By Alessandro Perri
Directors’ Duties Amid COVID-19
During these uncertain times, it is important that directors of corporations remain vigilant and actively engaged in their role.
Though we have described in depth the duties of directors and officers (see our Guide to Directors and Officers for Private Companies here), COVID-19 presents fresh and complex challenges to many private companies. We offer some thoughts on actions directors can take amidst the growing concerns with COVID-19.
Directors have a duty to act honestly, in good faith, and in the best interests of the corporation and a duty to exercise the same skill, diligence and care that a reasonably prudent person would exercise in similar circumstances. Directors owe these duties to the corporation, but they should also consider the interests of other stakeholders, like shareholders, employees and creditors, when making major corporate decisions.
With these duties in mind, directors should consider implementing these actions:
- Review the corporation’s by-laws and determine whether virtual board meetings and shareholders’ annual general and special meetings can be held. As “social-distancing” becomes the norm, telework is on the rise. Directors should consider whether similar measures can be taken with their annual general meetings.
- Similarly, directors should be proactive in working with management to ensure occupational health and safety best practices and ensuring that employees act accordingly. This should include allowing employees to work from home and pausing all work-related travel. For more information about how COVID-19 is affecting employers, please see our article here.
- Review business contracts and determine whether performance of such contracts may be hindered. For more information about when a party may cancel or suspend a contract, please see our article here.
- Directors should review and update their company’s business continuity plans including measures to respond to COVID- 19 and ensure such plans consider the potential risks of disruption to supply chains, production, staffing and financial liquidity.
Terminating or Suspending Contracts Amid COVID-19
COVID-19 is disrupting business and business owners and executives need to consider how or if they can terminate or suspend their rights and obligations under business contracts
Generally, this can occur in two ways. Businesses can rely on a force majeure clause in the contract or, if there is no such clause, on the doctrine of frustration.
A. Force Majeure
- What is a force majeure clause?
A force majeure clause entitles a party to terminate or to suspend performance of a contract when a specific event occurs.
These events are out of the parties’ control and can include acts of God (e.g. natural disasters), strikes and employment disruptions, government action (e.g. by-passing new laws that affect the performance of the contract), and pandemics (like COVID-19), epidemics or plagues. Sometimes, the clause will also include any other event or circumstance beyond the parties’ reasonable control.
2. To what extent does the event have to hinder performance of the contract?
To rely on the clause, a party must determine whether the event has hindered the performance of the contract. But it is important to review the specific language of the force majeure clause. Sometimes the event only has to prevent or substantially hinder performance. The strictest clauses require that the event renders performance of the contract impossible. If it is unclear, Courts tend to interpret force majeure clauses according to this stricter approach.
Courts have also stated that if the event simply makes performing the contract more expensive, parties cannot rely on the force majeure clause.
3. Can you rely on your force majeure clause because of COVID-19?
Every force majeure clause is drafted differently. Please consult with our team to determine whether:
- the definition of force majeure events includes pandemics, like COVID-19; and
- whether COVID-19 has impaired your performance of the contract beyond the required standard.
4. How can you rely on the force majeure clause?
If a party wants to rely on a force majeure clause, he or she should follow any provisions in the contract regarding notifying the other party regarding defaults under the contract. The contract may also require the relying party to use best efforts to mitigate the consequences of the force majeure event. The relying party should constantly keep the other party informed about how it is trying to mitigate the effects of COVID-19.
B. Frustration of Contract
- If the contract does not have a force majeure clause, then what?
If the contract does not have a force majeure clause, courts in Ontario are unlikely to determine that one is implied. Instead, a party may be able to rely on the doctrine of frustration to cancel a contract.
2. What is the doctrine of frustration?
The doctrine of frustration allows parties to cancel or suspend a contract where, through no fault of either party, the contract the parties entered becomes impossible to fulfill.
If a contract is found to be frustrated by an event, all obligations under the contract are terminated as of the date of that event.
3. What is the legal test for frustration?
A party may be able to rely on the doctrine of frustration if:
- the contract does not have a force majeure clause;
- the event occurs through no fault of either party; and
- the event renders the performance of the contract substantively different than the parties had bargained for
For example, if Party A agrees to sell to Party B a dozen machines, the contract may be frustrated if those same dozen machines are stolen before the agreement being fulfilled.
Before relying on a force majeure clause or on the doctrine of frustration, we recommend speaking with a legal advisor about your options. As your legal partner, Houser Henry & Syron LLP is ready to assist you through these uncertain times. Please contact us if you are considering cancelling or suspending a business contract.
For more information on director duty concerns and, or terminating or suspending contracts relating to COVID-19, please contact Michael Henry, Managing Partner at Houser Henry & Syron LLP at 416-860-8021 or MHenry@houserhenry.com.
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Henry & Syron LLP has provided legal services to Canadian and foreign
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 Atlantic Paper Stock Ltd v St. Anne-Nackawic Pulp and Paper Company Limited,  1 SCR 580.