By Thien Hoang
Welcome back to Friday Finds! This week, we will be discussing ongoing COVID-19 business restrictions, a case on a major M&A deal amidst COVID-19, a case on duty of care in contracts, and emerging business regulations for companies operating in China.
Since last week, Quebec and Ontario both introduced tighter lockdown measures to combat the spread of COVID-19. The Government of Quebec has ordered a curfew effective January 9 until February 8, 2021 from 8pm to 5am across the province. To a similar effect, the Government of Ontario has issued a stay-at-home order, effective January 13, for at least 28 days. While the new lockdown restrictions have affected various industries across the board, particular attention has been placed on how cash-strapped restaurants have been grappling with delivery costs amidst the pandemic. For small businesses that rely on third-party delivery companies such as UberEats, DoorDash and SkipTheDishes, commission fees can reach as high as 30%. Deli Boys, a Montreal-based restaurant and the lead plaintiff in a class-action lawsuit filed with the Quebec Superior Court, is seeking damages equal to the money paid to these companies for commissions above 15%. The plaintiff alleges that the exorbitant commissions are abusive in light of the ongoing pandemic. Back in December, the Government of Ontario moved to temporarily cap the fees charged for food delivery services to 15%. There are now ongoing calls for Quebec to implement similar legislation.
On December 2, 2020, the Ontario Superior Court of Justice (OSCJ) rendered its judgement in the case of Fairstone Financial Holdings Inc. v. Duo Bank of Canada, 2020 ONSC 7397. In Fairstone, Duo Bank of Canada (Duo Bank) entered into an agreement to purchase shares of Fairstone Financial Holdings Inc. (Fairstone), Canada’s largest consumer finance company. Within the agreement, Fairstone covenanted that no material adverse effect (MAE) shall have occurred between the date of signing and the date of closing. Due to the COVID-19 pandemic, Duo Bank took the position that Fairstone may have breached the MAE condition as well as other covenants and subsequently advised that it would not close the transaction. A MAE was “defined so as to exclude effects that are caused by (i) worldwide, national, provincial or local emergencies; (ii) changes in the markets or industry in which Fairstone operates; or (iii) the failure of Fairstone to meet any financial projections” (para 6). The court held that burden of proof shifted between parties in a three-part test. First, the onus was on the buyer to prove that a MAE had occurred; then, on the seller to prove that any carve-outs apply; and finally, on the buyer to prove a materially disproportionate impact on the target. Justice Koehnen ultimately found that although Duo Bank met its burden of proof to establish a MAE, all three carve-outs had applied in relation to the COVID-19 pandemic and none of them had a materially disproportionate impact on Fairstone relative to others in the industry. Furthermore, Justice Koehnen rejected the argument advanced by Duo Bank that Fairstone’s responses to COVID-19 materially breached its covenant to operate in the ordinary course. Justice Koehnen decision marks the first decision by a Canadian court ordering specific performance of a major M&A transaction as well as the first Canadian case to consider the impact of COVID-19 on an acquisition agreement.
On December 18, 2020, in the case of C.M. Callow Inc. v. Zollinger, 2020 SCC 45, the Supreme Court of Canada (SCC) ruled that the duty of good faith in contract law, specifically honesty in performance, requires parties to correct a reasonably mistaken belief if the party’s active conduct has materially contributed to it. The case involved a group of condominium corporations who, through deceptive representations, had given a snow removal contractor the false impression that their winter contract would likely be renewed for a longer term. While there was no freestanding obligation to disclose its intention to terminate the contract prior to the mandated 10 days’ notice, the SCC went on to say that no “contractual right, including a termination right, can be exercised dishonestly and, as such, contrary to the requirements of good faith” (para 48). This requirements suggests it is not enough for businesses to refrain from making direct lies. Rather, businesses, and their representatives, must be cognisant of both the contents and context of their communications with contractual parties to ensure they are not liable for any active deceptions.
On January 12, the Government of Canada announced a string of new regulations related to the human rights situation in the Xinjiang Uyghur Autonomous Region (XUAR) of China. In recent years, there has been increased international attention on the treatment of ethnic Uyghurs in the XUAR as a result of mass detentions, forced labour and alleged genocide carried out by the Government of the People’s Republic of China. In conjunction with parallel announcements in the United Kingdom, Canada seeks to advance certain measures to ensure Canadian companies are not complicit in human rights abuses in the XUAR. The measures are as follows: (1) the prohibition of the import of goods produced wholly or in part by forced labour; (2) a Xinjiang Integrity Declaration for Canadian companies; (3) business advisory on Xinjiang-related entities; (4) enhanced advice to Canadian businesses; (5) export controls; (6) increased awareness for responsible business conduct linked to Xinjiang; and (7) a study on forced labour and supply chain risks.
That wraps up this week’s Friday Finds! Thanks for reading and be sure to check back next week for more business law news stories.