Post-pandemic litigation to expect in England and Wales

Post-pandemic litigation to expect in England and Wales

Law360, Expert analysis: The coronavirus (COVID-19) crisis and measures put in place by governments to halt the spread of the pandemic have led to huge disruption to business activity. Companies continue to adjust to these challenges and ‎are ‎adapting to protect their business, employees, shareholders and other ‎stakeholders. This will inevitably lead to virus-related litigation. ‎Tracey Dovaston and Fiona Huntriss, partners at Boies Schiller Flexner LLP, discuss the post-pandemic litigation to be expected.

Many businesses have had to suspend or severely restrict operations and others are having cash flow difficulties and showing signs of financial distress. Some may be struggling to comply with contractual obligations, while others may be looking to extricate themselves from what has become a bad deal even if they could, strictly speaking, perform their obligations.

Globally, we are already starting to see insolvency-related claims and also a number of insurance, breach of ‎contract, employment and securities class actions across numerous sectors, ‎with the travel, financial services and manufacturing sectors ‎being the most frequently targeted. Many more claims in a variety of ‎sectors are expected in the coming weeks and months.‎

We have set out in more detail below the types of claims we expect to see.

First, there may be insolvency-related disputes for companies in or around insolvency:

  • the UK government is rushing through new legislation implementing debtor-friendly provisions to seek to protect businesses, and litigation is likely as these new legislative provisions are tested

  •  we expect litigation around companies that may have been in financial distress irrespective of the impact of coronavirus. Many of the temporary legislative measures put in place to protect companies in the short-term are stated only to apply where coronavirus is a significant contributing factor to the solvency issues. There are questions as to how that can be reasonably assessed, and in what circumstances companies and their officers will be liable if it is shown not to be the case
  • when temporary measures (such as the provisions preventing the presentation of winding-up petitions in certain circumstances, and rent holidays) expire, there will be a backlog of overdue debt and impatient creditors. The ensuring administrations (or analogous proceedings) will result in creditor vs creditor claims, creditor vs company claims, and claims against directors and other officers

  • the financial circumstances created by coronavirus will also test the ‘covenant-lite’ finance documents that are in place across many finance structures, and litigation and contentious restructuring actions will no doubt focus on valuation issues and removal of assets from the reach of certain creditors

  • there are also likely to be claims against states, for their immediate or longer-term responses to the coronavirus crisis. Where governments have bailed out or propped up companies, there may be litigation around state aid issues. Where governments have not stepped up, constitutional protections and governance/oversight requirements may be used to put liability on the state

  •  in the UK, all of these issues may be exacerbated by the economic impact of Brexit, and the uncertainty it creates in many legal and financial contexts

Another area ripe for litigation is where there are disputes over insurance coverage. These include disputes over coverage for a host of coronavirus-related ‎issues, including property insurance claims, commercial general liability claims ‎and travel interruption and cancellation claims.

We expect that business ‎interruption insurance claims, in particular, will be a substantial area of risk for ‎potential litigation. Insurance groups are defining business interruption clauses as protecting damage to buildings, not closure costs arising from a pandemic

The Financial Conduct Authority (FCA) is seeking a declaratory judgment from the English High Court on a sample of 17 policy wordings from eight insurers to provide clarity on exactly what is covered on business interruption insurance and this is expected to be heard in July 2020. Many other insurers with the same or similar wording will be caught by any court finding. It is no surprise that the insurance industry has warned that the pandemic is on track to be the most expensive event ever to hit the industry.

Another area likely to see more litigation is where there are contractual disputes, which could become widespread. Many businesses are having difficulties meeting their contractual obligations or they may find that counterparties in the supply chain are unable or unwilling to perform. In these circumstances, parties may be seeking to avoid or delay performance, or escape liability for non-performance, or even terminate the relevant contract.

  • businesses may seek to rely on force majeure clauses to see if operations may be suspended. This will depend on a number of factors including:
    •  whether the circumstances in question fall within the definition of a force majeure event under the contract—does it cover a pandemic, a change of law or regulation or an act of government or is there sweep up wording which covers others events beyond the reasonable control of the parties?
    •  if so, has the relevant event hindered, prevented or delayed performance depending on the wording of the clause? Generally the fact that contract is less profitable or more onerous will not be enough
    • are there any notification or mitigation requirements that have to be satisfied, as there generally will be?

  • businesses may rely on material adverse change clauses, for example to enable lenders to prevent a borrower drawing down on a financing agreement. This is fact-specific and will depend on the contract wording

  • businesses may seek to rely on frustration, termination rights under contract or termination due to insolvency related rights. Counterparties may argue no right to terminate or that the other party was in breach of its own contractual obligations, for example by failing to provide appropriate notice under the contract, so there are many potential areas of dispute

It is worth noting that during the 2008 financial crisis, judges tended to show little sympathy to claimants relying on force majeure type clauses, reminding parties of the risks of entering into commercial agreements, but this will certainly continue to be an area to watch.

There is also potential for class actions arising out of the crisis. While there may not be many of these in the short-term, areas for possible class actions include:

  • employee class actions—if there are failings by employers regarding furlough arrangements, making employees redundant or amending their employee contracts on pay and/or if failing to provide safe working conditions or taking adequate steps to protect individuals, their employees ‎and/or clients and customers from exposure to coronavirus, for example by requiring employees to return to the office before the pandemic abates

  •  data privacy and cyber group actions—if there are shortcomings particularly while so much of the workforce is working remotely. As businesses have moved their workforces to working environments ‎which utilise remote working software systems, such as video-conferencing and ‎cloud-based data services, the risk of cyber incidents and privacy breaches has ‎significantly increased. Any data ‎breaches during these heightened sensitive times may result in class actions ‎against the company in breach
  • securities/market disclosure—where companies make public disclosures about the impact of the virus and get this wrong. The regulators have warned firms to pay attention to this, therefore we predict that failings will result in a penalty

In addition, the insurance, health care (including care homes) and transportation ‎sectors may be likely targets of class/group actions. There are already claimant groups forming to take on insurers over their refusal to pay out on business interruption insurance claims.

Throughout Europe, claims have been brought against the authorities trying to hold them legally and/or criminally responsible for their role in coronavirus infections and deaths. For example, in France the ‘C19 Collective’, a group of 600 directors, has brought a claim against the French prime minister and others for failing to adequately prepare for the pandemic.

While replica cases in the UK will not occur as there is no route for a criminal case to be brought against the government or its ministers, some may seek accountability through a public inquiry (as occurred with the Grenfell Tower investigation), which could potentially lead to civil or criminal litigation at a later stage.

The pandemic and resulting economic downturn unfortunately creates a perfect storm for illicit activity and it is therefore expected to bring about a wave of enforcement by the regulators for activities such as unfair pricing (eg, for personal protective equipment, face masks or sanitisers) and market abuse, including insider trading (as referred to in the FCA’s business plan and May 2020 ‘Market Watch’).

The FCA is already working with partners in law enforcement, such as the National Economic Crime Centre, to share information on coronavirus-related financial crime. The Serious Fraud Office has also issued a warning that it is united with its law enforcement partners in ensuring any perpetrators of fraud are held to account.

There are a myriad of expected fraud claims arising out of coronavirus across sectors. Examples include the insurance industry, which fears the challenges of policyholders faking claims or exaggerating the nature of a loss. It predicts an increase in liability and casualty fraud as businesses come under further stress, requiring greater cooperation between insurers and regulatory bodies, such as the UK’s Insurance Fraud Bureau.

While we expect to see a significant increase in litigation, we expect businesses will be cost-savvy in the current economic climate and, if claims are brought, will also explore resolution mechanisms such as negotiation, mediation and issue resolution.

The extent of any litigation is still unknown and may change as governments globally adapt their policies around the coronavirus—and depending on how deep into recession our economies dive—but whichever way you look at this, it is likely that lawyers and courts will be busy.

Tracey Dovaston and Fiona Huntriss are partners at Boies Schiller Flexner LLP.

This content is based on an article first published by Law360, a LexisNexis® company, on 15 June 2020 and is published with permission.

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