In the face of the current uncertain environment, threat of business disruption follows and there are significant uncertainties regarding the effect of the COVID-19 on supply, production, distribution, human capital management, and other aspects of operations, as well as customer demand. We have outlined certain action items that you as a business owner can take to mitigate and address these concerns as part of your business continuity plan.
Supply Chain and Commercial
If you or your company have entered into a contract (i.e. supply or commercial lease), typically you are required by law to perform the agreed obligations. However, recent events may have or could impede your ability to do so and this is where your contract provisions govern your next steps and potential losses.
- Force Majeure: Your contract may contain a force majeure provision. A force majeure clause is that no party to an agreement should be held to perform its obligations to the extent that performance is prevented by certain extreme circumstances outside that party’s control, such as war, labour strikes, acts of God (hurricanes, earthquakes or other natural disasters). The exact language used will be determinative when read in the entire context.
- Impossibility and Frustration: The common law recognizes in limited circumstances certain excuses for non-performance, impossibility and frustration.
- Impossibility means the performance becomes objectively impossible due to a supervening event beyond the party’s control. For example, impossibility could arise from the quarantine of an individual where the contract performance requires personal performance of the promisor, or where the contract requires continued existence of a specific thing which perishes or is otherwise unavailable.
- Frustration is a party’s principal purpose for entering the transaction is destroyed or obviated due to a supervening event beyond the party’s control.
For suppliers entering into contracts, you may wish to include an express force majeure clause, inclusive of COVID-19 and disruptions in upstream supply, together with related provisions to directly address COVID-19. Failure to include this in new contracts could be interpreted as an assumption of risk of the effect of the known outbreak on the supplier’s contractual performance.
Alternatively, suppliers could request the other party to sign a waiver and assumption of COVID-19 risk, which may include disclosure of reliance on third-party suppliers and manufacturers that could result in disruption, delay or demand for product.
Other contractual risk allocations tools can also be utilized, for example, limiting remedies for breach of contract, misrepresentation, or inaccuracy, and expressly excluding consequential damages or losses (from lost profits or opportunity costs), as just some examples.
For existing contracts, typically the parties to a contract do not want the arrangement to fall through. You may want to consider discussing an Amending Agreement with the other party to the contract to postpone performance or implement other contractual elements, such as alternative supply source, until such time as it is achievable or economically viable to do so. However, if both parties mutually agree that the contract cannot be completed a simple Mutual Termination Agreement can be entered.
Landlords and tenants should also take into account commercial leasing considerations and review the rights and obligations they have in the face of a health emergency. Both the landlord and tenant will need to consider how their respective business could be impacted. Considerations include the obligation to pay rent and the scope of any force majeure clause, any obligation to remain open (“abandonment” often being a default), landlord obligation to keep the building safe and clean, landlord right to access and inspection, landlord right to govern the control and operation of a building (including the control of access to a building and common areas), and loss of use of the leased premises or common areas and the right to abate rent or exercise other remedies.
We recommend obtaining legal advice before navigating force majeure notice provisions and related contractual interpretation.
Business Acquisitions and the Business Viability
COVID-19 may impact the operational and financial health of businesses. For contracts governing mergers and acquisitions transactions, business acquisitions and dispositions, and some contracts for the supply of goods and services, whether entered or proposed, certain contractual provisions should be considered, and where possible address the risks.
- Material Adverse Effect / Materially Adverse Change: These terms are often used to measure negative effects of certain events on the transaction or one of the parties. It is a common provision used to qualify the vendor’s representations and warranties in a purchase agreement or as a condition of closing, verifying that as of closing there is no material adverse change or effect to the business, results of operations, condition or assets, etc. A material adverse change should be disclosed and typically gives right to the purchaser to walk from the deal. It remains to be seen how the phenomenon of a pandemic will determine the interpretation of these provisions in Canadian law.
- Due Diligence Condition: It is important to know the business you are dealing with, particularly when looking to purchase the business. As an example, purchasers will want a condition of disclosure and due diligence review included in contracts for business acquisitions. For vendors, disclosure should include a COVID-19 risk factor; something that can be drafted in to the contract itself.
Price structuring alternatives should be considered by purchasers to protect against overpaying for target businesses or assets that may lose value in the sign-to-close period as a result (direct or indirect) of the COVID-19 outbreak.
For those considering purchasing a business or entering into a merger and acquisition, it is prudent to include a due diligence condition and material adverse change provision.
Vendors should also be cautious of the risk of liability of certain contractual provisions for business dispositions that have not yet closed but for which a firm contract has been entered into.
In the case of contracts for the supply of goods and service, consider the addition of a provision to account for the risk that the company may incur expenses or delays relating to such events outside of its control, which could have a material adverse impact on its business, operating results and financial condition.
Other Action Items
It is recommended that in lieu of in person meetings you make use of the multitude of digital alternatives. Good news – the Electronic Transaction Act (Alberta) allows documents to be signed electronically in Alberta, with some exceptions.
While the scope of this article is not exhaustive, Walsh LLP offers online and telephone conferences to accommodate your business needs in a safe and efficient manner. We are dedicated to helping our local businesses navigate these uncertain times.
Please do not hesitate to contact the writer, Bethan Davies, a corporate commercial lawyer at Walsh LLP should you have any questions.