Coronavirus (COVID-19)—contractual rights, co-operation and dispute resolution—when and how to act

Coronavirus (COVID-19)—contractual rights, co-operation and dispute resolution—when and how to act

Commercial pressures arising from the coronavirus outbreak could rapidly escalate into disputes between businesses. Dispute resolution mechanisms in the UK are well prepared for the challenges arising out of COVID-19, but clear thinking, sensitivity and diplomacy will be needed as well as, where time is an issue, prompt speed of action. While it is important to focus on practical solutions where problems arise, that need not be done at the expense of putting contracts and remedies aside and potentially storing up legal problems for the future.

The world of dispute resolution is more than capable of responding to these challenges in a way which assists strong commercial positions while catering for the new reality. Legal advice can quickly establish the impact of trading restrictions and other measures now in place to tackle the coronavirus on contractual rights and obligations and the consequences for any resulting litigation.

Contracts should be reviewed now so that an informed judgement can be taken about whether formal contractual procedures—such as service of notices of delay—should be implemented. Full understanding of the contractual rights and obligations at stake will allow businesses to take a considered approach to these issues.

Businesses may feel that they should suspend normal processes such as formal contractual notices and dispute resolution machinery in order to try to work things out in a spirit of mutual goodwill and cooperation. However, bear in mind that contractual mechanisms are not necessarily suspended by this type of external crisis.

In the jurisdictions of the UK, the legal rules dealing with this are quite strict and therefore limited in scope and effect. There is no general doctrine allowing a court or tribunal to equitably adjust rights and obligations under a contract in response to external events, however unexpected. The general doctrine of frustration may apply in limited circumstances where performance of the contract has become impossible, but aside from this it is a matter of contractual interpretation whether or not parties have provided for highly unexpected circumstances—for example, by way of a force majeure clause.

The best solution may be to work with the other party to provide for the new situation by agreement, rather than storing up contractual problems for the future. If such negotiations prove challenging, it may be useful to convene a mediation with a third party expert facilitator to support the parties in negotiating a resolution. There is no reason why mediations cannot take place remotely, with parties and the mediator using video meeting software, and this is already starting to happen.

Should an external decision be needed, the courts are striving to remain open for business as much as possible. In the UK jurisdictions, the courts have made additional provision for electronic filing of documents—already the norm in most commercial cases in England and Wales—and for issues to be resolved on the basis of written submissions or by remote hearings using technology. Indeed, this will now be the norm for the foreseeable future. With additional use of technology to drive efficiency already on the radar in many UK courts, the coronavirus outbreak could lead to a sea change in the way in which litigation takes place in the longer term.

The courts have also indicated that priority will be given to urgent matters, such as applications for an injunction (interdict in Scotland) which could be used to prevent a breach of contract taking place. Special measures for the current circumstances can be coupled with existing provisions allowing the courts to give early, and sometimes non-binding, views on an issue to reach a quick solution to a legal problem. This may facilitate clarity, enable parties to reach agreement and move on to deal with the practicalities knowing that the legal position is secure.

Arbitration also offers the potential for quick and effective external decision making. Parties can agree that a third party arbitrator will have the ability to determine an issue or issues between them, whether or not there is an arbitration clause in the contract. Such an agreement can be tailored to the circumstances, so that the arbitration procedure will deliver an outcome in the timescale and manner required, although arbitrators will generally have a degree of discretion as to how the procedure should be conducted. This will usually enable them to direct that it take place via the use of video conferencing software—something that is expressly provided for in some arbitral institutions’ rules, such as those of the LCIA. For certain types of issues, such as technical issues, expert determination may also be a useful option where parties wish to seek a binding decision from an external third party.

While it can be tempting to act first and sort the contractual formalities later, survival in a highly challenging business environment may very well depend on having unambiguous and enforceable contractual rights and remedies.

This article was first published by Pinsent Masons LLP and is republished with the permission of the authors.

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