The COVID-19 pandemic presents unique challenges to businesses globally. Amidst 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 related to government measures such as restrictions on the movement of people and goods. Many companies are turning to principles of force majeure and frustration in an effort to suspend contractual obligations or excuse late or non-performance. However, despite this potential proliferation of disputes, as seen in the last 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 the defendant’s 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 determination of the dispute whilst 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 or litigation at a later date should they subsequently reassess their position. There are a number of simple steps discussed below that companies can take now to preserve the status quo.
Preserving the claim
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 the dispute may end up in formal legal proceedings.
As an initial practical matter, it is critical that companies 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 experienced by companies, management and employees alike. The best records are contemporaneous, accurate and 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 related 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 or 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 (for example through routine procedures such as erasing older digital files).
On the other side of the coin, particularly now with remote working, companies should be alive to what evidence they are creating and whether or not it might be disclosable in subsequent legal proceedings. Close attention also should be paid to protections of legal privilege including ensuring that how material is shared or disseminated does not inadvertently waive privilege.
Another important practical matter is to ensure any conditions precedent to bringing the 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 later pursue a claim for damages should ensure it has taken reasonable steps to mitigate its losses. Losses which could have been diminished through reasonable, prudent conduct often will not be recoverable. Consideration should be given to documenting what steps were taken as well as why in light of the rather unprecedented circumstances – what amounts to adequate mitigation may be a live question in a subsequent dispute (but again, seek legal advice on this).
Watching (and stopping) the clock
While the world around us seems to have come to a standstill, legal rights and obligations have not. Subject to limited exceptions, parties are required to 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 will need to take proactive steps to suspend their obligations or negotiate extensions of time. 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 issues proceedings immediately must also be aware of contractual or statutory limitation periods. Limitation periods operate to set a maximum period of time 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 quite significantly from jurisdiction to jurisdiction. For example, parties generally have three years to bring a breach of contract claim in the United Arab Emirates, six years in England and Wales, but 20 years to do so in Portugal. The limitation period will sometimes depend on the nature of the contractual agreement and often there are differences between ordinary contracts as compared to those signed under a deed. Further, in some jurisdictions (such as 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 (such as online filing of claims) through to blanket stays on the expiry of any limitation period. Companies must take note of the specific rules in all relevant jurisdictions and comply with any applicable requirements in order 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 to seek to agree a standstill and/ 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 and/ or to 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 and/or tolling agreement as getting it wrong can mean losing the right to later bring a claim. Unfortunately it is not uncommon for disputes to later arise over the construction and effect of such agreements. Such agreements must be tailored to the parties and circumstances, taking into account all relevant laws, to ensure that they are binding and operate in the desired manner. It is also important to note that standstill agreements are not always effective to suspend or amend limitation periods in all jurisdictions. Parties to cross-border transactions should again 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) and/or any delay in responding to such breaches. In some circumstances a right to suspend performance of the contract, or to terminate or re-negotiate the contract, will arise. Common scenarios where such rights arise include the following situations:
- 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 terms of the contract 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 the contract by clearly refusing to perform its obligations. In that case, an innocent party may choose whether to affirm or terminate the contract.
- Where the 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 that has been 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 so-called “acts of God”. Further information on force majeure clauses during the COVID-19 pandemic is available here.
- Where the contract contains a “material adverse change” (MAC) clause or a “material adverse event” or “material adverse effect” (MAE) 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.
- Where the contract contains a “change in law” provision that is triggered by a legislative change preventing a party from performing its obligations.
Importantly however, companies must carefully consider how their response (or failure to respond) to a counterparty’s breach or delay will impact 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 the terms of the contract 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 again 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 of and delay resolution of a dispute. It is a case of exercising a little more care now, so as to avoid greater difficulties later.
Communicating with purpose
Related to the above, companies should always take particular care in corresponding on contractual issues. If a company believes 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 too long. This is important to ensure that a period of inaction is not deemed to imply a waiver of rights.
Early correspondence in many instances will either 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. It is not uncommon for commercial parties to 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 down the track. Related to the above tips, it is also generally a good idea to have in place communication protocols so that only a limited few people within a company are responsible for discussing issues with the other party – this minimises the chance of an inadvertent waiver or 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. Generally 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 so-called “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 would need to 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 down the track if negotiations fail. Companies should also bear in mind during negotiations that, “off the record” or not, there is a risk that communications, whether in writing or orally, will find their way into evidence down the road. As such, care should be exercised over what is said, regardless of any agreement that the communication will not be used.
Flexibility is critical in continuing to do business in the face of uncertainty arising from COVID-19. However, staying flexible does not necessarily equate to having to decide now, whilst under multiple 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 of the pandemic.
The authors would like to thank Lachlan Crosbie for his assistance with this article.