Economic Uncertainty And Quebec Contract Law: How Businesses Can Navigate Rising Costs And Tariffs

This article provides a strategic guide for Quebec businesses to assess their contractual commitments in response to tariffs and increasing costs by using the tools available under Quebec law. It examines key considerations to help businesses understand how their contracts and Quebec law can be leveraged to navigate an increasingly uncertain and challenging business climate.

Navigating Quebec's Civil Law System in Commercial Contracts

Most principles underpinning Quebec's unique civil law system are similar to their common law counterparts. However, there are key concepts that have a particular importance to Quebec contract law and are crucial to understanding the broader legal framework within which commercial contracts operate. In Quebec, the principle of good faith governs all contractual relationships, meaning that parties must exercise their rights reasonably, avoiding excessive or unreasonable conduct.¹ Under the Civil Code of Quebec (CCQ), courts may also read implied obligations into contracts that are deemed to naturally accompany the express terms. Understanding whether the parties involved operate within an industry with established practices or standards can help interpret the contract in light of changing circumstances.

To fully understand their contractual obligations, businesses should:

Review the terms and duration of contracts to confirm their understanding of the scope of their obligations from a civil law perspective;
Assess the broader commercial environment to gauge how external factors may influence the contract.

Key questions to consider include:

Does the contract provide termination clauses, and if so, what are the conditions?
Are the contractual obligations conditional on the performance of the other party or the occurrence of a certain event?
Are there any secondary documents (e.g., purchase orders, terms and conditions) that form part of the contract?
Ultimately, how would a reasonable person placed in the same circumstances act, considering industry and past practices?

Price and Cost Adjustment Clauses and Delivery Terms

Many commercial contracts contain clauses for price or costs adjustments, especially in the event of changes to external factors. Similarly, certain contracts have pre-existing provisions that provide for the allocation of responsibility for (i) the payment of certain costs (e.g. import/export taxes); and (ii) the delivery of goods, particularly for parties engaged in cross-border trade who will often use International Commercial Terms ("Incoterms") to control such responsibilities. These can be triggered or adversely affect a party by the effect of the fluctuations in the cost of materials, tariffs, or other economic factors. As a note, delivery terms, including pursuant to certain Incoterms, will often require the seller to deliver the goods to the buyer with any and all duties paid. Businesses should review and confirm whether their contracts include price indexation clauses or delivery terms that could trigger the duty to renegotiate or automatically adjust payment conditions.

Contractual Default and Remedies

In Quebec, failing to meet a contractual obligation without justification can trigger a default. The non-defaulting party may seek remedies, including:

Specific Performance: A non-defaulting party may apply to the courts to compel the defaulting party to perform their obligations. This procedure, known as specific performance and generally obtained via an injunction, is the norm in Quebec civil law, unlike in common law jurisdictions, where it is generally seen as an exceptional recourse.
Resolution: In the event of a serious fault, the non-defaulting party may opt to resolve the contract retroactively and prospectively. The contract is deemed to have never existed and each party is restored to the position they were in prior to the formation of the contract.
Resiliation: In the event of a serious fault or repeated minor faults in a contract of successive performance (i.e., a contract where the nature of the work requires that the obligations be performed in several stages or on a continuous basis), the non-defaulting party may also resiliate the contract on a prospective basis. The contract remains valid until the point of resiliation, but the parties are released from any future obligations.
Reduction in Obligations or Exception for Non-Performance: In the event of a minor fault, the non-defaulting party may seek a proportionate reduction in their obligations towards the defaulting party. However, in the event of a default or failure to perform an obligation to a substantial degree in a contract of successive performance, the non-defaulting party may be able to refuse to perform their obligations to a proportionate degree.
Right of Retention: if the non-defaulting party has the defaulting party's property in their possession, with their consent, they may retain it pending payment of the full claim, if the claim is due and closely related to the property being detained.
Damages: A party to a contract may also seek damages for any default. In Quebec, damages are typically compensatory, aimed at restoring the non-defaulting party to the position they would have been in had their counterparty not defaulted. Punitive damages are awarded relatively rarely and in more exceptional circumstances, such as when a party intentionally causes harm.

Depending on the specific circumstances, the counterparty's refusal to cooperate in adjusting the contract to the current economic situation may give rise to certain remedies.

Good Faith, Implied Obligations and Duty to Renegotiate

As stated, the principle of good faith applies to all contractual relationships in Quebec. It prohibits a party from exercising a termination clause or ending a contract in an abusive or arbitrary manner. Quebec courts have developed the duty to inform in Quebec contract law, which mandates that all parties disclose relevant information to their counterparty before and during the formation of a contract to allow them to make an informed choice about whether to enter the contract and what terms to accept. Concealing information that could affect the other party's decision can be penalized by the Quebec courts and allow the counterparty to refuse to honour their obligations.

In a landmark ruling from 2018, Churchill Falls (Labrador) Corp. v. Hydro‑Québec, 2018 SCC 46, the Supreme Court of Canada established that Quebec civil law does not recognize a general duty to renegotiate the terms of a contract following significant changes to market conditions that seriously adversely affect one of the parties. It found that the doctrine of unforeseeability, allowing renegotiation from a counterparty if a contract becomes excessively onerous due to unforeseen events, is not recognized under Quebec civil law.

Yet, the Supreme Court recognized that in certain special circumstances, the duty to renegotiate could be implied. The Court distinguished between "transactional" and "relational" contracts:

Transactional contracts are those with clearly defined and quantified obligations, where there is no inherent duty to cooperate.
Relational contracts require ongoing cooperation and carry an implicit obligation to renegotiate terms in light of changing conditions that affect the onus of each party's obligations.

Moreover, the Supreme Court set a high threshold for when a contract may imply a duty to renegotiate terms in light of changing external conditions. For renegotiation of agreed-upon prices to be implied due to changing market conditions, the contract would need to be incomprehensible or have no basis or meaningful effect absent such an implied term.

Force Majeure

The doctrine of force majeure, or "superior force" under Article 1470 CCQ, can excuse parties from performing contractual obligations that have become overly onerous if unforeseen events, such as tariffs or natural disasters, make their performance impossible. Establishing the impossibility to perform is a factual question and sets a high threshold for parties looking to invoke superior force. Simply demonstrating that complying with an obligation will cause financial hardship is insufficient.

Contracts may also include their own force majeure clauses, which may establish broader or narrower criteria than those provided for in article 1470 CCQ for what constitutes a force majeure event.

Service and Entrepreneurship Contracts

The CCQ provides specific provisions for service and entrepreneurship contracts. These contracts often carry unique obligations and rights for both parties. The following is an overview of the key elements to consider, noting that each contract and situation might contain its own particularities, considering that the provisions of the CCQ are supplementary.

Client's Right to Resiliate: A client can unilaterally resiliate a contract at any time, including after work has started, though they may be liable for any costs, including damages, incurred by the contractor or service provider.
Service Provider's Limited Right to Resiliate: A contractor or service provider may only resiliate the contract for serious reasons, which generally must have been unforeseeable at the time of the contract formation, and never at an inopportune time for the client. In one recent case, the Quebec Superior Court held that the fact that a service provider realizes that the execution costs will be higher than anticipated is not a serious reason for terminating a contract.² In any event, if the service provider does resiliate a contract, they must take steps to minimize losses to the other party.
Price Increases and Justification: The CCQ limits the contractor's or service provider's ability to claim damages or increase prices due to unforeseen increases to the costs involved in providing the good or service. Any price increase must be justified and must be accepted by the client only if the increase is directly tied to expenses that were unforeseeable at the time the contract was signed.
Fixed-Price Contracts: In fixed-price contracts, the price cannot be adjusted even if the costs of execution change. The client is required to pay the agreed price, regardless of any discrepancies between the estimated and actual execution costs. Similarly, the service provider cannot increase prices due to unforeseen costs unless expressly agreed upon by both parties.

Conclusion

As businesses in both Canada and the United States face a period of significant uncertainty due to the imposition of tariffs, they must be prepared to reassess their contractual obligations. By understanding the principles of Quebec contract law, including good faith, force majeure, and the remedies for default, Quebec businesses might be able to better navigate potential challenges and economic uncertainty.

For further guidance on managing your contractual relationships and obligations under Quebec civil law, our Quebec business and litigation teams are available to help you achieve outcomes that are both commercially sound and respectful of the parties' contractual rights in the context of transactions or business disputes.

Footnotes

1 Civil Code of Quebec ("CCQ"), art. 6-7.

2 Sintra inc. c. Béton Brunet (Société de services en signalisation SSS), 2023 QCCS 293 at para 49.

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