As Canadian businesses begin to deal with the fallout of the novel coronavirus, many are evaluating whether their commercial contracts could be broken by force majeure clauses that cover events outside the parties’ control.
Sometimes referred to as “act of God” provisions, such clauses can excuse one of the parties to a contract from performing their side of the bargain – absolving them of financial responsibility or extending deadlines without a penalty. Force majeure clauses are meant to be a risk-management tool, providing an out in unexpected circumstances, such as natural disasters, war or riots.
In recent weeks, lawyers say they have fielded a wave of inquiries related to whether the coronavirus crisis could be covered by force majeure clauses. Supply-chain interruptions are a major concern, but employee absences, plunging demand and restrictions on travel are other factors that could interfere with contracts.
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Canadian companies that work with suppliers in China, where the outbreak began and where many industries were interrupted or even halted for weeks, are particularly worried they could be on the receiving end of a notice invoking one of the provisions.
The China Council for the Promotion of International Trade (CCPIT) began issuing what it is calling force majeure “certificates” to Chinese companies affected by the outbreak in January; according to a Reuters report last week, it has now handed out more than 5,600 of the certificates. Canadian lawyers say such certificates will be a factor for a court or arbitration body to consider, but will not necessarily be definitive on the point of whether a force majeure clause may be triggered.
Trevor Zeyl, a partner with Norton Rose Fulbright LLP, said the CCPIT certificates, “alarmed some people," noting, “A lot of our clients that are global in nature, but Canadian-based, are worried about whether that will impact them.”
To address clients’ common questions about COVID-19, the disease caused by the coronavirus, his firm held a webinar last week that attracted more registrations than any other the firm has conducted. It was while the conference call was under way that the World Health Organization declared the outbreak to be a pandemic, something that Mr. Zeyl said could be a significant factor in whether force majeure clauses are triggered.
“I do think this announcement definitely changes things. In the last two weeks, we’ve been getting a lot of calls from clients who are auditing their previously signed long-term commercial agreements, looking to understand whether the definition of force majeure is applicable. This may change in light of this announcement.”
That’s because determining whether a force majeure provision can be triggered involves a number of factors, beginning with the wording of the clause itself. For example, some contracts include only a general catch-all term while others specifically reference disease or even pandemics. Legal experts say the timing of the contract also matters; if the parties signed a long-term supply agreement two years ago, that would be very different from striking a deal last month, when the outbreak was already widely publicized and disruptions could be anticipated.
“It becomes a bit difficult because each clause is different,” said Preet Bell, a partner at Bennett Jones LLP in Toronto, who says that a party who wants to rely on a force majeure clause will also have to show that there was no way for them to meet their obligations under the contract. “It can’t be just that it’s more difficult or more expensive, but it has to get close to impossibility.”
Ms. Bell wrote a commentary on the issue with her colleague Richard Swan, who says supply-chain contracts are most at risk.
“If you’ve got hundreds of different parts coming from all over the world that go into the manufacture of a vehicle or a piece of electronics, when there are timing delays and plant shut downs and that supply chain gets interrupted, it can set off a whole chain reaction of events in the manufacture of the product, and that can lead to litigation.”
Torys LLP partner David Outerbridge says clients are evaluating their rights, noting that worker shortages, a drop in consumer demand and event cancellations could also raise force majeure issues. But he says most are looking to find ways to work together with their commercial partners to find solutions.
“Even though not every force majeure clause is going to be triggered by COVID-19, people recognize that the world of commerce is slowing down, and it’s being interrupted. Because of that blunt reality, it’s more important to co-operatively figure out a way to make the pain as little as possible rather than to get into a big fight."