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Corporate Commercial Securities, Contracts, and COVID-19

16-Mar-20

By McLennan Ross Corporate & Tax Team

Much has changed since December 31, 2019 when the Coronavirus (COVID-19) was first reported in Wuhan, China. What started as an unprecedented virus has now been declared a global pandemic by the World Health Organization. In addition to the serious health implications of COVID-19, the virus has had a serious effect on local, national, and international business.

Though the current situation may raise feelings of panic and uncertainty, the best way to mitigate these feelings and the risks posed by the COVID-19 pandemic is to be responsive and prepared.

Many businesses have begun looking into the legal implications that COVID-19 will have on their operations, specifically with respect to their contractual commitments. Below are some of the more common considerations for corporations that may not be able to fulfill their contractual obligations as a result of COVID-19:

  1. Default/Change Order:
    • If you are unable to fulfil obligations in a timely manner under a contract to which you are a party, will you experience an event of default? 
    • Do you need to consider a change order to address delay? 
    • Are there specific notification requirements? 
    • What are the timelines governing notification or submission of a change order?
    • What are the consequences? 
      • liquidated damages?
      • guarantees or other security?
      • bonding/surety?
         
  2. Change in Law:
    • Does your contract contain a change in law provision? 
    • If so, has a legislative response to the COVID-19 outbreak triggered such a provision? 
    • What is the effect if it has been triggered?
       
  3. Force Majeure:
    • Does your contract contain a force majeure provision? 
    • If so, has the COVID-19 outbreak or a legislative response resulted in a force majeure under the specific terms of your contract?
    • Has COVID-19, or some legislative requirement made it impossible or unlawful for either party to fulfil its obligations? 
    • What is the effect if the provision is triggered? 
    • What are the timelines associated with notification or response under the provision?
       
  4. Material Adverse Change:
    • Does your contract contain a material adverse change provision? 
    • Does the COVID-19 outbreak, or some legislative response meet the threshold under the specific terms of your contract? 
    • What is the effect if the provision is triggered?
    • What are the timelines associated with notification or response under the provision?
       
  5. Mitigation:
    • Does your contract expressly require you to mitigate?
    • If so, what are the express requirements under the specific terms of your contract?
    • If not, have you considered ways you are still able to mitigate your damages?

Clearly the answers to these questions will largely depend on the specific wording of your contracts.  We would encourage you to reach out to our Corporate Commercial Securities lawyers for support in your review efforts.   

Specific Commentary Regarding Force Majeure:

A force majeure clause is common in certain types of contracts and normally frees the parties from liability or obligation when an extraordinary event or circumstance beyond either party’s control prevents one or all of the parties from fulfilling their contractual obligations.

Generally, the application of a force majeure clause is a high threshold. According to the Supreme Court of Canada in Atlantic Paper Stock Ltd. v St. Anne-Nackawic Pulp and Paper Company Limited, the application of a force majeure clause requires: (1) that the triggering event is clearly beyond the control of the contracting parties; and (2) The triggering event must render performance of contractual obligations impossible. The principle of impossibility was further refined by the Alberta Court of appeal in Atcor Ltd v Continental Energy Marketing Ltd. to showing “that the event created, in commercial terms, a real and substantial problem”, which remains a high threshold to meet. Therefore, simple inconvenience will likely not render a force majeure provision applicable.

As the impact of COVID-19 and legislative responses continue to evolve, it is prudent to ensure that you understand the specific nature of your contractual arrangements to determine whether a force majeure clause exists and may be relied upon in your particular circumstances. 

We therefore strongly encourage you to consider the questions set out above, and to be proactive at this time to mitigate any potential liabilities that may arise from failing to fulfill your contractual obligations.

Please feel free to contact Dani Fialkov, Pat Haughian, or Moe Denny if you have any questions or concerns.

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