Introduction
Preserving claims
Watching (and stopping) the clock
Preserving contractual rights
Communicating with purpose
Comment


Introduction

The COVID-19 pandemic presents unique challenges to businesses globally. Amid the uncertainty and disruptions to all aspects of life and commerce, many companies are facing disputes with their counterparties. Examples of common disputes arising from COVID-19 so far relate to:

  • performance disruption and delay;
  • payment issues resulting from cash-flow problems; and
  • issues relating to government measures, such as restrictions on the movement of people and goods.

Many companies are turning to principles of force majeure and frustration to try and suspend contractual obligations or excuse late or non-performance. However, despite this potential proliferation of disputes, as seen in the previous global financial crisis, some companies will choose not to pursue legal claims for commercial or economic reasons. Legal action often involves significant expense and the commitment of employee and management time, and most companies are already facing pressures in both respects.

There are also considerations around:

  • defendants' solvency in the current circumstances;
  • the need to preserve ongoing commercial relationships; and
  • the possibility that important contractual relationships might resume once the pandemic subsides.

As a result, some companies are sensibly opting to negotiate or mediate a resolution. Others are seeking simply to put off dispute determination while reserving their rights to bring claims later when the immediate pressures of the pandemic have passed. If this is the chosen path, then it is critical in both instances that the flexibility to seek to resolve disputes commercially or to delay such disputes does not inadvertently prejudice the company's rights to bring claims in arbitration later, should they subsequently reassess their position. There are numerous simple steps discussed below that companies can take now to preserve the status quo.

Preserving claims

Companies should take steps now to preserve their legal rights and ability to bring legal proceedings in the future, irrespective of whether they are seeking in good faith to resolve the disputes by other means. Most companies are under the same pressures currently to avoid legal proceedings; however, as the pressures of the pandemic restrictions lift and life returns to the new normal, companies will reassess their positions. It is important to be prepared for the possibility that a dispute may end up in formal legal proceedings.

As an initial practical matter, companies must preserve the necessary documentation and evidence to prove or defend a claim. This is something that is too often forgotten or not prioritised during periods of disruption, as currently being experienced by companies, management and employees alike. The best records are contemporaneous, accurate, thorough and recorded in a manner that anticipates use as evidence in formal proceedings. This includes maintaining a written record of all interactions with the counterparty relating to a potential claim. Other evidence that may be relevant to a claim should also be collated and preserved. This can be difficult for parties working remotely, without access to their full electronic database, physical records or even the sites in question. However, it is essential to look at ways to ensure that documentary and other evidence is:

  • properly gathered;
  • filed for easy access; and
  • protected from being destroyed (eg, through routine procedures, such as erasing older digital files).

Conversely, particularly now with remote working, companies should be alert as to what evidence they are creating and whether it might be disclosable in subsequent legal proceedings.

Close attention should also be paid to legal privilege protections, including ensuring that material is not shared or disseminated in a way that inadvertently waives privilege.

Another important practical matter is ensuring that any conditions precedent to bringing a claim are satisfied. Many contracts set out conditions that must be met before a party can bring a claim. These can include giving formal notice within a set timeframe or endeavouring to settle the dispute through negotiations or mediation before commencing formal proceedings. These conditions are often strictly enforced and companies should make every effort to comply with them now so that if a claim must be brought later, there are no impediments.

Similarly, a party wishing to pursue a claim for damages later should ensure that it has taken reasonable steps to mitigate its losses. Losses which could have been diminished through reasonable and prudent conduct will often not be recoverable. Consideration should be given to documenting what steps were taken and why, in light of the rather unprecedented circumstances what amounts to adequate mitigation may be a live question in a subsequent dispute (it is recommended that legal advice be sought on this matter).

Watching (and stopping) the clock

While the world seems to have come to a standstill, legal rights and obligations have not. Subject to limited exceptions, parties must perform their contractual obligations in accordance with the agreed terms and payment or performance dates.

Companies at risk of default due to COVID-19-related disruptions must take proactive steps to suspend their obligations or negotiate time extensions. Companies facing a defaulting counterparty should in turn seek to exercise or reserve their rights to seek damages or terminate for breach as appropriate.

Companies that do not intend to issue proceedings immediately must also be aware of contractual or statutory limitation periods. Limitation periods operate to set a maximum period within which a claim must be brought, otherwise it will be time barred and the defendant will have a complete defence to the claim. Contractual and statutory limitations often act in conjunction. Statutory limitation periods vary significantly from jurisdiction to jurisdiction. For example, parties generally have three years to bring a contract breach claim in the United Arab Emirates, six years in England and Wales and 20 years in Portugal. The limitation period will sometimes depend on the nature of the contractual agreement and there are often differences between ordinary contracts and those signed under a deed. Further, in some jurisdictions (eg, France and Germany), temporary measures dealing with limitation periods have been introduced during the pandemic in recognition of the disruptions. These measures range from alternative methods of compliance (eg, online claims filing) through to blanket stays on limitation period expiration. Companies must take note of the specific rules in all relevant jurisdictions and comply with any applicable requirements to preserve a legal claim. Particularly for cross-border disputes, it is critical to seek legal advice on limitation periods when considering delaying issuing proceedings.

One common option for avoiding limitation issues is seeking to agree a standstill or tolling agreement. Such agreements generally aim to preserve the existing commercial relationship in the short to medium term by agreeing to suspend time running for limitation purposes or extend the limitation period, as well as freezing certain contractual rights and duties, to allow disputing parties to focus on more immediate concerns or negotiate a resolution rather than engaging in a legal dispute now. These are separate agreements to the underlying contract and must be negotiated fresh between the parties. It is always advisable to seek legal advice on the terms of such a standstill or tolling agreement as getting it wrong can mean losing the right to bring a claim later. Unfortunately, disputes often arise later over the construction and effect of such agreements. These agreements must be tailored to the parties and circumstances, consider all relevant laws and be binding and operate in the desired manner. It is also important to note that standstill agreements are not always effective in suspending or amending limitation periods in all jurisdictions. Parties to cross-border transactions should take particular care to seek local law advice.

Preserving contractual rights

Companies should review their contractual rights and obligations and consider how those might be affected by their own conduct, particularly any acquiescence to delayed performance (or other breaches of contract) or any delay in responding to such breaches.

In some circumstances, a right to suspend performance of a contract, or to terminate or renegotiate it, will arise. Common scenarios where such rights arise include:

  • where the contract provides for an express right to terminate. For example, commercial contracts often include a right to terminate if one party becomes insolvent or there is a material breach. In respect of the latter, whether delay amounts to a material breach depends on the contract's terms and the circumstances. However, where it is specified that time is of the essence, delay might amount to a material breach. There can also be common law rights to terminate that operate in parallel;
  • where one party repudiates a contract by clearly refusing to perform its obligations. In that case, an innocent party may choose whether to affirm or terminate the contract;
  • where a contract has been frustrated. Parties may be discharged from performing their obligations if performance is rendered impossible by an extreme event that occurred after the contract was entered into. It is important to focus on performance being rendered impossible, not merely difficult;
  • where the contract contains a force majeure clause that provides relief where an unexpected event outside a party's control prevents performance. Force majeure clauses turn on the precise language used but may cover events such as:
    • pandemics;
    • natural disasters;
    • travel restrictions;
    • governmental actions; and
    • 'acts of God';(1)
  • where the contract contains a material adverse change, material adverse event or material adverse effect clause. It is important to consider the contractual triggers and case law in relation to the applicability of such clauses on a case-by-case basis; and
  • where the contract contains a change in law provision that is triggered by a legislative change preventing a party from performing its obligations.

Companies must carefully consider how their response (or failure to respond) to a counterparty's breach or delay will affect these rights. For example, in some instances a company can waive its rights or enable an estoppel argument if it acquiesces to the breach or puts off objecting to it – sometimes this will occur even where there is no intention to do so. Another example is that in some instances a company can alter a contract's terms by its conduct or communications.

Many contracts contain no waiver clauses purporting to preserve a party's rights even if they delay in responding to a breach. However, these are not always effective in protecting contractual rights and there are variations from region to region, so it is important not to rely on these clauses alone. There are similar issues with so called 'no oral modification' clauses, which seek to restrict the circumstances in which contractual changes can be made (usually limiting it to variations in writing and signed by an appropriately authorised persons). Even if these clauses are ultimately effective, ill-considered conduct or communications can spawn satellite disputes that increase the costs and delay resolution of a dispute. It is a case of exercising a little more care now to avoid greater difficulties later.

Communicating with purpose

Companies should always take particular care in corresponding on contractual issues. If a company believes that it is entitled to contractual relief, it should consider notifying the other party and expressly reserving its rights while it considers its options, being careful not to delay a final decision for too long. This is important to ensure that a period of inaction is not deemed to imply a rights' waiver.

Early correspondence in many instances will make or break a claim. If negotiating a dispute, it is a good idea to consider and stick to key position points (preferably having the benefit of legal advice). It is also generally advisable to avoid making concessions (on or off the record), even if they appear harmless now. Commercial parties often seek to engage in 'horse trading' of concessions with the best intentions of moving a negotiation along. With the benefit of hindsight, such concessions invariably turn out to be unnecessary or, worse, cause issues for the claim later. In general, it is a good idea to have in place communication protocols so that only limited people within a company are responsible for discussing issues with the other party – this minimises the chance of an inadvertent waiver, estoppel or, worse, concession or admission that might harm the company's legal position.

Some parties may wish to hold off-the-record discussions on a without prejudice basis in order to encourage open and frank communication that might resolve their issues.

In general, the intent behind an agreement to speak off the record or without prejudice is that the content of those communications cannot later be used as evidence in any dispute resolution proceedings. In some jurisdictions, where such discussions occur after a dispute has arisen and with a view to settling the dispute, related correspondence may be automatically protected by the without prejudice rule (a rule of evidence, despite being commonly called 'without prejudice privilege'). Where no dispute has arisen, or the discussions veer into areas that do not relate to settlement, there is often no protection under this rule. Moreover, although many jurisdictions recognise some form of without prejudice privilege, the scope of that protection varies widely and in some jurisdictions there is no such protection at all. In those instances, the parties must contractually agree that their discussions will not be used or disclosed in any subsequent proceedings. Whichever route is chosen, it is important to seek local law advice, particularly if dealing with cross-border parties.

Even if there are local protections, it can be good practice to put in place and record clear agreement between the parties as to what 'off the record' means and what is, and is not, covered – this is another area that is commonly argued over later if negotiations fail. Companies should also bear in mind that during negotiations, off the record or not, there is a risk that communications, whether in writing or oral, will find their way into evidence. As such, care should be exercised over what is said, regardless of any agreement that the communication will not be used.

Comment

Flexibility is critical in continuing to do business in the face of the uncertainty arising from the COVID-19 pandemic. However, staying flexible does not necessarily equate to having to decide now, while under multiple and often immense other pressures, to forgo legal rights. Claims can be preserved in many instances – even strengthened – by carefully considered but simple steps taken now. Companies should settle on an appropriate strategy, tailored to their business and jurisdiction, sooner rather than later. Doing so will best protect their rights and leave their options open once they come through the immediate disruptions caused by the pandemic.

For further information on this topic please contact Andrew Battisson or Daniel Allman at Norton Rose Fulbright's Sydney office by telephone (+61 2 9330 8000) or email ([email protected] or [email protected]). Alternatively, contact Carmel Proudfoot at Norton Rose Fullbright's Perth office by telephone (+618 6212 3222) or email ([email protected]). The Norton Rose Fulbright website can be accessed at www.nortonrosefulbright.com.

Endnotes

(1) More information on force majeure clauses during the COVID-19 pandemic is available here.

Lachlan Crosbie, graduate, assisted with the preparation of this article.