5] Importantly, the foreseeability analysis is conducted at the time of contract formation. Therefore, COVID-19 may not constitute a Force Majeure event for contracts that were entered into after the pandemic began or became reasonably predictable.

With respect to “lack of control”, the courts view this as requiring both that the event originate outside the control of the impacted party, and that it not have been avoidable with the exercise of reasonable diligence.[6]  If the reason for the impacted party’s difficulties are due to a cause which the impacted party itself brought about (e.g., lack of an effective business plan), it may be denied the ability to rely on the Force Majeure clause.[7]  This may be important in the context of COVID-19, insofar as some firms may have already been experiencing underlying problems that the disruption associated with the virus simply brought into prominence.

In the province of Quebec, the Civil Code of Quebec (“CCQ”) defines the Force Majeure defence (referred to as “superior force”):

  1. A person may free himself from his liability for injury caused to another by proving that the injury results form superior force, unless he has undertaking to make reparation for it.

Superior force is an unforeseeable and irresistible event, including external causes with the same characteristics.

It applies in contractual and extra-contractual matters, and allows the debtor to be freed from an obligation of means and of result. Pursuant to the provision, the concept of Force Majeure designates an event that is unforeseeable at the time of the conclusion of the contract, that cannot be resisted, and that prevents the performance of obligations. This concept also includes fortuitous events.[8]

In brief, the primary characteristics of Force Majeure are unforeseeability, irresistibility, and externality. Furthermore, the event must result in the absolute impossibility of performing the obligation in question.[9] This impossibility cannot be simply personal to the debtor; the event must be generalized and must make the performance impossible for all.[10] Accordingly, the theory of hardship does not apply in Quebec.

[1] Domtar Inc. v. Univar Canada Ltd., 2011 BCSC 1776 at para. 78.

[2] Atlantic Paper Stock Ltd. v. St. Anne-Nackawic Pulp and Paper Company Limited, [1976] 1 SCR 580 at 583. [Atlantic Paper Stock]

[3] Atcor Ltd. v. Continental Energy Marketing Ltd., 1996 ABCA 40 at para. 12.

[4] Atlantic Paper Stock, supra note 2 at 583.  See also: West Fraser Mills Ltd. v. Crown Zellerbach Canada Ltd., 1983 CarswellBC 541 (S.C.) at para. 26, aff’d 1985 CarswellBC 2168 (C.A.) where even though the economic downturn was reasonably foreseeable, the Court still held that the Force Majeure clause applied on the ground that it was outside the impacted party’s control.

[5] Atlantic Paper Stock, supra note 2 at 583.

[6]    See e.g. Wal-Mart Canada Corp. v. Gerard Developments Ltd., 2010 ABCA 149, where the court held that the failure to obtain necessary permits by the date required was not a Force Majeure event because they could have been obtained with reasonable diligence.

[7]    Atlantic Paper Stock, supra note 2 at 587.

[8]    Vincent KARIM, Les obligations, vol. 1, 4e ed., Montreal, Wilson & Lafleur, 2015, n° 3223, 3225 and 3226.

[9]    Id., n° 3247.

[10]   Jean-Louis BAUDOIN and Yves RENAUD, Code civil du Québec annoté, 22e ed., Montreal, Wilson & Lafleur, 2019, art. 1470, n° 1470/2.

How to prove that the Coronavirus can be considered as an event of Force Majeure?

Under Canadian common law, the party invoking the Force Majeure clause bears the burden of proving its application. In considering whether a party has done so, some cases suggest that Force Majeure clauses are to be interpreted strictly. However, it is important not to push such categorical rules of construction too far given the modern, contextual approach to contractual interpretation. In order to prove that a Force Majeure clause applies:

The party seeking to invoke the clause must prove that a triggering event has occurred. In most cases, a Force Majeure clause will list a few examples of events that constitute Force Majeure and then end with a residual or “basket” clause that includes any other events which are unforeseeable and outside the control of the impacted party.  This structure makes these clauses amenable to interpretation ejusdem generis, so that the breadth of the basket clause may be restricted to situations similar to the enumerated examples. It is therefore important to consider the specific triggering events that are listed when assessing whether they may be engaged by developments relating to COVID-19.  For instance, there may be a greater ability to invoke a Force Majeure clause in response to the COVID-19 crisis if the provision includes a triggering event such as an “epidemic”, “quarantine”, “pandemic”, “disease” or “public health emergency”. However, even if the listed triggering events are more general (such as, e.g., an “act of God” or “plague”), it may still be arguable that they encompass certain aspects of the crisis.

In addition, as noted above, most Force Majeure clauses also require that the triggering event be: (a) unforeseeable; and (b) outside the control of the parties.

Absent contractual language to the contrary, the party seeking to invoke the clause must demonstrate that: (a) its ability to perform its contractual obligations has been impacted; and (b) the impact was caused by the triggering event, rather than some other cause.

As to the requirement of an impact, the degree of impact necessary to trigger the Force Majeure clause may be stipulated by the parties.  Some provisions may require that performance be rendered impossible by the Force Majeure event (e.g., by stipulating that a party must be “prevented” or made “unable” to perform), whereas others may require (typically as an addition, rather than alternative, to impossibility language) that performance simply become impracticable (e.g., by stipulating that a party’s performance  must be “hindered”). Still others may require, for example, that performance become illegal.

As to the requirement for causation, most Force Majeure clauses will require a direct causal connection between the Force Majeure event and the inability or difficulty of performance (e.g., “as a result of”, “occasioned by”, “in consequence of”, etc.). However, clauses with “weaker language such as ‘in case of an event of Force Majeure’ may be interpreted as not requiring a causal connection between the event of Force Majeure and non-performance.”

Under the Quebec civil law regime, the burden of proof also lies with the party raising the Force Majeure defence. The party seeking to invoke the clause must demonstrate:

  • The event met the criteria set out in section 1470 CCQ (i.e. an unforeseeable and irresistible event of an external cause);
  • The circumstances were exceptional and extraordinary; and
  • The event is the sole impediment to the performance of its obligations and the only cause of the damage.

Absent an explicit contractual clause in the parties’ agreement, the determination of Force Majeure is left to the discretion of the judge of the competent court. The trial judge has large discretion to appreciate the facts in order to assess the unforeseeable and irresistible nature of the event.[1]

[1]    V. KARIM, prec., note 8, n° 3260.

What is the best course of actions recommended in case either party issues a notice of Force Majeure?
  • Every Force Majeure clause should be considered and interpreted separately and in light of the contract as a whole.
  • Take reasonable steps to prevent the event from occurring in the first place and to mitigate its impact (e.g. quarantine protocols, increased sanitation, remote work capabilities, etc.). The requirement to avoid the Force Majeure event and mitigate its impact is consistent with jurisprudence concluding that the application of such clause is reserved for those events which are truly beyond the parties’ control. Note that reasonable steps may change with the circumstances, particularly in the context of a public health crisis evolving daily. Accordingly, both parties are well advised to keep up-to-date on local, national, and international evolutions in the response to COVID-19.
  • Force Majeure clauses may contain strict notice obligations. They typically require that notice that a Force Majeure event has occurred be given in writing within a specified number of days of the event. Particular attention must paid to these timelines as an individual’s ability to rely on the Force Majeure clause may be barred if they are missed.
  • Where a contract does not include a Force Majeure provision, parties may consider relying on the common law doctrine of frustration.
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