Liability risks to business in the COVID-19 era
April 3, 2020
The COVID-19 pandemic has radically, if temporarily, changed the way that Canadians live, work, save, shop and play. Physical (social) distancing and the associated measures that come with it have changed a reasonably favourable business environment into a world where only essential/priority services remain open to the public, and most people are restricted to working from home, if they are working at all. This bulletin discusses some of the risks of legal liability that businesses might encounter in the COVID-19 era. It will focus on four different types of liability: (1) contractual liability, (2) tort risk (civil liability in Québec) for exposing customers and/or employees to the virus, (3) liability risks that arise from employees continuing working from home, and (4) class action risk.
We have written previously on when a party to a contract can rely on a force majeure clause to avoid performance. Our bulletins on the application of force majeure clauses to COVID-19-related business disruption can be found here (for the common law provinces) and here (for Québec).
However, force majeure has limitations. In the common law provinces, the doctrine applies only if a force majeure clause has been expressly inserted into contracts. In Québec, force majeure (also referred to as superior force) exists as a matter of law under the Civil Code of Québec (CCQ). However, it can be excluded, modified or limited by the contract itself. As a result, force majeure may only provide inconsistent help to businesses that are no longer in a position to fulfill their contractual obligations. It is necessary to consider other tools.
The first and best place to look for a basis for contractual non-performance is the contract itself. Contracts often have terms and conditions (aside from force majeure) that permit non-performance in certain circumstances, such as a supply shortage or a business closure. Similarly, certain types of contracts may have a “material adverse effect” clause, permitting non-performance if there has been a material adverse effect on operations. While it is clear that an “MAE” must be a serious and rare event, it is an open question whether a temporary closure (even a serious one) would be sufficient. However, if the pandemic continues to keep people indoors for several weeks or months, the likelihood that the interruption will be an MAE increases.
In common law jurisdictions, if the contract has no express term permitting non-performance, a party seeking to avoid performance may need to rely on the doctrine of frustration.1 Like force majeure, frustration can be difficult to establish. Essentially it requires that an event occur that renders performance impossible. In theory, the fact that performance is more expensive (or less profitable) is not sufficient for frustration. However, in fact, this rule is not applied quite as strictly as it sounds, and significant difficulty in performance may very well constitute frustration.
Businesses that contract with consumers face added challenges because of the COVID-19 epidemic, which has forced the cancellation of events and travel, the closure of non-essential retailers and the disruption of supply chains and deliveries. To reduce litigation risk in the consumer context, businesses should be mindful of specific representations made with respect to pricing and timing of delivery and refund rules available under consumer protection statutes. Special care can be taken to ensure that a business’s response to the COVID-19 crisis does not incidentally violate consumer protection requirements—even when those actions are designed to provide relief to consumers. Finally, to counter the forces of supply and demand, some common law provinces have taken regulatory action (including setting up snitch lines) to counter price gouging for essential items in response to COVID-19. In Québec, consumers may seek to nullify a contract or reduce prices where the disproportion between the value of the goods and the price amounts to the exploitation of the consumer.
While legal doctrines and contractual provisions can be of some help to companies who find themselves in difficult circumstances, a better approach in many circumstances may be to have an honest discussion with the contractual counter-party about what parts of a contract can and cannot be performed, how long non-performance is expected to last, and how to assist the counter-party with the challenges that it faces in this difficult economic time. The businesses that help each other now may thrive when life returns to normal, hopefully later this year.
2. Tort/civil liability
Another potential risk for businesses that continue to operate through the COVID-19 shutdown is the risk that a customer or employee could contract the virus through an interaction with the business. While workers’ compensation benefits may be available to employees who contract COVID-19 as a result of an exposure arising out of and in the course of employment, no business wants to be the source of health risks for its employees or customers. However, the best way to minimize both is to significantly enhance the business’ preventative measures.
For businesses that continue to operate, they should have a written preventative COVID-19 policy regarding the measures adopted in the business to prevent the spread of COVID-19, including physical (social) distancing measures, enhanced hygiene and cleaning measures, and directives regarding symptomatic or quarantined employees. This policy should be in writing and readily visible to employees and, if appropriate, customers. Proper training should also be provided to employees to ensure they know how and when to implement these measures.
Workplace policies should be reviewed and clear directives should be issued requiring employees to (a) stay home if they have an symptoms or have been exposed to a person who received a positive COVID-19 diagnosis; and (b) report to their employer any exposure risk. Consider adopting measures for rapid isolation of a symptomatic employee. Sick leave policies should be modified to discourage employees from exposing others due to financial concerns. For more details on an employer’s obligations regarding employee positive diagnosis, symptoms, or close contact and on the employer’s health and safety obligations to employees working from home, please refer to our bulletin on COVID-19 and the workplace here (for the common law provinces) and here (for Québec).
In addition to employees, businesses should adopt measures that protect their customers from COVID-19 exposure. This includes ensuring physical (social) distancing among customers, providing hand sanitizer for employee and customer use, and proactive risk avoidance measures (including, if necessary, a shut-down and sterilization) if a risk of infection becomes apparent.
Whatever measures a business ultimately adopts, clear communication with employees and customers is key. While the business environment will ultimately improve, companies that are perceived as having been reckless with the health of their employees, customers, or the public may find it far more difficult than those who have taken the recommended precautions.
3. Risks associated with working from home
Privacy and cybersecurity breaches during pandemic-adjusted operations may also pose heightened risk (including class action risk) for organizations, especially in circumstances where the incident is more difficult to contain, and harm is more difficult to mitigate. With most employees working remotely, it may be more difficult for organizations to detect unusual system activity or misuse of personal information, lengthening the period of exposure and, in turn, increasing the potential class size and severity of harm to affected individuals. Similarly, individuals may be less able to take preventative measures to mitigate the risk of harm associated with the misuse of their personal information because of emergency measures in place at government agencies and businesses. For example, it may be more difficult to replace payment card or identification when offices are closed or restricted, increasing the risk of identity theft and fraud. Organizations named in privacy class actions in these circumstances may face more exposure if plaintiffs can show actual damages arising from the incident, rather than mere anxiety of identity theft.
It is recommended that employers provide clear guidance to employees working from home, around cybersecurity, the printing and disposal of documents containing personal information, and ensuring that family members who may be sharing office space do not have access to personal information. Recent case law confirms that organizations may be vicariously liable for employee-caused privacy breaches. However, taking affirmative steps to prevent such breaches will both prevent the breaches in the first place as well as assist in resisting vicarious liability if they do occur.
4. Class actions
Given the financial and reputational exposure of class actions, they always represent a significant risk to business. In the COVID-19 era, this risk is particularly acute, which is one reason why it is recommended to adopt clear policies and guidelines to accompany measures taken to address the crisis. Class actions may arise in the context of breaches of contracts, breaches of consumer protection legislation, and negligence. Class actions may also be launched by employees who consider their employer did not take appropriate steps to protect them from the additional hazards they face. Some proposed class actions have already been filed alleging harm caused by remedial actions taken to address the crisis. It is therefore recommended that businesses adopt clear internal guidelines on how to deal with employees, customers and consumer complaints that may arise during this crisis. Each complaint and response should be tracked in writing, and guidance and training can be given on how to address complaints consistently and in accordance with specific COVID-19 policies that have been adopted.
There is no doubt that the COVID-19 era is a highly uncertain time for businesses, as well as their employees and customers. During this difficult period, the main risks that we all need to be cognizant of during this time are the risks to human health and safety. However, no company wants to find themselves in the middle of a legal battle at the same time as they are fighting a deadly virus and a massive economic downturn. Proactive precautions and communications with employees, suppliers and customers can help alleviate that risk, for the benefit of all concerned.
1 The doctrine of frustration does not apply in Québec, where force majeure is a general principle of law which applies to contracts, even in the absence of a force majeure clause, though this can be limited or excluded entirely by contract.
Read all our coronavirus-related updates on our COVID-19 guidance for organizations resource page.