COVID-19 and the types of disputes arising

December 2020  |  SPECIAL REPORT: INTERNATIONAL DISPUTE RESOLUTION

Financier Worldwide Magazine

December 2020 Issue

Businesses all over the world have spent most of the year facing unprecedented pressures, uncertainty and volatility. Phrases such as ‘lockdown’, ‘quarantine’ and ‘social distancing’ have become part of societies’ new lexis. With hopes of a quick economic recovery fading, it is likely that the impact of COVID-19 on the global economy will be felt for years to come.

While the true impact of the crisis cannot yet be assessed either at a macro or micro level, in this article we consider certain trends in the types of disputes which have arisen between parties as a result of COVID-19 and contemplate the potential disputes which are likely to arise in the future.

With national lockdowns, border closures and supply chain interruptions, businesses around the world have found themselves unable to fulfil their contractual obligations, whether that be the supply of goods, products or services. While some parties have been able to agree rescheduling of payment obligations, or reach agreements to defer payment, this tends to be where there is the incentive of a long-term contract governing their relationship or no alternative option. There are certain sectors which have already been severely impacted, including, for example, aviation and travel, whereas others, such as e-commerce, have thrived.

However, given the pressures most business are facing due to COVID-19, when a counterparty breaches its obligations under a contract, there is little scope to renegotiate or reach a settlement because neither side can afford a financial compromise. This has led to a number of different types of potential contractual disputes.

On 7 May 2020, in anticipation of an increase in parties failing to perform their contractual obligations, the UK government released guidance on “responsible contractual behaviour in the performance and enforcement of contracts impacted by the COVID-19 emergency”. While this is only applicable in England and not binding, it provided guidance on reasonable and fair behaviour in respect of particular scenarios, including extensions of time, and requesting and making payments where COVID-19 has had a material impact on fulfilling the terms of the contract.

Unsurprisingly, given the unprecedented nature of the pandemic, parties are looking beyond the usual contractual remedies and relying on concepts of law such as force majeure, good faith, frustration or arguments of impossibility. These are all anticipated in the guidance. Force majeure has no definition in English law unless specifically provided for in a contract. It is a clause which covers circumstances which are outside the control of the parties or an ‘act of god’. However, the types of events which fall within the ambit of a force majeure clause will depend on the specific contractual wording, where such wording exists. Whether or not the pandemic falls within the clause is subject to interpretation. There are also arguments as to whether the pandemic itself prevented the party from complying, or if it was decisions resulting from the pandemic, such as manufacturing plant closures. Clearly there is a wide scope for contractual interpretation which is generating numerous disputes.

Another trend arising is the increase in insurance claims as businesses seek to recover losses from their insurers under insurance policies, whether these be claims through class actions or through individuals. These tend to be disputes as to whether the losses suffered were in fact insured losses, and this will depend on the precise wording of the policy. However, wider issues in relation to the cause of the losses in the context of the pandemic are arising as well. These difficult questions also arise for insurers seeking to recover losses under reinsurance contracts.

An area in which there has been a noticeable upward trend is consumer claims. With thousands of journeys and events being cancelled around the world, passengers and holidaymakers have sought refunds from consumer businesses such as airlines, hotels, cruise lines and travel agencies. More generally, authorities have also been ready to enforce competition and consumer law and to monitor market developments to identify potentially harmful and exploitative sales and pricing practices, especially in online sales.

Notwithstanding the existence of these issues, unlike with the global financial crisis, there has not been the expected deluge of litigation. This is likely to be the result of a number of factors, including that governments in many jurisdictions have brought in legislation in order to provide either financial support to companies and individuals or to avoid huge numbers of insolvency claims.

In the UK, for example, the Corporate Insolvency and Governance Act 2020 has halted winding up petitions and prevented creditors serving statutory demands in the UK at least until 31 December 2020. While these sorts of protections are in place, parties are faced with the choice to either wait it out or reach a deal. If it is evident that a contractual counterparty is on the brink of insolvency, careful consideration will be taken before commencing proceedings.

However, we can expect a gradual increase in insolvency litigation considering the scale of the economic downturn caused by the pandemic, especially in the hardest hit sectors such as aviation and retail. Insolvency disputes are more likely to arise in the medium and long term as governments around the world start to wind down the rules protecting struggling businesses. Take, for instance, the temporary suspensions of wrongful trading claims, aimed at giving some ‘breathing space’ to directors of companies facing insolvency.

As businesses in the hardest hit sectors struggle to remain viable, we expect that authorities will be on the lookout for corruption, fraud and bribery risks and practices which may have arisen as a result of COVID-19. Authorities around the world have already announced their intentions to pursue violations which occurred during the pandemic. As a result, investigations into business practices are likely to increase in the months and years ahead.

Another factor which may be limiting the number of formal disputes being filed could be the cause of the defaults themselves. Unlike the global financial crisis, this pandemic has impacted business on both a commercial and personal level. The fact that the pandemic strikes a personal note may be a factor which is preventing parties from initiating proceedings.

The future trends in the types of disputes that will arise will depend on a number of factors, including, for example, jurisdiction and the strategy that has been taken in response to the virus in that jurisdiction. This will potentially dictate the speed of the economic recovery, along with when an effective vaccine is available and deployed.

Furthermore, agreements to defer and reschedule debt can only last for a limited time before they become unsustainable. Government protections are not going to continue indefinitely, and it will only be a matter of time until matters turn contentious. There will be parties that will be reliant on recovering their losses to survive. This, combined with growth in third-party funding, is likely to result in a large number of formal disputes commencing during the first half of next year.

Other businesses may be simply holding tight to overcome the worst of the pandemic and, once in the clear, they may be more willing to commence proceedings against defaulting parties.

Finally, as time passes, although the cause of the dispute may have been COVID-19, it is likely that the financial implications will outweigh the personal factors which may have prevented parties from commencing proceedings. It is likely we are only seeing the tip of the iceberg as the real ‘storm’ of litigation is yet to come.

 

Zayba Drabu is counsel and Giulia Barbone is a trainee solicitor at Norton Rose Fulbright LLP. Ms Drabu can be contacted on +44 (0)20 7444 5129 or by email: zayba.drabu@nortonrosefulbright.com.

© Financier Worldwide

BY

Zayba Drabu and Giulia Barbone

Norton Rose Fulbright LLP

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