There is no shortage of thought leadership concerning the application of legal doctrines to events caused by COVID-19 and the resulting economic disruption.
Given the unprecedented difficulties facing contractual parties, these articles, unsurprisingly, have focused on the impacts of 'force majeure', 'frustration', 'hardship' and similar concepts.
Consideration of these issues is certainly important, but now is also the time to make sure that the overall dispute resolution strategy is right in today's changed circumstances. We all need to learn from the past, but also adapt for the future, using tools and mechanisms, many of which were not available or perhaps were less relevant, when markets were last faced with similar disruption.
As we start to move from the urgent react phase into the 'new normal', there is an opportunity and a need to reflect in more detail on dispute management strategies.
As we reflect, we also need to have in mind some of the emergency measures particular to the COVID-19 crisis, both soft guidelines and hard legislation, enacted around the world to address the unique effects of COVID-19.
Stage 1 – Hold counterparties to terms and insist upon contractual performance.
Stage 2 – Renegotiate the most important contracts and seek to perform those.
Stage 3 – Suspend or abandon any contracts that are too onerous insofar as possible.
Stage 4 – After the crisis, pursue non-performance claims against counterparts which are solvent, where that makes commercial sense. Where the counterpart is insolvent, abandon proceedings and write off uncollectable debt.
As the above stages play out, the market finds a new balance. Weak companies may fold, or restructure. Strong companies will tough things out.
Over time it should become apparent which companies are strong and creditworthy counterparts for new business, and which are weak and should be treated with caution.
However, the COVID-19 situation is unique.
First, almost every area of activity has been impacted by COVID-19. And the impacts have been both practical (working from home, lockdowns, forced closures of large parts of the global economy) and, of course, financial.
Second, there isn't a level playing field. Huge sectors of the global economy have been hit by the same forces. But, because of the responsive legislation implemented around the world, both strong and weak companies have been supported, and some have not been supported at all. Some jurisdictions have offered assistance solely—or at least primarily—to those companies which contract with the public sector. Others have taken a much broader approach. And the assistance provided is unique to each relevant jurisdiction.
Third, economies are emerging from lockdown in different ways and at different speeds, and it is unclear the extent to which governmental economic and practical support will remain in place and for how long. And who knows what will happen when that is withdrawn. The position in relation to changes to 'hard law' is unclear.
Fourth, the impact of some of the 'soft law' on dispute resolution is presently unclear. Governmental guidelines in response to COVID-19, for instance those issued in the UK concerning 'responsible and fair performance and enforcement of contracts during the public health emergency', occupy an unclear or anomalous status. While it is easy to understand that 'good' behaviour is encouraged, and 'bad' discouraged, the guidelines explicitly do not override contractual terms.
Fifth, on the same lines, it is uncertain how a tribunal faced with a situation of hardship caused by COVID-19 might decline to enforce strict contractual terms and instead seek to impose a 'fairer' result, taking into account 'soft law'. Will a tribunal be more susceptible to the Solomonaic urge to 'split the baby', for example? By way of short digression, the authors of this article were involved in a case in which a straightforward right to call on a bank guarantee, clearly and unconditionally set out, was denied by a tribunal on the grounds that the guarantee related to the performance of another contract, where performance was in dispute. In those circumstances (and no doubt to the horror of all finance lawyers around the globe) the tribunal prevented enforcement of the guarantee seemingly on the grounds that to do so wasn't fair.
Therefore, in the light of all the factors identified above, it may be necessary—or at least pragmatic—to approach the early stages of dispute resolution in a different way.
Assuming we are comfortable with the above, then, in the 'new normal' there are other strategies which can be adopted to make the dispute resolution process as efficient and effective as possible, and we will address them in a subsequent note.
If you would like to discuss any questions or issues around dispute resolution strategy then please contact us.