Welcome to our Q&A session on commercial leasing. The purpose of this session is to help commercial landlords and tenants during these difficult times.
This session is not intended as legal advice as it is impossible to cover all relevant details, and available rights and remedies will depend on the unique facts of each situation. For specific advice, please speak with your qualified legal counsel before making any decisions or taking any action. Additionally, the situation is extremely fluid and is changing on a daily basis. As things evolve, your best course of action could also evolve so please follow up-to-date and reliable sources for your information.
Shari (Director of Client and Lawyer Happiness for Caravel Law): Welcome to Caravel Law’s Q&A session on general commercial contract enforcement. We are hosting this to help businesses during this tenuous time. I’ll read a little disclaimer here: The session is not intended as legal advice as it is impossible to cover all relevant details. Available rights and remedies will depend on unique facts of each situation. For specific advice please speak with qualified legal counsel before making any decisions or taking any action. Additionally, the situation is fluid and changing on a daily basis so as things evolve your best course of action is to follow up with reliable sources for information. Please note this event is being recorded and may be used by Caravel Law at any time and please note there is no expectation of privacy on sessions held on Zoom. Anyone acting inappropriately will be removed.
I want to introduce you to Tracey Durand who is the former senior VP of Corporate and Legal Affairs and General Counsel of Sodexo Canada and also the former VP General Counsel and Corporate Secretary of Shred-It and Compass Group Canada. Randy Witten was the VP and Associate General Counsel for Corus Entertainment as well as the Assistant General Counsel of Woolworth Canada. Both Randy and Tracey have been practicing in association with Caravel Law for quite some time and regularly assist clients with contractual issues and general commercial considerations. Welcome both to the floor. All participants have been muted so please post questions in the Chat box. If you have specific questions, we are unable to answer in this format we encourage you to consult a lawyer or contact us directly.
So – I will begin by sharing some questions that were submitted before today’s event. Tracey and Randy welcome. I’ll start with the first question: Could someone please explain force majeure – how does it work, what is it, and how does it relate to what is happening with Covid-19?
Randy: I can start if you like. Force majeure is a concept that provides that if there’s some event that occurs that prevents a party from performing an obligation under a contract there are certain remedies set out, and often there are different events specified in a force majeure clause in a contract, such as pandemic or a government order or labour shortages, etc.
Shari: Could you elaborate a bit on what events could cause force majeure to apply?
Randy: There could be any number of events: labour shortage, any kind of government order, strikes, the list is long – not all are coming to mind right now – but the idea in a force majeure clause is to be as specific as possible. Those clauses are not always enforced readily, so the more precisely a clause addresses a potential obstacle, the more likely it is to be enforced. So for example, these days if we are looking at a force majeure clause as a way to protect ourselves from being unable to perform a contract we would want it to reference a public health emergency or pandemic.
Shari: Next question: I don’t know how my business is going to make it through this current situation. What are my options for obligations I have made that I know I will be unlikely to keep?
Tracey: So I think – obviously it depends what those obligations are and how your contract language reads. So the first step is to see what remedies or outlets you might have in the contract. If there is a force majeure clause you are going to look at that and see if it is applicable to the circumstances. In the absence of a force majeure clause it becomes something that you’d look to whether there are any other clauses in the contract that might help you – business continuity clauses, things like that. And then your first step might be to, from a business perspective, look at whether there are business options to scale back, presuming your contract allows you to make changes and negotiate some changes in your contract. But obviously all of this is very dependent on what the language of your contract is and your particular circumstances, which is why you need to take a look at those things.
Shari: Are there clauses that people should look to add on new agreements now that are forming? Anything they should consider that wouldn’t have been standard before, but through this new sense they should be considering?
Randy: I would say there’s nothing new to be added as a result of the situation, except to say that the force majeure clause should be addressing anything that possibly could be an issue. Having said that, one of the tests for being able to rely on a force majeure clause is that the event should not be foreseeable. So for example – now that we’ve experienced this pandemic, if in the future another pandemic arises, the court would probably say well that was actually foreseeable so you should have provided a remedy in the contract and you cannot rely on a force majeure clause. It’s almost like a force majeure clause is a one time, get out of jail free card. In the future, if the same event occurs, there’s a problem. So, having said that, beyond the force majeure clause there are a number of contract clauses that might be relevant to address a scenario where the party has a problem. There are protections like an insolvency clause – if a party is having financial difficulty, we might address in that kind of clause what happens. You might have an insurance clause to provide interruption and travel cancelation insurance. A limitation of liability clause will restrict how much exposure financially parties might have if they can’t fulfil their obligations. Something else to consider, and this isn’t something you can address in a contract, but if a force majeure clause is not in a contract or doesn’t apply, the party might be able to look to the concept of ‘frustration’ which is, in Ontario, expressed in a law that says if the parties can’t perform under contract then, by definition, the contract ends and the parties go back to the beginning as if the contract never existed. Again, it’s a difficult claim to make, it’s difficult to establish ‘frustration’ but it is another potential recourse.
Tracey: And if I can add onto that, one of the things we’ll have to caution people about going forward is there is a lot of talk and discussion about force majeure clauses right now and what they should say, if they’re applicable and whether you can rely on them. But a lot of people are going to be looking to ‘throw’ those clauses, for lack of a better word, into contracts now, assuming they are the magic bullet in this particular circumstance, and they aren’t necessarily. And they are going to be required to be more specific, potentially, down the road. So I would caution parties who think that all problems could be resolved by having a force majeure clause to address this type of situation going forward. Randy raises a valuable point – we now all know this is possible and foreseeable and something that we may be living with for quite some time.
Shari: So back to the questions: What should I do about clients or partners that are not holding up their end of things at the moment, like services or payments?
Randy: The force majeure clause may apply in terms of how to deal with that situation – parties may have already provided for what happens – sometimes a clause will contemplate a suspension of obligations for a certain period of time, rather than the harsher termination or it might provide for damages. Then if we move outside the force majeure clause your contract might have provided that if a party doesn’t fulfil an obligation then there are damages payable or the contract can be terminated. So there are various concepts like that that the contract might already address, depending on each situation. To add to something to what Tracey said before – it’s the irony I guess about the point we were talking about. Typically if there’s an event of some kind that no one has thought about or was unusual, lawyers usually respond by drafting contractual clauses, so it doesn’t nail anyone in the future. And the irony is that now that this has happened, we kind of can’t rely on force majeure again in the future [for the same type of event].
Tracey: And I’ll add – I think another clause that will be in some parties’ contracts is the requirement for business continuity plan. So depending on the contract, there may be people — to your question about if the other parity is not fulfilling its obligations – one of the things you need to check in your contract is did you have a requirement, and if you did, good on you, for them to have a business continuity plan that would allow them to continue to fulfill their obligations perhaps in this unusual circumstances. Again, everyone is very focused on force majeure, Randy has quite rightly pointed out the irony of that, but you need to look at your whole contract to address this situation and make sure you haven’t missed something that might be available to you.
Randy: There are a couple of other contract clauses that might be relevant in this situation – often there’s a dispute resolution clause that sets out a mechanism of how parties will manage a dispute. Sometimes it starts with parties having senior management speak with each other and sets a timeline for each to reply. Some contracts include a mandatory arbitration clause. Something else – the contract can include a cross default clause. If 2 parties have different contracts between each other, a default under one contract is considered to be a default under the other contract. So that’s something to keep in mind when people are looking at contracts in isolation – there may be a bigger picture involved, for example, with bank lending contracts.
Shari: Have either of you seen people attempting to void agreements? Are people using this as a catchall for reasons why they shouldn’t be having to enforce certain commitments they have made? Have either of you seen that yet?
Tracey: Thankfully I have not. I haven’t seen anyone trying to completely void a contract. I’m seeing a lot of parties, and I guess this is a great news story if it holds, but I’m seeing a lot of parties trying to negotiate changes, even where there aren’t specific provisions in their contracts which allow them to negotiate changes, to come to some reasonable and fair plan for how they can continue with their contract. I think it is important for people to, and I raise this point at this point: whatever you do and if you are able to negotiate things with another party that will sustain you in the short term, be very careful that you don’t inadvertently create a permanent situation or a permanent change. So I think that’s one place where lawyers are going to need to advise, and you need to consult with your lawyer to make sure that, to the extent that you are able to negotiate a resolution or short term solution, that you aren’t creating something permanent, that it is temporary — you can always extend things.. but if you come to an agreement with another party that will work for both of you that’s probably the best resolution of all rather than bringing out the contract in a more aggressive and adversarial way.
Randy: I agree, a negotiated solution is the best solution. It still requires people to look at their contracts first to see what legal remedies they may have, but in end those hopefully are used more for leverage than actual enforcement, so if I know I have 2 or 3 clauses I can look at to be able to technically enforce my rights, I can use those to say look, I don’t want to do that but I have those in my back pocket, so let’s work something out. You don’t have to be that direct about it, but you get my point.
Shari: What are the limitation periods affected by the pandemic – like, what’s a reasonable amount of time that people can expect these things to —- when will it revert back to business as usual?
Randy: In Ontario the government has suspended limitation periods. Generally a contract requires someone to start legal action within 2 years of the source of the claim arising, but now that period has been suspended. The two year period won’t start — we don’t know when the suspension will be lifted but for now that’s not a concern.
Shari: Anything else you think people should know or consider right now?
Randy: There are a couple of things everyone can do if there’s a potential dispute under a contract. The first thing is to maintain ‘legal privilege’. If there’s any communication they’ve had with their lawyers – a party wants to maintain the confidentiality of the information, so it’s protected by the concept of ‘legal privilege’. So, not to disclose communications or legal advice one has received from a lawyer. The second thing is to be careful about what someone admits in terms of the inability to perform obligations. Clearly, if you can’t perform the other party will know that, but again, in terms of what we admit that could be held against us later, so be careful as to what you disclose/not disclose. Each situation would need advice, so they can be more specific if they want to consult for specific legal advice.
Tracey: Yes, that’s an important point: the maintenance of privilege and being careful about what you share and what you admit to in this circumstance. Lawyers can guide you in that undertaking. The other thing I’d be careful about in the short term is — entering into new contracts. I’ve seen this a bit with some clients, the need to enter into some contracts now, so it’s not as much about the contracts they’ve already got but they’ve got to negotiate some new contracts and it should be your standard negotiation with advice and with a view to the long term, not necessarily the short term. If it is a short term contract make sure it’s a short term contract, and the terms are applicable to a short term contract. Be careful about obligating yourselves to things — if we are in a better place in 6 months from now in terms of business contracts, that you haven’t obligated yourselves to something that’s more pandemic, world-specific, rather than normal business course.
Randy: And to add: If I want to make a force majeure claim there are certain obligations I have. The clause would require that I notify the other party that I’m relying on that to make a claim. And if I’m relying on a force majeure argument, I’m going to be the one that has to prove that I’m meeting the test, it’s not up to the other party to disprove it. As the process unfolds as to how the pandemic evolves and how we are responding to it, I may have a reporting obligation to keep the other party in the loop, as to what’s happening and how close I am to be able to resume my obligations. The other thing I have to do is mitigate – I have to do whatever I can to cut my losses and find some alternative way of performing, if possible. Similarly if the other party is making a claim to protect itself under our contract, I have 3 choices: either accept that claim, dispute it, or we can negotiate. And the other thing to note – each side also has to mitigate and try and find an alternative way to satisfy the obligation to cut the losses.
Shari: If there are no other questions, again, I would encourage anyone listening to certainly regarding your certain circumstances reach out to legal counsel or reach out to Caravel Law and we can connect you with someone. Any closing statements?
Tracey: I guess I would say, it’s not a good time to make assumptions, or rely on what you are reading on the internet so we encourage you to look carefully at your situation, consult legal counsel when you can. Every situation will be different so I caution people from saying my friend with a business over here did this, so that’s what I’m going to do. There are a lot of resources out there so we encourage people to be cautious and open minded – it may require some creative thinking on the part of business parties and those advising them.
Randy: I would echo that. In terms of the information out there, a lot of it is good and a lot of it is not. Choose your sources carefully.
Shari: Thank you for providing this information today. Thank you very much.