Litigation and Dispute Resolution Bulletin

MARCH 30, 2020

The spread of coronavirus (COVID-19) is having a tremendous impact on global commercial activity. In particular, it has demonstrated the interconnectedness of different markets. What initially seemed to be an epidemic in a region of China revealed itself to be neither local nor regional. COVID-19 has attacked the world's manufacturing lungs. We can anticipate that its impact will be much greater than that of SARS in 2002 and 2003, mainly because of the position and importance that China has come to occupy in the global supply chain during the last eighteen years.

In fact, the suspension of operations by a number of Chinese suppliers and manufacturers is generating substantial global repercussions for the supply chain. The suspension and slowing down of activities by suppliers in Europe and North America are having a similar effect.

Not only is the manufacturing sector being disrupted by the pandemic, but the retail sector, which depends on manufacturers and distributors, will undoubtedly be affected as well. Deliveries of goods and services will thus be delayed. Such delays or even the impossibility of providing the goods sold will have far-reaching consequences affecting even the construction and real estate sectors. General contractors are required to complete their real estate project within the planned timeframe, failing which they can incur liability toward the property developer who has retained their services. What happens if a general contractor is unable to obtain materials from suppliers and subcontractors in a timely fashion due to the pandemic?

Thus, the recent coronavirus pandemic raises numerous legal and commercial concerns. This article will briefly summarize the concept of force majeure and then discuss its impacts on supply chains and delivery delays.

Force majeure in Qubec civil law

In Qubec civil law, the concept of force majeure is defined by article 1470 of the Civil Code of Qubec^[1] (hereinafter "CCQ") as an "unforeseeable and irresistible event, including external causes with the same characteristics". Force majeure (officially translated as "superior force") is understood as an event that the debtor could not anticipate or resist and that has made performance of his obligation impossible.^[2]

However, it is important to clarify that the concept of "force majeure" is not of public order. In fact, the parties to a contract remain free to define this concept differently and to modify or even waive its application and effects altogether.^[3]

The unpredictability of an event of force majeure is analyzed in light of a reasonably diligent, and prudent person^[4] and must be evaluated at the time when the obligation was contracted by the debtor, as opposed to when the event actually occurs.^[5] In other words, it is necessary to put oneself in the shoes of the debtor at the time the contract was entered into in order to determine whether an event was reasonably foreseeable. As for the requirement of irresistibility, the event must be both insurmountable with respect to its effects and inevitable as to its occurrence.^[6] More specifically, the irresistible nature of the force majeure requires that its occurrence prevents the absolute performance of the obligation by anyone, since the impossibility cannot simply be personal to the debtor.^[7] The fact that an obligation becomes exceptionally difficult or onerous does not satisfy this criterion.^[8]

Certain cases and authors state that the event must also be external to the field of activities for which the debtor is normally responsible, in that there is an absence of any control by the debtor over the event at the source of the impossibility of performance.^[9] It is important to emphasize that this requirement is not unanimously supported in case law because some judgments stand by unforeseeability and irresistibility to determine force majeure.^[10]

It appears from the case law that an epidemic/pandemic generally satisfies the criteria of unforeseeability, irresistibility and external character specific to force majeure. Two decisions^[11] rendered by the Court of Qubec have dealt with the possibility of invoking an epidemic as force majeure.^[12]

However, it cannot be assumed that a specific situation will be qualified as force majeure in all situations, since a precise analysis taking into account the specifics of the contractual relationship between the parties is paramount. As an example, although the terrorist attacks of September 11, 2001, in New York City have often been qualified as an event of force majeure^[13], the decision Caisse Desjardins de St-Paulin v. Bombardier inc.^[14]refused to qualify these attacks as force majeure. Bombardier Inc. had attempted to characterize these attacks as force majeure in order to terminate, without penalty, a contract with Techni-Paint Inc. for the painting its aircraft. The Court, while stating that the burden of demonstrating force majeure rests with the party that invokes it, concludes that the contract termination by Bombardier did not result from a situation of force majeure, but rather from its decision of a financial nature. Bombardier preferred to paint its aircraft itself. The Court likewise pointed out that the September 11, 2001, attacks would, at most, have slightly delayed some deliveries.

This example, drawn from the tragic events of September 11, 2001, demonstrates that each situation must be studied on a case-by-case basis, taking into account all of the facts related to the event which occurred and the nature of the parties' operations. This allows the Court to determine whether, depending on the gravity of the circumstances, the event invoked is in fact one that could be qualified as force majeure because it was indeed unforeseeable and irresistible.

Impacts on the supply chain

In reaction to the sudden outbreak of COVID-19, the Chinese government has deployed great restrictive efforts to stop the spread of the virus. As a result, China is facing multiple factory closings, with millions of workers placed in quarantine and confinement. Some European countries, as well as the United States, have also introduced measures that will pose major difficulties for import and export operations. This paralysis disrupts the functioning of the global supply chains, while a substantial number of companies have contracts based on the reliability and fluidity of such supplies.

In order to counter this problem, a growing number of Chinese companies are invoking force majeure to exempt themselves from their contractual obligations towards their co-contracting parties, and thus avoid having to pay the penalties and damages resulting therefrom. There is no doubt that the situation affecting Chinese suppliers is of the magnitude of a force majeure. Chinese contract law recognizes this application and a number of interpretation guides issued by Chinese provincial courts have characterized the coronavirus epidemic as force majeure.

The outbreak of the coronavirus, as well as the actions of the government in response to this pandemic, such as the compulsory closing of factories, could not have been anticipated when the contract was entered into and generally prevent the absolute performance of the obligations of Chinese suppliers toward their clients and distributors.

However, what about the Canadian companies that count on their suppliers, located in another country affected by the pandemic, in order to honour their obligations toward their own customers, distributors or contractors and who face this supply chain disruption?

First, a company dealing with a lack of a supply could attempt, in turn, to justify its own contractual non-performance by claiming that the pandemic is a force majeure and thus free itself from any liability toward its customers, distributor or contractors.

In the light of article 1693 C.C.Q, the occurrence of an event of force majeure produces a dual legal effect. First, it exempts the debtor from any liability for its failure to perform its obligation, and secondly, it releases him completely from his obligation in the event of a final or absolute impossibility of performance.^[15]It is important to point out that the parties may, by a contractual clause, provide for the suspension of the contract for the term of a force majeure in case of the temporary impossibility of performance.^[16]

Two important exceptions to the general principle of release are set out in the C.C.Q. The first involves the case of the debtor who has agreed to assume the risks in the event of a force majeure, thereby assuming an obligation of guarantee. The second relates to the case of the debtor who has already been put in default of performing his obligations, but which persists in the default when the event of force majeure occurs.^[17] In both these cases, the debtor cannot invoke force majeure to be released from his obligations towards his creditor.^[18]

It is important to emphasize that a company wanting to invoke the pandemic as force majeure may not necessarily be absolutely unable to perform its obligation. In fact, a Canadian company can technically obtain goods from another supplier, which would undermine the criterion of irresistibility necessary for triggering the legislative mechanism of force majeure. For example, a wholesaler or big box retailer can have access to a number of suppliers for the same goods or products.It cannot claim that the inability of one of its suppliers to supply it creates a situation of force majeure, because it can still execute its obligation by obtaining supplies from another supplier, even if it is likely that its purchase cost will increase.

As a result, we think that companies must be proactive in seeking a solution to supply problems, for example, by attempting to obtain the necessary goods from another supplier. It is by demonstrating that they have attempted to find alternatives which have proved to be fruitless that such companies can respect the irresistibility criterion of force majeure.

Secondly, in the eventuality that a company cannot execute its obligations toward its creditor because of a contractual termination by its own supplier, it may wish to use this termination as force majeure to justify its own contractual non-performance. Although the case law has examined this subject, the validity of this defence cannot be affirmed with conviction.

In addition, in Syndicat des professeurs de l'tat du Qubec et Qubec (Ministre des Relations avec les citoyens et de l'Immigration), (lizabeth Olivier)^[19], the arbitration tribunal concluded that a debtor cannot invoke as force majeure the cancellation of another contract by a business partner in order to reduce its own obligations to its creditor when cancellations of this sort occur regularly each year. Such cancellations, while unplanned, do not constitute an unforeseeable event. This judgment therefore suggests that a contractual cancellation by the partner of a debtor that prevents him from performing his obligation to his creditor and that is not normally foreseeable could constitute an event of force majeure.

Delayed Delivery

In the eventuality that a company cannot execute its obligations to its creditor because of a delivery delay that can be attributed to its own supplier, the company might be tempted to claim that this event, resulting from the actions of a third party, constitutes an event of force majeure. Nevertheless, the act of a third party can be construed as force majeure only if it contains the same characteristics and if it is not a third party for which the debtor is responsible, such as its employees or subcontractors.^[20]

In light of the Portes Overhead Door de Montral (1965) lte v. Construction Broccolini inc.^[21] decision, a company prevented from fulfilling its obligation because of a delivery delay attributable to its supplier is an event that can be qualified as force majeure. This is true insofar as the company has taken all the precautions necessary to comply with its obligations.^[22] However, there seems to be some uncertainty in the case law in this regard as the recent decision Industrie Desormeau inc. v. Isoelectric nergie inc.^[23] of the Court of Qubec mentions that delays incurred due to delays attributable to a third party supplier do not constitute force majeure since the fault of a third party responsible for the performance of the contract cannot be qualified as such.

Although a certain uncertainty exists in the case law regarding the possibility for a company to invoke a delayed delivery by its supplier as reason for release from its own contractual non-performance or its own delay, we are of the opinion that this is possible in the extent to which the delay by the supplier itself results from a situation of force majeure as opposed to a contractual fault and in the absence of a contractual clause to the contrary.We also believe that the Court will consider whether this debtor had access to other suppliers and was diligent in its contractual relationship with its creditor, notably by keeping the creditor informed of the delays of its own supplier so that the creditor could mitigate its damages.

Conclusion

Following the outbreak of the coronavirus, a number of companies are currently evaluating the impact of situations of force majeure on their operations and are wondering about their rights and obligations in the context of the paralysis of supply chains and in the wake of delivery delays.

In general, it is our view that a pandemic is considered to be a situation of force majeure giving rise to the defence of contractual non-performance insofar as the debtor has taken the necessary measures to comply with its obligations. Thus, companies must not assume that a pandemic will automatically release them from a contractual non-performance vis--vis their creditors. Rather, we think that they must be proactive and seek solutions to overcome supply problems or delivery delays by attempting, for example, to obtain the necessary goods from other sources.

As mentioned herein above, it is common for parties to provide their own definition of force majeure, as well as the applicable legal regime. An epidemic/pandemic is often a scenario that falls under the protection offered by a force majeure clause, but a case-by-case analysis is obviously necessary.^[24]Furthermore, we emphasize that the pandemic may also be included in more general terms which describe the actions undertaken in reaction to this event, such as a "governmental action", "national or regional emergency" as well as "quarantine".^[25]

In order to properly determine and understand the rights and obligations of each contracting party when dealing with the situation of a pandemic or force majeure, a factual, legal and contractual case-by-case analysis must be carried out. In addition to the pandemic, we have witnessed other events of a force majeure nature that have also affected manufacturing supply chains, such as forest fires, storms and floods. It goes without saying that companies must pay special attention when negotiating their contracts to establish a definition of "force majeure" that best corresponds to their sector of business and especially in order to determine which of the parties will have to bear the risk when a force majeure event occurs.

Comment on this section:

In addition, inSyndicat des professeurs de l'tat du Qubec et Qubec (Ministre des Relations avec les citoyens et de l'Immigration), (lizabeth Olivier)^[19], the arbitrationtribunal concluded that a debtor cannot invoke asforce majeurethe cancellation of another contract by a business partner in order to reduce its own obligations to its creditor when cancellations of this sort occur regularly each year. Such cancellations, while unplanned, do not constitute an unforeseeable event. This judgment therefore suggests that a contractual cancellation by the partner of a debtor that prevents him from performing his obligation to his creditor and that is not normally foreseeable could constitute an event offorce majeure.

1.What do you think about this development as part of the common law?

2.What do the impact(s) could be?