As business are slowly re-opening and COVID-19 cases are seemingly decreasing, the aftershock of the epidemic is far from over. If there is anything we have learnt from the present state of affairs, it is that in business, we must always be prepared for the unexpected. Following these unforeseen and unprecedented levels of disruption in our society and to our economy, now is the time to reflect on how we, as businessmen and women, could have been more legally prepared. As Benjamin Franklin once said: “By failing to prepare, you are preparing to fail”.
The main issues businesses are facing at this time include notably labour issues (i.e. layoffs, work reductions, salary cutbacks), default in performance of obligations and inability to operate due to government-imposed restrictions. Solutions to these issues include thorough review and drafting of legal documentation.
The two avenues we will explore are how to review existing contracts and entering into new agreements in a post COVID-19 era.
Reviewing Existing Contracts
First and foremost, one should review any pertinent existing contract they are a party to. It is recommended to create an inventory of all current undertakings to determine which will be impacted by the epidemic and to what extent. It is important to focus on key provisions, mainly the following Clauses:
Force majeure Clauses. Read carefully to determine if the epidemic constitutes a superior force releasing parties from their obligations. COVID-19 can be considered a superior force depending on express wording and surrounding clauses. However, take note that if it does qualify and mitigation action is not taken, one may be precluded from relying on this type of clause. Additionally, certain obligations may be excluded from the application of a force majeure clause, (i.e. payment clauses). This brings forth the importance of thoroughly reading the contract in its entirety, to obtain a full picture.
Payment Clauses. (Including but not limited to deposits, retainers, administration fees)
Events of Default and Penalty Clauses.
Suspension and
Termination Clauses.
Indemnification and
Limitation on
Liability Clauses.
Dispute Resolution Clauses.
Notice Provision Clauses.
Once one has established provisions in contracts that may be of relevance, it is important to assess risks of not meeting contractual obligations in a timely manner and consider remedies in the event of a non-performance.
Keep counterparties informed at all times of your current situation and communicate to reach a common solution. Parties always have an obligation to mitigate risk and damages. For example: verify if governmental measures (i.e. Work-Sharing Program) exist as tools to mitigate risk. Be sure to keep detailed records and accounts of your mitigation efforts to be able to prove good faith.
Ultimately, the ideal solution calls for an amendment to your contracts, to account for concerns regarding COVID-19. It is preferable to amend contractual agreements than to breach and be involved in litigious matters. If a party is unlikely to meet its contractual obligations, it is wise to give advance notice of the problem so that parties may negotiate this contractual amendment. However, do be advised that this option is subject to consent by both parties, which depending on the relationship, may be difficult to obtain.
Entering into New Agreements
Upon entering into a new agreement, and contingent upon a second wave, “force majeure” clauses, extensions of time or other clauses may be inapplicable due to foreseeability. It can be proven that both parties were aware of the situation before entering into a contract, making it reasonably foreseeable. The court may find that the risks of COVID-19 have been factored into the bargain and that these clauses should no longer apply.
This is why, moving forward, it is important to clearly define particular situations through the agency of specific and detailed clauses, to avoid relying on general clauses.
The following categories of Clauses are some examples that can be included in a New Agreement or a Contractual Amendment moving forward:
Force majeure Clauses. Consider the type of events that will be deemed a force majeure event and avoid ambiguity.
Health and Safety Requirement Clauses. Provide for health and safety requirements and measures that will be put into place to protect parties, particularly in contracts involving healthcare workers.
Progress Performance Clauses. This can include structures or milestones to monitor performance throughout the course of the relationship.
Pricing and Payment Clauses. Include time limits for payments, payment suspensions, and penalties for late payment. For example, businesses that rely on prepaid service contracts may need to hold payments in a trust/escrow account to be able to refund clients promptly. Other examples include a “COVID Tax” which provides for a price increase due to additional measures and efforts being put into place.
Re-Negotiation Clauses. For example, Government orders can trigger an update to the contract for a fixed period of time. However, be sure to specify and avoid open-endedness. Leaving too much room for re-negotiation may permit parties to stray too far from the original agreement.
Hardship Clauses. This is beneficial when there is excessive burden placed on one of the parties due to unforeseen events. A hardship clause could, depending on the circumstances, entitle you to re-negotiate the amount of your contractual payments.
Terms and Renewal Clauses. Parties can determine a shorter renewal period and notice to renew as financial situations are rapidly changing.
Events of Default Clauses. Determine the criterion/threshold characterizing a default. For example, is it “impossibility to perform” or will parties be held to a lesser standard? Be specific about what constitutes events of default to prevent a tribunal from having to interpret the contract at a later date.
Temporary suspension Clauses. Define the duration of the suspension.
Parties may consider defining an expiration period to terminate the contract in the event of a prolonged suspension period. This gives parties protection from unilateral termination for a certain period of time.
Termination Clauses. Determine the notice period prior to termination.
Relevant for both suppliers and customers who may need to terminate projects as a result of circumstances or changing business priorities.
Mitigation Clauses. Determine the extent to which parties will be expected to mitigate damages and assume costs and expenses.
Dispute resolution Clauses. In the event of dispute, consider internal dispute, mediation, or arbitration clauses to avoid potential litigation.
Liquidated damages Clauses. Determine a pre-estimate of damages in the event of a breach, to avoid leaving the court to decide in a potential litigation.
To conclude, spending more time, energy, and resources now to review and draft proper legal documentation, will reduce time and money spent resolving potential disputes for the future. If you require any additional information or wish to implement some of the information provided, we are eager and available to assist you.
ME PATRICIA CHAMOUN
LEGAL AND BUSINESS ADVICE
Since the start of the COVID-19 pandemic, we have received many questions from companies who must make heartbreaking decisions about keeping their staff employed. Some of them are experiencing serious financial difficulties and others are on the verge of bankruptcy. With the government’s recent announcement of the gradual resumption of activities by several businesses and industries, the employer will have to consider the status of its employees post COVID-19.
How to find your way around, while respecting everyone’s rights and responsibilities?
We have put together for you the most frequently asked questions from our entrepreneur clients. We respond to it considering the Act respecting labor standards (“Act”) and the case law *.
Written in collaboration with Me Cristelle Sary.
WHAT IS THE DIFFERENCE BETWEEN DISMISSAL, TEMPORARY LAYOFF, AND DISCHARGE?
DISMISSAL: The employer permanently breaks the employment bond with his employee for reasons such as financial difficulties, technological innovations, or job mergers.
Can an employer justify the dismissal of an employee in the current context of COVID-19? It is not all black or white. An assessment must be made on a case-by-case basis according to each situation. However, if the company is not able to continue its activities during the current period of closure, and that is able to demonstrate that its activities are significantly reduced, the dismissal can possibly be justified.
TEMPORARY LAYOFF: The employer suspends temporarily the employment contract with the employee, he can be called back to work. He retains his employment bond for the duration of the layoff and his contractual relationship is maintained. There are certain conditions on the duration of the layoff, otherwise a layoff can be deemed as a dismissal or a discharge.
Currently, this is the measure that seems to be the most used by employers, especially in this context of economic uncertainty where it is difficult to establish the date of return to regular activities of the company. A temporary layoff allows the employer to assess the economic sustainability of the business on a regular basis. It can thus estimate its human resources needs and the direct consequences of job losses on its production and make concrete decisions on the mobilization of its employees in the short and medium term. However, if the impact of the current context can jeopardize the solvency of the company, the employer can consider the dismissal of employees.
DISCHARGE: The employer permanently breaks the employment bond for reasons such as the employee’s lack of skills or his unacceptable behavior. This measure must be based on serious grounds as well as a good and enough reason. That is to say that the employer who executes it must do so because of a serious fault such as insubordination, incompetence, or a serious breach of the employee’s obligation of loyalty. In the event of a dispute, the employer must demonstrate a good and a enough reason for the dismissal or pay the necessary compensation.
CAN THE PANDEMIC BE DEFINED AS A FORCE MAJEURE?
According to the Civil Code of Quebec and the case law, force majeure is an unforeseeable and irresistible event. The CNESST gives the fire as an example of force majeure. This is a fortuitous event that the employer cannot foresee. However, each situation of dismissal or layoff which invokes force majeure must be rigorously analyzed in light of the facts.
HOW TO BE A GOOD CORPORATE CITIZEN?
Before proceeding to a dismissal without a notice of termination (see box), the employer must look at the assistance programs and measures offered by the provincial and federal government. For example, Canada’s Emergency Wage Subsidy and the PACME program are being put in place to help employers retain their employees during the COVID-19 crisis and to ensure their continuity following the gradual reopening of activities of their companies.
Being good pays off. The crisis will pass, and employers will need good employees when they return to regular activities. We suggest adopting new communication measures with employees like following up by email, telephone or videoconference to pass on your messages and vision so that employees do not feel abandoned.
Therefore, it is preferable that the employer tries to keep his employees either by temporary layoff or by using government assistance programs and measures. Indeed, dismissal is not always the best solution, although it can provide financial and temporary relief to employers in the current context.
These unprecedent times, challenges even the strongest companies, therefore it is more important than ever to consult your labor lawyer to help you decide these questions. Obtaining a legal opinion adapted to your situation and sector of activity minimizes the risk of possible litigation.
* Note, the case law plays an important role in legal analysis and may give different and broader rights than those provided by the law.
My obligations as an employer
In the event of a dismissal or temporary layoff of more than six months, the employer is required to give a written notice of termination of employment to his employee who has at least three months of service. This notice must contain the following essential information:
1. It must provide for an employee departure deadline. Under the Act, the period between the termination notice and the employee’s departure varies according to the number of years of continuous service. This period may also be different depending on the case law applicable to each situation; and
2. The reason for termination of employment.
If the employer does not give a notice of termination of employment or does not deliver it within the prescribed time, he will have to pay compensatory indemnity.
Remember that in these difficult times, the employer should act as a good corporate citizen. This means that he must, in the context of social media and the spread of information at high speed, be socially responsible by weighing each action vis-à-vis his employees and his community. Employers must be willing to take good initiatives in order to have a positive impact on society.
This section does not constitute a legal advice. Please consult a lawyer who practices labor law if you are faced with a situation or question like the ones presented below. Each situation is distinct and specific, depending on its context and the applicable facts. The answers below are general in the context of an employer and an employee under Quebec jurisdiction.