Pandemic Breathing Space for Disputes

One of the potent ingredients that mediation offers parties in difficult entanglements and negotiations, is breathing space.  More time to reflect, and to reflect more deeply or in a more balanced way, on the issues, the personalities, the risks and opportunities in a commercial or legal conflict.

The term ‘Breathing Space’ has also been neatly used in a series of helpful booklets from the British Institute of International and Comparative Law. The guidance can be accessed here.

The BIICL has convened a number of distinguished judges, legal practitioners and academics to consider a bigger landscape of conflict, the potential for a ‘plethora of defaults’ in private law matters arising from the onset of the COVID pandemic (though Mr Draghi’s expression was originally referring to the risks in the financial and economic landscape).  There are three booklets in the series, the first one published presciently in the early months, April 2020.

The problem envisaged is the potential for a multiplicity of default clauses triggered in contracts, with counterparties claiming they are excused from performance by the exigencies of the virus impact. Different legal terms used in contracts or legal systems will become hot topics, whether force majeure, frustration, supervening illegality, material adverse change, unjust enrichment, etc.

While the authors acknowledge that conciliation, mediation and negotiation will have crucial roles, their immediate focus of concern is the risk of a deluge of litigation or arbitration to add to the other intrinsic uncertainties faced.

Thus, the use already in several jurisdictions of a recognition of necessary ‘breathing space’ in legal enforcement proceedings, or hearings.

And part of the juristic exploration during this moment must be to revisit the significance of ‘context’ for contractual interpretation, to balance certainty of legal principle with just outcomes, and to ensure that law can contribute to safeguarding commercial activities rather than exacerbating the adverse effects of the virus.  Overall, the emphasis is to encourage ‘a legal environment which is conducive to optimism and global recovery’.

The update in Concept No 2 published in September 2020, is able to consider in more depth the private law implications around the various legal terms.

It acknowledges the broader landscape of tangible actions taken by varied international systems already by this date, aimed at ameliorating debt impacts and pressure on SMEs, including seeking to reform insolvency laws to reflect moratoria on debt enforcement and to enable effective business restructuring where possible.  There is a useful discussion on force majeure, frustration, good faith, material adverse change, waiver of rights and other terms most likely to surface in legal disputes arising out of pandemic effects.

Also, consideration of how these are typically framed in common law versus civil law jurisdictions. I must confess that the application of a ‘hell or high water’ clause had not come up in any of the commercial mediations I have handled, but I can imagine it paints a vivid picture for US juries of an essential contractual requirement!

The need for reconsidering commercial law or its outcomes, as per the Breathing Space series, is founded on the scale of the virus impact, a very different beast to the global financial crisis of 2008, and one where problems are compounded by the increasing globalisation of supply chains in the last twenty years.

“Responsible contractual behaviour” is a mantra of government guidance for business parties, and in turn a signal to courts, in these circumstances.

Thus, the increased emphasis not only on refining legal concepts to adapt to this challenging environment, but to encourage dispute resolution on the broadest scale (a theme very strongly picked up in recent pronouncements by the Master of the Rolls, Sir Geoffrey Vos). The authors nevertheless are mindful of the value of legal certainty in court judgments, and of just outcomes being the core objective of the legal precedent or laws developed to date with which courts and businesses can work with some certainty.   Therefore, the example too, of the value sometimes of bringing issues of principle early on to the courts for decision, such as in the recent cases on the interpretation of business interruption insurance clauses.

A crucial role is highlighted for ADR in these circumstances, including procedures specially created with COVID-19 in mind, offering a range of options from negotiation support through mediation, to arbitration.

And the Note records the uplift in virtual proceedings becoming much more normal, in mediation, litigation and arbitration, with a corresponding variety of protocols to match different strands of legal dispute type, as well as processes for resolution. Using appropriate technology and effective case management have been key ingredients in all of these for successful transition through the pandemic.

The authors argue that courts should lean towards not only greater use of ADR, but also offering support for negotiated solutions in interpreting contracts and in helping continue viable contracts, or helping terminate them where inevitable, in an equitable manner. The authors note that just as the MD of the IMF has argued that “a global crisis like no other needs a global response like no other”, so this applies to the law and dispute resolution thinking.

This summary comment offers a useful segue into Concept Note 3 which focuses particularly on developing practical guidelines for taking a broad conciliatory approach to commercial disputes and to minimising protracted or disproportionate legal proceedings including active use of ADR.  The Note encourages mutual agreement to the Guidelines, which are are a helpful broad canvas not just for the pandemic but for healthy conflict prevention and resolution approach by any companies that value contractual relationships.

Similar to the structure set out in the options available in the CEDR/CIArb Pandemic scheme, the Guidelines are split into three sets of principles.

The first involves principles for managing behaviours to support contractual relationships, the second group focuses on behaviours aimed at resolution or avoiding escalation of disputes, through to the third section advocating active use of ADR and/or behaviours that otherwise ensure more efficient management of legal proceedings.

The Guidelines can be accessed here.