Unexpected Events, International Trade, and Contractual Obligations

In a globalized economy, unexpected events on the other side of the world can easily have direct economic impacts on the Canadian economy. Complex supply chains and strategic imports can be quickly disrupted by political, social, or medical issues.

One contemporary example would be with the coronavirus emerging in China. The China Council for The Promotion of International Trade (CCPIT), which was founded in 1952, and is responsible for developing business cooperation and exchange with other countries, announced this week, announced they will provide force majeure certificates for companies impacted by the coronavirus outbreak. CCPIT is the agency most famously responsible for developing the Belt and Road Initiative, involving 126 countries and 29 international organizations.

Rebecca Howlett and Jessica Brickley state in Lexology,

It will not have escaped the attention of most readers that the world’s largest manufacturing territory is currently undergoing an outbreak of a virulent and deadly virus. At the time of writing, significant parts of China are on lockdown, with the Chinese government extending the Lunar New Year holiday, quarantine measures being put in place in at least twelve major cities, and many businesses temporarily shutting down operations (and, in the case of international businesses, evacuating employees). The impact on the global economy is starting to be felt, with slumps in the NASDAQ and FTSE100, as well as in the value of shares of technology businesses such as Apple, which are heavily reliant on China as a manufacturing centre.

These force majeure certificates appear to be geared towards protecting Chinese companies from the adverse impacts of contractual obligations, and these companies will be required to demonstrate a severe impact on goods and logistics, including proof of delays or cancellations in transportation by sea, air or land, combined with relevant cargo sales contracts and agreements. Although the Chinese legal system is largely based on a civil law tradition, the understanding and application of force majeure in this context remains unique. The implications of absolving Chinese companies from contractual liability will invariably be felt by companies outside of China as well.

Another recent application of this theory has emerged in trade and tariff wars. In 2018, the U.S. imposed a series of tariffs on approximately $50 billion in Chinese imports. Retaliatory duties by China were met with an additional announcement of further tariffs on another $200 billion in Chinese imports. Responses to the American steel and aluminum tariffs led the EU, Mexico, India and Canada to impose their own imposition of duties.

Disputes between the U.S. and China in 2018 also distorted the soybean market, with increased soybean costs in the U.S. driving an increased Chinese demand for canola oil from Canada. Approximately 90% of Canada’s canola seeds, oil and meal are exported, worth $2.7 billion dollars a year. In 2019, China then banned Canadian canola, citing pest concerns. Some commentators noted other political dimensions, including controversies around Huawei, as prompting some of these positions.

For many Canadian businesses, these political shocks had real economic consequences. Whether contractual obligations would be upheld would largely depend on the drafting of any force majeure clauses, and the wording used in them. Absent these terms, the so-called Gilbert Steel rule would apply (quite literally in the case of steel and aluminum). These are typically considered the normal risks of a contract.

The classic Supreme Court of Canada decision on these clauses, Atlantic Paper Stock Ltd. v St. Anne-Nackawich Pulp and Paper Company Limited confirmed that the event must be clearly beyond the control of the contracting parties, and must render the performance of contractual obligations impossible. With regular coverage of emerging medical issues like coronavirus, or the constantly developing updates around retaliatory tariffs, close scrutiny is likely to be applied by courts to actions taken by a party claiming impossibility to see whether alternative methods of performance were properly explored.

More complicated are the obligations of parties like hospitals, who owe a private duty of care during emergencies in regards to their decision-making, and are generally expected to still operate. In Ontario, this can be found in a regulation to the Public Hospitals Act,

2. (1) Every hospital shall be governed and managed by a board.

…

(3) The board shall,

…

(e) ensure that the administrator, medical staff, chief nursing executive, staff nurses and nurses who are managers develop plans to deal with,

(i) emergency situations that could place a greater than normal demand on the services provided by the hospital or disrupt the normal hospital routine, and

(ii) the failure to provide services by persons who ordinarily provide services in the hospital.

The challenge that arises is that modern hospitals still rely on service agreements with private parties, which could include force majeure clauses that would excuse non-performance. The litigation that followed Ebola in 2015, and SARS in 2002, confirmed the policy considerations under the Cooper-Anns test exclude governments from liability when exercising statutory powers. Without proper business continuity and contingency plans in place, hospitals potentially face significant liability, unless force majeure clauses are closely scrutinized.

Theroux and Grosse rely on the 1996 Alberta Court of Appeal decision in Atcor Ltd v Continental Energy Marketing Ltd, which was based on the Court’s decision in Atlantic Stock, to focus on 3 main issues in the applicability of force majeure:

1. how broad should be the definition of triggering events;
2. what impact must those events have on the party who invokes the clause; and,
3. what effect should invocation have on the contractual obligation.

Tariffs or duties, for example, are rarely listed in the definitions a force majeure in contractual terms, while epidemics or quarantines can more frequently be included. With situations like the coronavirus, it is not the creation of a medical situation at the level of an epidemic that has led to contractual disruptions, but rather the political decision making that has been employed to contain an outbreak that has had an economic impact.

Theroux and Grosse therefore use principles of interpretation such as ejusdem generis and expressio unius to help clarify such lists, but still note the restrictive readings that Canadian courts have employed. Although third-party occurrences have been challenging in Canada in these contexts, they point to the Association of International Petroleum Negotiators (AIPN) Model Form Gas Sales Agreement, which can include provisions related to the events up and down the contractual chain,

art 1.1: Force Majeure Event

failure of [_________] [insert specified third party] to [_______] [insert specified actions] for reasons that would constitute a Force Majeure Event as defined in this Agreement if the [_________] [insert specified third party] were a Party to this Agreement.

The English High Court of Justice decision in Seadrill Ghana Operations Ltd v Tullow Ghana Ltd also illustrates how common law courts internationally might treat a force majeure claim. In addition to emphasizing the specific wording of the contract, the court highlighted that the event must be the sole cause of preventing the fulfillment of the obligations. If a party has taken an opportunity to benefit from a potential event, a force majeure may not be the sole cause. The court also highlighted the need for parties to take reasonable steps to mitigate the impact of an event, even if it is less profitable to do so.

Unfortunately, few people scrutinize the construction of boilerplate terms such as force majeure clauses, until an event occurs. Careful consideration of the probably or foreseeable risks in a particular industry, the development of contingency plans and alternative suppliers in place of emergency, and proper allocation of risk along the supply chain, can often minimize the impact of these events far better than seeking absolution from contractual obligations in court once an unexpected event occurs internationally.