Responding to Covid-19: Business and Legal Considerations
The outbreak of COVID-19 has been a shock to workers, employers and the global economy. As we continue to prepare for the short and long-term effects of the virus on our organizations, the following are some business and legal considerations to help guide us during this uncertain time.
The duration and effects of COVID-19 are yet to be determined. Accordingly, it is critical businesses have a long-term strategy, or business continuity plan, in place. While that strategy may be unique to each organization and likely to change, it is essential to promptly focus on this issue. At a minimum, a business continuity plan should review, consider and plan for the following:
How employees can be supported remotely, including considering what infrastructure will be necessary to perform their jobs with minimal interruption and friction;
How to coordinate employees working in various areas;
Frequent and transparent communication with employees, vendors and customers; and
Assessing which aspects of your business are most critically affected by the existing quarantine measures and planning solutions around it.
The solutions and strategies to each of the above considerations will vary from organization to organization. However, regardless of the industry you operate within, the most important aspect of navigating these times will be timely, transparent and focused communication. Employees should not be left wondering how to manage work remotely or if they will be employed in the coming weeks and months. Similarly, vendors should not be unclear whether orders are suspended, and customers should know how they can interact with your company and how their customer experience may change on account of the current isolation measures and any other relevant restrictions which are temporarily in place.
Managing Legal Obligations During COVID-19
Businesses should proactively engage in a systematic review of their legal and contractual obligations. These obligations may be to third party vendors, banks and other lenders, landlords, or governmental agencies. It is important to work with professional service advisors to identify what obligations will likely be impacted by COVID-19 to better understand legal risk and exposure. In doing so, the following considerations will be especially relevant:
Material (adverse) change or termination for convenience clauses
Frustration of Contract
Mitigation and Good Faith
Material Adverse Change or Termination for Convenience
Carefully review the terms of your contracts or terms of service. Some contracts contain “material adverse event” or “material adverse change” provisions which may (or may not) be activated by events such as COVID-19. Where such events occur (or there is a risk that a party is going to take this position), parties may be able to renegotiate key terms, depending on the circumstances. Similarly, a contract may contain a unilateral or bilateral termination for convenience clause. In considering whether to exercise such clauses, pay attention to notice requirements that must first be provided to the other party. Failing to strictly comply with notice requirements may be fatal to your entitlement of these otherwise beneficial provisions.
Force Majeure is a rarely used clause in a contract, engaged only in an extraordinary circumstance, where a party cannot perform the contract due to circumstances beyond its control. Events which trigger this clause are commonly referred to as an “act of God.” The definition of Force Majeure is often drafted in a manner which is expansive and commonly includes epidemic, disease, war and so on. Although COVID-19 is unlikely to be specifically referenced in such a clause, the open-ended language involved will arguably be sufficiently broad and general to capture it. The specific issues here are novel and unprecedented, so a close review of contract terms and circumstances now is likely to be beneficial.
Relying on a Force Majeure clause is not easy. The party relying on it must establish that the Force Majeure event prevented it from fulfilling its contractual obligations (including exhausting other options). The party seeking to rely upon Force Majeure must look to the exact wording of such a clause to see whether it applies a specific standard (i.e. being “prevented” from performing your obligation v. being “hindered” or “delayed”). Where there is no specific contractual standard, Courts in Canada will apply a high standard, finding that Force Majeure will apply if it is essentially impossibly to perform the contract. The fact that performing your obligation under a contract has become expensive or unprofitable, is not enough. There can also be issues about how a temporary situation is addressed, and whether recent events about a “pause” as opposed to something which essentially voids the contract.
In addition to understanding what standard to meet in relying on a Force Majeure provision, a party must also demonstrate a substantial causal tie between the Force Majeure event and its inability or failure to perform its contractual obligations. These are factual questions that will vary from case to case.
Finally, if an organization believes that they may be entitled to rely on a Force Majeure provision in one or more contracts, it is still essential to check for any notice requirements. There are often strict notice requirements which must be met to ensure you can actually rely upon and benefit from the Force Majeure clause.
Frustration of Contract
Frustration of Contract may be used where there is no express Force Majeure clause in a contract. This doctrine applies in situations where the performance of the contract becomes something radically different from that which was undertaken in the contract. A party seeking to invoke Frustration of Contract must satisfy the following three components:
There must be an extraordinary supervening event that occurs, through no fault of the contracting parties. The event must not have been contemplated or foreseeable at the time of entering into the contract.
There must be no clause in the contract, like Force Majeure, for courts to apply the doctrine of frustration.
The performance of the contract would have to be such that it is substantively different than what the parties bargained for.
Importantly, the doctrine of frustration can apply to a wide range of contracts including employment, commercial and real estate.
The standard for establishing Frustration of Contract is higher than the standard for Force Majeure. A party wishing to rely on the doctrine of frustration must show that it would be “positively unjust” to hold it to its contractual obligation.
If a party succeeds with a Frustration of Contract claim, the contract is deemed “frustrated” and all obligations are void as of the date of the supervening event. Many provinces in Canada have legislation to deal with the outcomes of such findings. For example, Ontario’s Frustrated Contracts Act sets out terms for adjusting the parties’ rights, liabilities, expenses incurred and benefits that may be recovered by the party that established frustration. There are also specific rules and case law which has developed under employment law. In all types of cases, including in business and employment scenarios, it is important to conduct a close legal review of the relevant contracts, the facts as they actually exist, and the respective obligations of the parties.
Mitigation and Good Faith
If your organization finds itself in a situation where loss is likely to occur in the context of a contract or business relationship, regardless of any legal claims you may have, there is a legal
duty to mitigate your damages. In other words, if there is something reasonable which your organization can do to limit your loss, you must do so. Parties can only recover damages for breach of contract to the extent a claimant has taken reasonable steps to prevent further loss. An organization which claims a breach of contract cannot sit idle and let a situation get worse.
Additionally, parties have a duty of good faith in the performance of their contracts. This duty requires parties not to lie or otherwise mislead each other about matters directly connected with the performance of a contract. This duty is likely to be engaged where one party seeks to evade contractual duties.
If we can be of any help to you and your business during these times, please contact us by phone at: (416) 844-3457 or by email at: firstname.lastname@example.org
In response to continuing questions and concerns regarding #covid19 on businesses, I thought to share a short piece I recently distributed to my clients. Thank you to my employment law colleague George Waggott for his help and input.