Coping with COVID-19: Are business contracts enforceable in a crisis?

In the latest Coping with COVID-19 video, OBJ explores contract law, specifically whether commercial contracts are enforceable in a global crisis.

The panel discussion included Megan Wallace of Perley-Robertson, Hill & McDougall, Chris McLeod of Mann Lawyers LLP and Andrew Foti of Avōkka Professional Corporation. This is an edited version of the panel discussion. For the full discussion, please watch the related video.

OBJ: Let me give you this scenario, one that I suspect is playing out across Ottawa’s business landscape right now. It goes like this: Businesses have relationships with clients and suppliers. More often than not, these relationships take the form of contracts. Sales contracts would normally have things like price, payment terms, schedules and other clauses. Business owners are getting these two questions each and every day. Can I cancel this contract? Can I delay this contract? Megan, let me ask you this. Are business contracts enforceable during a global health and economic crisis?

WALLACE: Generally speaking, it would really depend on the nature of the contract, what it’s for, and whether performance is still possible. What I’ve been dealing with a lot at work are clients who have planned either annual meetings or events and are now working with hotels and suppliers to try to terminate those contracts. So I’m sure the lawyers for the hotels and the third-party contractors are also dealing with people trying to cancel on the other end. So there’s no strict rule that says because the World Health Organization has declared a pandemic that contracts aren’t enforceable. You have to go to the language of the contract, what it’s for, and what it provides for, in respect of force majeure and termination and things like that.

OBJ: Chris, let me pick up on something that Megan just said. If I’m a business owner and I’m still prepared to deliver that product or service, should I assume the contract is still enforceable?

MCLEOD: Contracts are still presumptively enforceable. The question is whether there is some reason that they would become unenforceable, either by virtue of a clause inside of the contract or by virtue of some sort of application of common law principle and frustration, but contracts are still presumptively enforceable. I think, because of COVID-19, there’s a broader number of tools in the tool belt in order to try and escape from contractual obligations … Megan brought up a good point about force majeure provisions and frustration. That’s a very tricky area of the law, and it’s something that hasn’t been seen in this context in any of our lifetimes.

OBJ: Andrew, I want to give you an opportunity to weigh in. What type of advice would you be giving to a client related to contract law?

FOTI: The first order of business is to look at the contract. Chris and Megan have indicated we should determine whether it has force majeure language. It’s interesting, you know, that our inclination is usually to read past all that boilerplate. Now people are going to the boilerplate and asking, “Is it there?” So the first question is: do you have a force majeure clause? The second question is this: if you don’t have a force majeure clause, what would frustration look like? I would be saying to a client and business owner, “Well, so what answer do you want? Do you want to perform? Can you perform?” That’s really the threshold question.

OBJ: Megan, let’s go back to you and zoom out a little. I’ve seen this term, force majeure, in contracts. Where does it come from?

WALLACE: It’s a term that is referring to an event beyond the control of either party that makes performance of the contract impossible. So it’s speaking of things that are beyond our thought and our skill. Something that wasn’t expected. It is one of those things where you have to specifically list the different events. So when you’re interpreting a force majeure clause, if it says tornado and doesn’t say pandemic, you’re not covered. Then you’re looking at the possibility of frustration, like Andrew was saying. It’s also really important for business owners to note that, where performance of the contract is not precluded. So, for example, if I’m supposed to be preparing a book of documents and I can do that from my house, that will not trigger force majeure. It has to be based on the fact that you cannot perform the contract.

OBJ: Chris, is force majeure something that would be part of your usual discussions with clients?

MCLEOD: Just to jump back a little bit to something that Megan said. This is really important. Force majeure is not a generally applicable term. It finds its basis in the contract between two parties. So you will either have a force majeure clause or you won’t. And the scope of your rights and obligations under that, in the event of a force majeure, is captured within that clause. So, as Megan said, if it only says tornado and something else happened, you may not be covered. Oftentimes you see words like epidemic in there. Maybe not pandemic. I’m not sure that I’ve seen that one before, but there can be catch-all language in there, things like other government actions that trigger your ability to exercise your rights under the provision. If the government shuts down public events and you were scheduled to have a public event, it might do that. Importantly, your rights under the force majeure provision can also contain obligations. So, if you do take the position that you’re exercising your rights and terminating the contractual obligations under the provision, you may have obligations under that provision as well. You might have to put the other party on notice. And if you don’t understand it, talk to a lawyer.

OBJ: Andrew, I just picked up on something that Christopher said. Maybe you can clarify this for me. If I’m a business operating in a time of crisis, is it important for me to communicate to my client that I’m able to still deliver a good or service they purchased?

FOTI: If it’s a revenue contract, it would be important to communicate that you stand ready to deliver. On the supply side, it becomes a question of getting the supplier to say whether they can or they can’t … For litigators, these statements are the evidentiary trail that will determine what’s going to happen to these contracts. So you want to think carefully about the outcomes you want, and then move accordingly.

Michael Curran

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