As our economy takes its first steps toward reopening and we look ahead to the post-COVID-19 world, many companies are grappling with the fallout of the various defaults or breaches of contract they have experienced during the crisis. While much has been written about “force majeure” and what companies should do if they are unable to meet their obligations because of the crisis, less has been said about the situation of the party on the receiving end of the default, who often suffers losses and significant set backs of their own as a result.
Litigation is almost inevitable, and, for companies seeking compensation for their losses, the focus must now shift toward preparing for the next steps.
In taking those next steps to protect your rights and interests in anticipation of and in response to post-COVID-19 disputes and litigation, it is important to consider both operational realities and the status and future of these contractual relationships in these unprecedented times. As will be explained in more detail below, there are key points to be addressed not only in the short term but also in the medium and longer terms as those plans begin to take shape.
1. Immediate and/or short term: gather evidence and determine the applicable legal framework
Legal and practical implications of the emergency on contract terms
The first task, likely already undertaken at this stage, is to review all contractual documents with a particular focus on deadlines in non-performance, notification, and termination clauses, as well as choice of law and forum selection clauses.
In response to the COVID-19 situation, a general suspension of procedural deadlines and limitation periods was issued by government decree in Quebec,1 with certain exceptions. Since these types of suspensions vary from one jurisdiction to another, an analysis of the forum selection clause is particularly important.
Contractual deadlines are not affected by the suspension of procedural deadlines and limitation periods. This makes it important to review any notification periods and related requirements in the contract, as well as any “force majeure” clause that might affect these requirements.2 The current crisis may have an impact on notification periods and the implementation of certain notification provisions, including those pertaining to the right to remedy.
Finally, care must be taken with contract termination clauses, since the solvency or bankruptcy of the other party may be an issue in the near future and could jeopardize your rights going forward.
Communications and #WFH situations: what to say and to whom
With the unavoidable use of technology and its seemingly indelible memory, it is crucial to re-visit or establish your internal and external communication strategy and methodology to prevent and avoid future evidentiary issues.
As in all pre-litigation scenarios, both litigation privilege and attorney-client privilege must be protected. Internally, dispute-related communications must be easily identifiable and have litigation preparation and management as their primary objective. Limiting the circle of communication (and cc’s) is advisable.
When communicating with both in-house and external counsel, the current reliance on electronic communications can result in careless or accidental distribution, which may dilute or even waive attorney-client privilege at later stages.
When communicating with third parties, including the defaulting party or their potential replacement, there is a risk of proliferation of an inaccurate (or otherwise damaging) virtual paper trail. This extends to communications with the defaulting party in the hope of reaching a negotiated compromise or reworking the contract terms. Remember that employees or company representatives can easily be recorded, with or without their knowledge, during telephone or virtual communications.
In short, the current and ongoing reliance on written communication (be it text, email or other forms of messaging) and online audio and video conferencing tools creates a permanent evidentiary record that you will want to ensure does not return to haunt you in the future.
Gathering evidence and documenting the case
In Quebec, “parties are duty-bound to co-operate and, in particular, to keep one another informed at all times of the facts and particulars conducive to a fair debate and make sure that relevant evidence is preserved.”3 The COVID-19 measures will not alter or lessen this obligation. Therefore, as soon as potential litigation is foreseeable, all potentially pertinent evidentiary documentation must be gathered early on and kept in a safe location. Your document retention and destruction policies should be reviewed, and all employees in possession of potentially relevant documents or data should be advised to preserve them.
Moreover, it should be noted that, depending on the jurisdiction in which the anticipated litigation will take place, these obligations can be even more demanding and may require formal legal holds.
2. Medium term: mitigating damages and contextual limitations on contractual rights
Once you foresee a potential loss or injury, you have an obligation to mitigate your damages. The scope or intensity of this obligation may vary depending on the jurisdiction and governing law.
In addition, many will consider replacing the defaulting party, for example, by finding a new supplier. If this is done, it is crucial to determine who should cover any potential cost differential and also assess whether there is a contractual notice requirement in this regard.
The particularities of the COVID-19 reality can come into play when assessing whether, with whom, and for how much a defaulting party can be replaced. Certain current and potentially lasting market pressures resulting from the current situation could have a detrimental impact on the cost of replacement and render the terms of any new replacement contract less favourable to you. These “extra” damages may not be recoverable due to the unforeseeable nature of the recent events—a factor to be considered in the overall approach when dealing with a defaulting party.
Limits on the exercise of contractual rights: the importance of cooperation and good faith
Depending on the circumstances of the non-performance and the position taken by the defaulting party, you should not act too quickly to replace your co-contracting party. The context of COVID-19 and the unprecedented pressures and restrictions faced by all will be a consideration in any future litigation. Acting in a manner contrary to the general duty of good faith and diligence in the performance of contracts, or otherwise abusing a contractual right, could turn the tables and create exposure to liability. Therefore, it is important to cooperate with the other party, to demonstrate some flexibility and avoid taking the law into your own hands.
3. Long term: Thinking outside the box and considering private dispute prevention and resolution (ADR) as an alternative to traditional court litigation
Once the cards have been played and litigation seems unavoidable, the parties involved may opt for a private dispute prevention and resolution process.4 Indeed, with the anticipated volume that the courts will face once they reopen, alternative dispute resolution (ADR) may be among the only practicable solutions to arriving at an effective outcome in the foreseeable future.
In fact, in Quebec, parties have an obligation to consider private prevention and resolution processes (such as mediation) before referring their dispute to the courts. Resorting to ADR could be a desirable alternative, the aim being to find a solution to move forward in a commercially viable manner. Moreover, the contract itself may contain a mediation and/or arbitration clause, to avoid the need for the dispute to be brought before the courts. This clause may include procedural deadlines and notice requirements of its own. Such notice requirements are unlikely to be affected by the current suspension of procedural deadlines and should be strictly adhered to unless agreed otherwise.
Given the anticipated overcrowding of court dockets and the ripple effect on the overall time needed to obtain a judgment, even parties who have not provided for arbitration in their contracts should consider using ADR. A stand-alone arbitration agreement referring to the specific dispute, or to all contractual disputes more broadly, can be agreed to at any stage, even after litigation has been initiated. The arbitration agreement itself is subject to a number of substantive requirements and context-specific best practices and should be drafted with care.
As with all aspects of commercial relationships, the reality of contractual disputes and litigation in the emerging new normal requires a combination of reactive responses to the immediate concerns and adaptive planning for medium- and long-term considerations.
Communication and cooperation, both internally and externally, and a shift toward creative and considered solutions will help parties navigate their way through the dispute resolution process and even into litigation.
1 For example: Arrêté n° 2020-4251 de la juge en chef du Québec et de la ministre de la Justice du 15 mars 2020
2 For further details regarding force majeure, we refer you to the following article: https://langlois.ca/breach-contract-due-covid-19-pandemic-case-force-majeure
3 Art. 20 Ccp
4 Art. 1 Ccp: The main private dispute prevention and resolution processes are negotiation between the parties, and mediation and arbitration, in which the parties call on a third person to assist them. The parties may also resort to any other process that suits them and that they consider appropriate, whether or not it borrows from negotiation, mediation or arbitration.