Is a Pandemic an Event of Force Majeure?
Montreal, April 2, 2020
To say these are trying and uncertain times, is a euphemism, if ever there was one. Bunkered down in our homes, we spend our days in a perpetual state of worry. We worry about our food and toilet paper inventory. We worry about our kids’ minds mutating into oatmeal from overplaying Fortnite. We worry about our baby-boomer parents, for whom “social distancing” means, placing the couches more than 2 metres apart when they have the neighbors over for afternoon tea.
To be sure, the whole world seems to have hit the proverbial “pause” button. And yet, as surreal as this has been, we really have no idea how long this pandemic will last and when normal life will resume. For businesses, the financial and legal implications of this pandemic remain entirely unclear. This article will examine whether this pandemic may be considered a force majeure (superior force) event in the private sector of the province of Quebec.
The first place to look for answers about how to deal with the impacts of COVID-19 on your business relationships, is your commercial contract. In many cases, leases and other commercial contracts contain a “force majeure” or “superior force” clause, which typically outlines the events that may be considered a “force majeure”, “superior force” or “act of God”. These clauses usually set out the parties’ respective rights, as well as the mechanisms, modalities, and conditions for invoking same. Some such clauses may provide that the parties may suspend the performance of their obligations until the force majeure event ceases, while others may provide for the termination of the contract after a certain delay has lapsed. Finally, these clauses usually require the party seeking to invoke it to deliver a written notice to the other party. Rigorous attention should be paid to the details contained in these clauses, to avoid questions about the validity, or application, of the clause.
If no force majeure clause exists in your lease or commercial contract, or if the specific factual circumstances in question are not covered in a force majeure clause you may have found in the cotract, then the parties may fall back onto the provisions of the Civil Code of Quebec.
For instance, Article 1693 CCQ reads as follows:
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.
Pursuant to Article 1693 CCQ, the debtor of an obligation may be released from its performance of it in two circumstances: (i) the event of superior force occurs before the tenant is in default of the obligation, or (ii) even if the debtor is in default, where the event of superior force is such that the creditor could not have benefited from the performance of the obligation due to the existence of the event. The onus of proof with respect to superior force is on the debtor invoking same. The last line of Article 1693 CCQ, permits the parties to contract out of the above releases and their formulation.
Superior force is defined in the second paragraph of Article 1470 CCQ, which reads as follows:
A person may free himself from his liability for injury caused to another by proving that the injury results from superior force unless he has undertaken to make reparation for it.
Superior force is an unforeseeable and irresistible event, including external causes with the same characteristics. (our emphasis)
From the outset, it is worth noting that the above definition of “superior force” is not of public order, such that the parties may widen or restrict the scope of same in their contract. To qualify as a superior force, the Civil Code requires the event to have been unforeseeable and irresistible.
The case law has determined that an event is unforeseeable, if the parties could not, at the date of signature of the contract, have predicted it. This criterion is examined by the Courts on a case-by-case basis, using a “reasonability” standard. The question posed is, would a reasonably informed person have been able to predict the event. It is safe to presume that a Court would find that COVID-19 meets the above standard with respect to any contracts signed prior to the outbreak. However, this might not be the case for any contracts signed after the pandemic recently became a globally famous phenomenon.
An event will be construed as irresistible, if the person invoking superior force was unable to take any reasonable steps to avoid the event and it renders the performance of his/her obligations impossible. The case law has made a distinction between situations that render the performance of an obligation more difficult, or costly and those that make it impossible to do so. From this perspective, the Provincial Government’s recent order, forcing all shopping centres to close to the public, certainly creates a situation that renders it impossible for a landlord to perform its’ obligations under a commercial lease. On the other hand, while a landlord may be able to invoke force majeure as an impediment to the performance of its obligations under a lease, one wonders whether the same may be said of the tenant. After all, the Tenant’s inability to operate its business may make the payment of rent difficult but is it “impossible”. Moreover, many leases contain provisions obligating the tenant to carry “business interruption” insurance, so that it may have the financial means to meet its ongoing obligations.
On the other, in Quebec, a lease is considered a synallagmatic contract (i.e. each party to the contract is bound to provide something to the other party). The essence of a commercial lease is that the landlord must provide the tenant with peaceful enjoyment of the premises in exchange for the payment of rent. Thus, irrespective of force majeure, if the tenant is unable to use or occupy the premises or operate its business for a prolonged period, then it may apply for an abatement of rent, or termination of the lease. However, it must be said that the obligation to provide the tenant with peaceful enjoyment is not of public order, such that the parties are entitled to contract out of such obligation. In the latter case, one speculates that a tenant, even if precluded from accessing the premises, may be nonetheless be obliged to pay rent.
In conclusion, the parties to a contract should review the provisions of their contract carefully, to ascertain whether it contains a force majeure clause and if so, whether it may apply to the current COVID-19 situation. Special attention should be paid to any explicit limitations in the clause, as well as the conditions and modalities for invoking the clause. Many leases contain an obligation for the tenant to maintain insurance for business interruption. The Landlord’s insurance policies may also contain loss of revenue coverage. Both policies should be reviewed carefully. In either case, the parties should pay careful attention to the specific terms, conditions, and delays to be adhered to when filing their respective insurance claims. The Landlord will also want to investigate the impacts of a force majeure claim on their lending instruments and agreements. The lease may also contain specific language whereby the parties have limited or contracted out of the landlord’s obligation to provide peaceful enjoyment of the premises. Finally, the provisions of the Civil Code of Quebec may be invoked in some circumstances when the contract is silent or incomplete. However, relying on the current interpretation the Courts have given to Article 1470 CCQ, one wonders whether COVID-19 will meet the standard of impossibility in this ever-evolving paradigm.
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