As businesses navigate the impact of COVID-19 (coronavirus), it is likely that disputes will arise between counterparties regarding their respective rights and obligations and who bears which risks and losses.
Here are 8 practical tips for managing the earliest stages of a dispute and laying solid foundations for achieving the best outcome possible, whether via commercial negotiations, litigation or arbitration proceedings.
1. Assess your legal rights and strategic options
Engage your legal team as soon as possible to conduct an early assessment of your contractual rights and any common law and equitable rights you may have. Understanding the strength of your legal position is crucial to identifying the optimum outcome and the best strategy to get there. Beware of potential pitfalls before acting precipitously. For example, wrongful termination of a contract risks giving your counterparty a claim against you for damages for repudiatory breach. One potential ground of default might be less open to challenge than another. Terminating a contract with your counterparty may in some scenarios cause it to cross-default under its borrowing facilities, triggering its insolvency, which may not be in the interests of an unsecured creditor. A contractual right to exercise unilateral discretion may well be subject to express or implied limits. If you intend to rely on the doctrine of frustration, consider what impact the Law Reform (Frustrated Contracts) Act 1943 (if applicable) will have on the recovery of monies paid under the contract to date and the allocation of expenses. For more information on the potential default triggers in finance arrangements see if applicable and for guidance on force majeure clauses, hardship clauses and frustration in English law contracts see hardship clauses and frustration in English law contracts.
2. Preserve your rights
If you have become aware of facts which may entitle you to terminate a contract or exercise some other right or remedy, it is important to preserve them, otherwise they may be lost by delay or inconsistent words or actions, through waiver, election, estoppel or affirmation. If you need more time to investigate and consider your options before exercising your right, consider sending an express reservations of rights, even if your contract contains a “no waiver” clause. Any reservations of rights may be superseded by further words or actions or lengthy delay, so it is prudent to agree a communications protocol (see Tip 3) and keep reserving rights, especially if you are continuing a dialogue with the counterparty or taking any further action which it might later be argued amounted to a waiver of your rights or affirmation of the contract.
3. Agree and follow a privilege and communications protocol
All of your internal and external communications by any means (letters, emails, call recordings, voicemails, texts, instant messenger communications and WhatsApp messages, handwritten notes, etc.) and hard copy and electronic records may have to be disclosed to your counterparty and other third parties adverse to you in the event of litigation or arbitration proceedings or regulatory investigations, unless they are protected by legal privilege. It is key to liaise with your legal team to agree how best to safeguard confidentiality and privilege over communications and avoid generating material which may be prejudicial to your interests if you are required to disclose it. For guidance please see Legal privilege.
4. Evidence preservation
Stakeholders are having to make difficult decisions with limited information against a complex and rapidly evolving backdrop. It is important to capture and preserve the basis for decisions, such as the grounds for serving contractual notices, exercising contractual discretions, and the conduct of valuation exercises in order to defend them in the event that they are challenged days, months or years later. Putting in place a system to collate and preserve the evidence that may be needed to bring or defend claims is critical, especially when so many of the workforce are operating remotely and may be using alternative communications channels and procedures.
5. Comply with contractual notification requirements
Your contract may impose deadlines for notifying an intention to terminate, exercise a right or bring a claim. Any such deadlines should be identified early on, in order to ensure that rights and remedies are fully preserved. In many cases, your contract will also provide for contractual notices to be given in a particular format and manner. These are strict requirements and should not be taken lightly: the Courts and arbitral tribunals are regularly asked to assess the adequacy of contractual notices, and in some cases, valuable claims are lost on account of non-compliance (for example, if a notice does not include the details required by the contract, or is given in the wrong way).
If you are the claimant or have a counterclaim, you may owe a duty to mitigate your loss. This is important because further down the line, your claim may be reduced if it can be shown that you failed to implement appropriate measures by way of mitigation. Check your contract, as it may oblige the parties to mitigate their losses by taking specific steps. If the contract is silent about mitigation, a duty to mitigate is likely to be owed at common law in any event. As a general rule, it is difficult to prove that there has been a failure to mitigate. However, failure to mitigate is frequently alleged, and care should therefore be taken (1) to identify any steps that can or should be taken and (2) to keep a record of those steps being taken, in case you need to evidence them at a later stage in the dispute.
There may be insurance covering some or all of the losses in dispute, or (for defendants) covering defence costs. For example, credit insurance is sometimes purchased by financial institutions against the risk of borrower default, and by trading companies against the risk of key customers and suppliers becoming insolvent. In such cases, an insurance claim may represent the most straightforward recovery action. Similarly, Directors & Officers and Professional Indemnity insurance may be available to cover claims by third parties and associated defence costs. Relevant insurance policies should be identified quickly, and wording should be checked as there may be a strict deadline for notifying claims under the policy, as a condition precedent to liability. When insurers have been notified, it is likely that information requests will follow. It is important to project manage the claims process with assistance from your insurance broker, so that appropriate information requests are answered with the goal of obtaining confirmation of cover as promptly as possible.
8. Press and external communications
At the outset, agree and implement a policy for addressing press enquiries and your external communications. This should be done in conjunction with your organisation’s PR team, if there is one. Serious consequences can follow if external communications are not properly formulated. At worst, inappropriate communications can cut across your litigation strategy, or even result in loss of privilege. Therefore, make sure that your policy is publicised internally and that all requests for comment are referred to a single point of contact.