The escalating impact of COVID-19 in the UK is causing widespread disruption. Measures designed to contain the spread of the virus, such as travel restrictions, self-isolation, business closures and cancelled events, are now affecting most commercial activities.
Our COVID-19 Hub includes resources and insight articles to help businesses manage these challenges. Here, we consider some key issues from a dispute resolution perspective, and provide some practical pointers.
What recourse might be available if your contractual arrangements are affected?
First, consider the terms of your contract to identify whether it contains a "force majeure" clause. This will set out the circumstances in which an affected party may be relieved of the consequences of failure to perform due to an unforeseen event such as the disruption caused by the pandemic.
Other clauses to look out for include "material adverse change" (MAC) provisions (commonly found in acquisition agreements and finance agreements). This sort of clause might provide protection where a counterparty has been adversely affected by an unforeseen event. MAC clauses in the context of facility agreements are discussed here. In other, simpler forms of agreements, the cancellation terms may be relevant.
Where there is no force majeure or other applicable clause, contracting parties may be able to argue that the impact of COVID-19 has "frustrated" the contract. The doctrine of frustration applies where an event occurs which renders the contract impossible to fulfil, or makes the obligation to perform radically different from that originally undertaken. The implications of COVID-19 for commercial contracts are considered in more detail here.
- Incorrectly asserting force majeure or that a contract has been frustrated may itself amount to a breach of contract, entitling the other contracting party to claim damages or potentially terminate the contract. It is therefore important to take appropriate advice on any such contractual issues.
- Where businesses agree to requests from counterparties that services be delivered in a different way as a result of COVID-19, care should be taken to confirm the precise scope of the concession given. Parties should be careful to avoid inadvertently varying the terms of their contracts on an ongoing basis, or otherwise waiving or compromising their rights.
If your business has been disrupted, it is important to check the terms of your insurance cover. Unfortunately, most business interruption cover is provided in combination with property insurance, and only triggers in the event of physical damage to property. Events cancellation insurance is more likely to respond if the cancellation of an event has affected your business.
- If there is a possibility of cover being triggered, ensure you provide notice to your insurers without delay to avoid prejudicing cover.
- Normal principles of mitigating loss apply, and all reasonable steps to limit losses should be taken.
Managing employees' safety
All businesses are having to consider the health and safety issues arising as a result of COVID-19. Our employment team has set out guidance for UK employers here, covering employers' responsibilities, travel protocols, pay for employees in self-quarantine, data privacy and dealing with the employment implications of disruption to your business.
Cyber crime risks
Many businesses have reported seeing an increase in criminal cyber activity, such as malicious emails and malware, during the escalating coronavirus crisis. The concern is particularly acute given mass home working.
- Ensure that their incident response plan is up to date (and that the contact details of the incident response team have been circulated) so that any cyber incidents can be managed effectively.
- Warn staff in finance teams working remotely to be on guard for payment diversion red flags, such as an unexpected change to usual payment details, pressure being applied to make an urgent payment, or spoof calls from a "bank" security team.
- Remind staff of the dangers of clicking on links or downloading items from unsolicited emails, particularly those that are COVID-19 related.
More information about cyber and data security can be found here.
The threat of insolvency
During any distressed situation, information is key. If you are worried about a counterparty, you should follow three Ms: monitor, manage and (try to) mitigate.
- Monitor: Obtain as much information as you can from the counterparty about any issues they are facing. Are they eligible for any government support?
- Manage: Check your contractual terms and consider whether there is anything you can do now. Can you terminate (and do you want to)?
- Mitigate: Plan for the worst. If the counterparty fails, are there alternative counterparties? How quickly can they get up and running? What are the costs? Do not forget to monitor the solvency of your current counterparty and take prompt action if an insolvency appointment is made.
An increasing number of directors are giving thought to their duties in the potential "zone of insolvency", continually reviewing the financial situation of the company and carefully considering whether it has reached a point where it can no longer avoid insolvent liquidation (or administration). This is a fine balancing act which is highly fact-specific, can change at short notice (especially with new emergency funding being announced daily), and is hard to carry out with certainty when the key risk factor is new to the global markets and so hard to quantify financially.
The government has announced measures intended to enable the courts to continue to function and remain open to the public, without the need for participants to attend in person unless absolutely necessary.
In the Civil and Family Courts, hearings requiring the physical presence of parties and their representatives should take place only if a remote hearing is not possible and suitable arrangements can be made to ensure participants' safety. Where possible, the courts will use telephone and video technology to allow hearings to proceed. We are aware of at least one case where a High Court judge has ordered parties in a high-value dispute to draw up proposals for a virtual trial to commence this week. However, virtual trials will not be appropriate in all cases so some litigants will experience lengthy adjournments.
Electronic filing, already available in some courts, is being extended. For example, filing by email will be permitted for proceedings in the UK Supreme Court and Privy Council.
Procedural deadlines are likely to come under pressure. The High Court recently made what we understand to be the first case management direction expressly in light of the pandemic, allowing the parties to agree extensions to deadlines for up to 56 days (the default position under the CPR being 28 days). While relatively modest in nature, this is likely to be a precursor to many similar applications. Those with looming limitation deadlines will also be concerned, and there have been calls for limitation periods expiring in the next few months to be extended.
The Scottish civil courts are also maintaining "business as usual" where possible, although all hearings involving witnesses have been adjourned.
At a time when court actions will be subject to severe delay, mediation may provide a solution to resolving disputes now. With proper planning, a mediation can be held remotely and be an effective tool in resolving disputes. Please see our article on this topic here.