COVID-19 – Superior force, what to do in the event of a contractual breach?
Several measures have been taken by the Quebec government recently to deal with COVID-19. Initially, these included, among others, a ban on indoor events involving more than 250 people1 as well as the closure of gathering places such as training rooms and ski resorts2 . Then, the government have ordered the suspension of non-priority activities in work environments. Several businesses will thereby be forced to stop providing the services to which they were contractually bound for public health reasons. Thus, some businesses may no longer be able to meet certain contracts or deadlines.
In the current situation, what are the respective rights of the parties to a contract? Is the person who can no longer honour his contractual undertakings be sued for damages? Is a person who has already paid for services that he or she will not receive entitled to a refund? Should we include clauses in our future contracts to protect ourselves from obligations that we might not be able to meet? Here’s our legal perspective.
LIABILITY IN CASE OF SUPERIOR FORCE
Subject to the provisions of the contract, a debtor may be released from an obligation when it could not be performed due to a superior force3 . Moreover, “a person may free himself from his liability for injury caused to another by providing that the injury results from superior force”4 . In order to do so, the debtor of an obligation will have the burden of proving the superior force5 .
COVID-19: A SUPERIOR FORCE?
The Civil Code of Quebec defines superior force as an “unforeseeable and irresistible event”6 for a reasonably prudent and diligent person placed in the same circumstances as the contracting debtor at the time of the formation of the contract7 . This concept is sometimes referred to an “act of god”.
In our view, the COVID-19 pandemic may, in some instances, constitute an unforeseeable event, but it must be remembered that this criterion must be assessed at the time the obligation was contracted. Thereby, a person who can reasonably foresee the occurrence of the event at the time the contract is entered into cannot withdraw from it, since he should have taken steps to avoid it or otherwise refused to enter into it. In other words, a person who can reasonably foresee the occurrence of the event at the time of the conclusion of the contract cannot invoke superior force, since he should have taken steps to avoid it or otherwise refused to contract8 . Thus, any obligations entered into after the World Health Organization (WHO) has declared a pandemic or after government action has been taken may be treated differently from those entered into before. The analysis of foreseeability must be based on a reasonable person in the same circumstances. It does not require that the event has never occurred before, but the frequency of occurrence at a given location is certainly relevant to the analysis9 .
The criterion of irresistibility is met when any prudent and diligent person, placed in a similar situation, would not be able to resist external force. The occurrence of the event must be unavoidable and its effects insurmountable for anyone10 . If the debtor could prevent the resulting consequence on its contractual obligations, it will not be able to release itself from its obligations by invoking superior force. The obligation must be absolutely impossible to perform. Therefore, if the obligation is simply more difficult or onerous to perform, the criterion of irresistibility will not be meet11 . For example, the government’s decision to order the closure of the training centres thus constitutes, in our view, what some French authors refer to as the “fait du prince”12, which creates an irresistible situation that makes the provision of services truly impossible due to government measures.
The doctrine and jurisprudence have also developed a third criterion, the exteriority of the event. According to this additional criterion, the event must not be due to the fault of the debtor or to an act attributable to him13 . The event and its consequences must therefore be beyond the debtor’s control, as in the example of a government order prohibiting certain activities.
Under the latter test, although courts of first instance have sometimes recognized death and illness as superior force14 , some authors have suggested that the debtor’s illness could not constitute superior force, as the illness was not “external” to the debtor15 . Whereas case law is not established on this concept, it will be interesting to see how jurisprudence will evolve on this concept in the light of the current situation.
Although we believe that the current pandemic and the government measures taken as a result of it may, in certain circumstances, constitute a superior force, we believe that the analysis must be done on a case-by-case basis.
EXAMPLES OF POSSIBLE SUPERIOR FORCE CASES RELATED TO COVID-19
According to this framework, we believe that certain situations, such as the cancellation of a show with more than 250 spectators or the cessation of certain activities by order of the government, could, subject to a case-by-case analysis, qualify as superior force.
However, some situations are more delicate. For example, a distributor that would encounter certain obstacles in its supply chain due to the pandemic (plant closures in China, border closures, etc.) could have difficulty meeting certain obligations or contractual deadlines, without it being absolutely impossible. In principle, in compliance with the government measures in force, all reasonable and possible measures according to the context should be considered to meet its contractual obligations, even if they are more onerous, otherwise there can be no question of exemption for cases of superior force.
WHAT DOES YOUR CONTRACT SAY?
Before concluding that there is a superior force and despite the criteria listed above, it is important to first refer to the contract concluded between the parties. There is nothing to prevent a party from stipulate into a contract, despite the default provisions of the law, a reparation for the damage caused or to guarantee the performance of its obligation despite a case of superior force16 .
The contract may also provide for a mandatory notice procedure to be sent to the creditor within a certain period of time in order to invoke superior force17 . The consequences of impossibility may also be provided for in advance in the contract (discharge of the debtor, extinction of the obligation, suspension of the obligation, termination, etc.). It is therefore essential to consult your contract as soon as a case of superior force occurs.
Finally, if we learned on March 18th that Canada’s six largest banks will be offering payment deferrals to their customers who are financially impacted by the pandemic, private lenders may not necessarily have the same flexibility18 . In the event of anticipated financial difficulties related to COVID19, it will therefore be important to first consult the provisions set out in the financing contract. In some cases, the financing contract could, for example, include a material change clause, i.e., an event that significantly affects the debtor’s ability to perform its obligations under the contract. In such cases, certain consequences might be provided for in the contract, such as the application of security, forfeiture of the benefit of the term or suspension of payments if the loan is not fully drawn down, or sometimes the abandonment or interruption of construction financing. However, determining whether the COVID-19 pandemic constitutes a material change will first require a careful analysis of the contract and the specific facts of each case.
THE RESTITUTION OF PRESTATIONS IN CASE OF SUPERIOR FORCE
If, subject to the terms of the contract, a superior force case results in the discharge of the debtor from the obligation which it is impossible for him to fulfill, it also releases the contracting party from his correlative obligation19 . If this has already been done, there must be a restitution.
Concretely, assuming that the superior force qualification of the Civil Code is applicable, this means that a concert ticket whose event has been canceled should be reimbursed and, similarly, a gym and ski resorts which cannot provide their services anymore by order of the government will have to charge nothing to their customers for the period when the establishment is closed. If, due to a subscription, payment has already been made for a period including a portion when the establishment was forced to close, a partial refund must be made to compensate for the period when the services were no longer accessible. For example, if a payment had already been made on March 1st for the next three months of a gym membership, which has closed on March 15th due to government order and will remain closed all spring, subject to the terms of the contract20 , a refund of five sixths of that payment should normally be made.
As another example, for a contracting party who could not make a delivery due to the COVID-19, assuming that he succeeds in demonstrating that his non-performance is really a case of superior force, the legal consequence will depend on the circumstances . If it is a delay on a delivery date provided for in the contract, but the date was not an essential element of the contract, the debtor may then perform his obligation late, either as soon as the cause of impossibility will have ended, without it being possible for the creditor to claim damages arising from this delay21 . It would then be a suspension of the obligation, rather than its termination. On the contrary, if the deadline was a determining element in the contract, the obligation may be extinguished and the parties will proceed in a restitution of prestations.
THE IMPORTANCE OF THE FORMAL NOTICE
Note that if the debtor had been put in default before the performance of the obligation became impossible due to superior force, he will not then be discharged, except when the creditor could not, in any case, have benefited of the performance of the obligation due to this superior force22 . The creditor whose debtor is already in default and who fears the potential impact of the addition of government measures to contain the COVID-19 will therefore have an interest in promptly giving him notice to perform his obligations.
RECOMMENDATIONS FOR YOUR FUTURE CONTRACTS
Nothing prevents two parties from redefining in a contract the contours of the definition of superior force, for example by providing in advance for a list of events justifying or not justifying the non-performance of an obligation23 . Considering that the criterion of foreseeability includes a certain notion of probability which could possibly be assessed differently following the outbreak of the current pandemic, it could therefore be appropriate to include – or exclude – in advance in the contract, according to the will of the parties, certain consequences which may be caused by infectious diseases or epidemics (quarantines, border closings, government decisions, delays, problems in the transport of supplies, etc.).
In addition, if you were to conclude a contract today, more particularly, but not limited to, in sectors at risk of being affected by current events, involving risky intermediaries or even internationally, it would be very careful to specify clearly who bears these risks of non-execution concerning the current COVID-19 pandemic specifically. Otherwise, considering the potentially foreseeable nature of these risks at the time of conclusion of the contract, you may not be able to exonerate yourself from your responsibilities if you are unable to meet your obligations.
Several other clauses may also be relevant. For example, for the delays to execute contractual obligations, a clarification could be made to the contract to indicate that the dates mentioned are for information only and that no compensation could be applicable in the event of failure to meet deadlines. Another clause could provide for a notice to be given within a certain period to claim a breach of an obligation which has become impossible to fulfill. Finally, since it is rare for a judge to have the power to revise contract clauses (Hyperlien), it might be prudent to foresee the desired consequences in the contract if the performance of an obligation does not become absolutely impossible, but much more costly for unforeseeable factors or stipulated occurrence in the contract.
The superior force clauses must therefore be adapted on a case-by-case basis. It is advisable to consult a lawyer to ensure that you are adequately protected according to your situation and your needs.
VERIFY YOUR INSURANCE POLICY
Be aware that some insurance policies could cover losses resulting from an inability to perform an obligation due to superior force. If necessary, it is important to give the insurer a notice within the applicable deadlines and to comply with the procedure provided for in the insurance contract.
CONCLUSION
The COVID-19 hatching and government measures to counter it may have many legal and commercial impacts on Quebec businesses. The qualification of superior force will essentially depend on a contractual and factual analysis on a case-by-case basis, which means according to the gravity and the unpredictability of the consequences of the events on the ability of the parties to fulfill their obligations. If you are in a situation where you find it impossible to fulfill your obligations due to the pandemic or if your contracting partner has not performed his obligations for this reason without reimbursing or compensating you, it may be to your advantage to consult one of our lawyers, who will be able to advise you adequately according to your specific situation.
1 Order No. 177-2020 (March 13th, 2020) concerning a declaration in accordance with article 118 of Public Health Act, (2020) no 12A G.O. II, 1101A.
2 Order No. 2020-004 (March 15th, 2020) concerning the ordering of measures to protect the health of the population during the COVID-19 pandemic situation, (2020) no 12A G.O. II, 1103A.
3 Rule 1693(1) of the Civil Code of Québec (hereinafter referred to as ‘’C.c.Q.’’) states that : ‘’Where an obligation can no longer be performed by the debtor, by reason of superior force and before he is in default, the debtor is released from the obligation; he is also released from it, even though he was in default, where the creditor could not, in any case, have benefited from the performance of the obligation by reason of that superior force, unless, in either case, the debtor has expressly assumed the risk of superior force’’.
4 Rule 1470(1) C.c.Q.
5 Rule 1693(2) C.c.Q.
6 Rule 1470(2) C.c.Q.
7 Vincent KARIM, Les obligations, vol. 1, 4e éd. Montréal, Wilson & Lafleur ltée, 2015, p. 1382.
8 Id., p. 1393.
9 Lemay c. Poirier, AZ-97036315, B.E. 97BE-535, [1997] R.L. 554 (C.Q.); Giguère c. Ste-Marie (Ville de), AZ-00021733, J.E. 2000-1471, [2000] R.R.A. 733 (C.S.).
10 Didier LLUELLES et Benoît MOORE, Droit des obligations, 3e éd. Montréal, Édition Thémis, 2018, par. 2734.
11 Vincent KARIM, préc., note 6, p. 1395.
12 Didier LLUELLES et Benoît MOORE, préc., note 9, par. 2740.
13 Taillefer c. Cinar Corporation, 2009 QCCA 850, par. 73 et 74.
14 Vincent KARIM, préc., note 6, p. 1387.
15 Didier LLUELLES et Benoît MOORE, préc., note 9, par. 2735 et 2736.
16 Didier LLUELLES et Benoît MOORE, préc., note 9, par. 2743.
17 Id., par. 2745.
18 https://www.lapresse.ca/affaires/finances-personnelles/202003/17/01-5265154-les-six-principales-banques-canadiennes-offrent-des-sursis-de-paiement.php
19 Art. 1694 C.c.Q.
20 However, contractual freedom can have certain limits. For example, when the Consumer Protection Act is applicable, the contract cannot derogate from the provisions of this law, which is of public order. In addition, article 1437 C.C.Q. stipulates that an abusive clause in a consumer contract or contract of adhesion is null, or the obligation arising from it may be reduced.
21 Didier LLUELLES et Benoît MOORE, Droit des obligations, 3e éd. Montréal, Édition Thémis, 2018, par. 2748.
22 Art. 1693 C.c.Q.
23 Otis Elevator Co. Ltd. c. A. Viglione & Bros. inc., AZ-81011017, J.E. 81-92 (C.A.); Didier LLUELLES et Benoît MOORE, Droit des obligations, 3e éd. Montréal, Édition Thémis, 2018, par. 2731.