Recovery time for contracts?

A plethora of defaults; a deluge of disputes; an unbearable strain on the judicial system, domestically and internationally. All of these warnings have surfaced in assessments of the effects of COVID-19 on the world of commercial contracts.

That many business relationships have been disrupted by the pandemic is unarguable. But how should the law respond? Some commentators dusted down the authorities on force majeure, frustration and the like; but is it helpful to turn at the outset to such concepts when the business, and economic, priority will usually be to preserve the trading relationship?

Governments globally have recognised this, through temporary legislation designed to provide relief to individuals and businesses which might otherwise face harsh outcomes through no fault of their own. So have a group of senior lawyers, combining judicial and academic expertise, under the auspices of the British Institute of International & Comparative Law (BIICL).

An initial meeting of seven, including two former UK Supreme Court Presidents (Lords Phillips and Neuberger), and Scotland’s Sir David Edward QC, led to the release in April of “Breathing space – a Concept Note on the effect of the pandemic on commercial contracts”, and a larger group delivering a fuller comparative survey in a second concept note in May.

Seeking breathing space

“In times of uncertainty, the law must provide a solid, practical and predictable foundation for the resolution of disputes and the confidence necessary for an eventual recovery,” the first paper states. While sometimes, as with the business interruption insurance dispute, the courts may be the only option, “In other cases, arguably an outcome which leaves one party a winner, and the other a loser, will not take full account of the market/social contextualisation of the crisis.”

Can “a more creative... but nevertheless rigorous approach” be adopted without prejudicing the need for legal certainty? The note continues: “In many jurisdictions, procedural rules already encourage conciliation – can these be developed further to give a breathing space? The onus at least in the first instance would be for the continuance of a viable contract rather than bringing it to an immediate end.”

Calling for a comparative approach, it urges a debate as a matter of priority on how the law might encourage “a legal environment which is conducive to optimism and a global recovery”.

In furtherance of that aim, BIICL held a webinar in late June to explore possible approaches, and the Journal was able to interview two of the contributors to follow up some of the themes.

Comparative angles

Opening speaker Dr Eva Lein of Lausanne University explained that the concept notes related to both dispute resolution methods and the substantive law. On the former, constructive alternatives to relieve the strain on formal processes would be needed; on substantive law, some jurisdictions including Singapore and Germany had already enacted temporary measures – these vary considerably; and there is a problem in how they interact with general contract law.

In the UK the Cabinet Office provided welcome guidance dated 7 May (since revised on 30 June), which (while not formally applying to Scotland) urges “responsible contractual behaviour in the context of the pandemic”, both ahead of and during dispute resolution.

Turning to contractual principles, Lein noted that these can be interpreted and applied differently between jurisdictions. A Spanish court has already ruled that COVID-19 is a very specific situation that requires a very flexible approach, and that “It is necessary to adapt contract law institutions to the social reality of the moment.” The question remains how UK courts will react.

Resolution first

International arbitrator and former general counsel Wolf von Kumberg predicted that contractual relationships would change in a more collaborative direction, as would dealing with commercial disputes. Renegotiations would be needed and the courts were not the right place for these. He too approved the Cabinet Office guidance – “an extremely well thought through document” – though it would require alternative and fast track dispute resolution mechanisms, for the sake of continuing business relationships.

In the future, building in a means of amending essential terms including pricing and payment should become a feature of contracts, with a neutral mechanism to assist in cases of difficulty. Training in effective communication and conflict management would also be important; and ADR tools should be built into contracts, with businesses adopting corresponding policies and guidelines. Virtual ADR processes were already proving very effective, possibly with advantages over face-to-face mediation.

He concluded: “If people say what we are advocating isn’t really justice, from a business perspective I don’t think businesses are necessarily looking for justice but for resolution, and what we should be offering is a resolution of their current issues.”

Catherine Dixon, chief executive of the Chartered Institute of Arbitrators, said her organisation now had a pandemic disputes resolution service using ADR to facilitate businesses, particularly SMEs, recovering quickly, keeping costs down and giving some certainty as quickly as possible. She believed it reflected the Cabinet Office approach. Operating online and on a fixed cost basis, it offered the options of facilitated contract renegotiation, mediation and/or fast track arbitration.

She was joined by James South of the Centre for Effective Dispute Resolution, who believed the pandemic had accelerated a trend of the arbitration and mediation communities coming together, with the aim of providing clarity and keeping things simple for businesses: a “one stop shop” approach. In his experience parties did not really care about concepts such as force majeure; “they just want issues resolved”, and emerging disputes nipped in the bud quickly.

Challenge for the law

Finally Sir William Blair, former judge at the London Commercial Court and a co-author of both concept notes, highlighted some points in the second note. Its focus was international commercial contracts and its aim was to prevent disputes “clogging up the system when we should be focusing on recovery”.

He observed that while English law had always taken a very commercial approach, this was a crisis “like no other”, which deserved a response like no other, and the law had the responsibility of rising to the challenge. He proposed that where contracts are viable, the emphasis should be on making them work. If they are not, “we should be focusing on an equitable solution to bring the contracts to an end” – the current law of frustration being “not necessarily ideal”.

In terms of legal principles, the courts should be open to finding implied terms in certain cases, perhaps to allow a breathing space; and should be slow to find that contractual obligations had been waived by parties entering discussions with that aim. Further, “the time of mediation has come”, and though the courts had been slow to encourage it in the absence of agreement, “we’ve really got to look at that again”.

Advice for advisers

Afterwards I spoke with both Sir William and Eva Lein.

In response to my question, will legal advisers have to rethink their approach to dispute resolution, Lein pointed first to learning from other jurisdictions, “because this is a crisis that affects all countries in similar ways and we can learn more from each other than we usually do”.

She continued: “We should look more and more at what happens elsewhere, how efficient the solutions are elsewhere; and we also have to think more about online hearings and technology in the courts” – with discussion whether online hearings should become the default, except for specific or very important disputes.

I had noted Blair’s comment that concept note 2 focused on international commercial contracts, and wondered to what extent it applied domestically.

“Well, a lot of it certainly does,” he replied, “but I think what has changed in international commercial contracts over the last 30 or 40 years is the whole concept of the supply chain... you’ve got the prospect of a disruption anywhere in the chain disrupting the whole chain. If you compare that with the domestic situation, broadly within that you are applying a single law, single emergency regulations and guidance, but in the supply chain you’ve got a whole number that may be relevant.”

Judicial creativity?

How far should we encourage judges to be creative, something hinted at in the first note? Would that not go against the trend of recent Supreme Court decisions respecting parties’ bargains?

Blair disputed “that we are looking for the courts to do anything other than courts have always done, which is to apply legal principle to changing circumstances”. Commercial certainty remains key. “But what you’ve got to recognise is that in this pandemic, working out what your legal rights are is much more difficult... There has been nothing like this, so we can’t gauge as clearly as we would like how legal liabilities are going to work out, and that is another very good reason for parties resolving their disputes by negotiation or by mediation rather than having full blown disputes.” If judicial decision-making produces new results, that is the nature of the common law process.

Lein suggested that legal concepts could be changing. “There are contract law solutions, and there is flexibility in their interpretation.” She recalled the Spanish case where the court adapted the law to the social reality of the moment: “but it’s the existing regimes that adapt, it’s not that the judge invents something out of thin air”.

Relational contracts

Another emerging idea is the use of long term “relational contracts”, centred around parties committing to acting in good faith if unforeseen circumstances arise over a lengthy contractual relationship. Can that, I wondered, be applied to the present situation, or is it for the future?

“It’s a very good question,” Blair replies. “We do not have, at any rate in the English branch of the common law, any general doctrine of good faith performance, and we will not introduce one. There are reasons for that. One is that English law is used surprisingly often in international commerce and finance, when parties that have no connection with England just adopt it as a convenient law to apply. These parties want the contract to be enforced according to its terms, and that’s why we take the position we do.

“But if you have a contract that lasts for say 20 years, the parties can’t possibly anticipate all the things that may arise; they won’t have been anticipating a pandemic, obviously, but there will be lots of other more minor things they won’t have anticipated. Lord Leggatt, recently appointed to the UK Supreme Court, has said in a number of cases that at least for that kind of contract, the court will expect parties to negotiate in good faith to try and resolve issues that were unanticipated in a contract that lasts a long time.”

www.biicl.org/projects/breathing-space