Although this has largely been true of the global response to the COVID-19 pandemic so far, there is a growing current of discussion which seeks to imagine and map out the post-virus world. It now seems inevitable that the pandemic, the government, business and consumer response, and the economic consequences, will give rise to myriad legal disputes and debates in the UK and around the world. In this article, we suggest several ways in which the short and long term legal landscape of England and Wales will be impacted by the pandemic.
Force majeure and frustration
For this reason, parties may have more success invoking ‘force majeure’ as an excuse for failed contractual performance related to the pandemic.
The coronavirus pandemic is clearly going to affect the performance of many contracts across numerous sectors, industries and geographies. In some cases, counterparties may claim that the contract has been frustrated. The principle of frustration in English law applies when an unforeseen event renders the performance of a contract physically impossible or illegal, or transforms the obligation to perform into something radically different. If a contract has been frustrated, it is automatically discharged and the parties are released from any future obligations, and thus would not have to pay damages for non-performance. However, if the parties have made express provision in a contract for a particular event (for example, if they have allowed for it in a force majeure clause), the relevant contract will not be frustrated. Moreover, the principle does not apply when the performance of a contract has merely been rendered more difficult or inconvenient by the unforeseen event. By way of example, in Canary Wharf v European Medicines Agency [2019] EWHC 335 (Ch), the Court resisted the defendant’s attempt to widen the doctrine of frustration in a way that would release them from their obligations under a UK lease once the UK left the European Union.
In short, the pandemic and the resulting shockwaves in the global economy will drastically change the dynamic between lenders and borrowers.
For this reason, parties may have more success invoking ‘force majeure’ as an excuse for failed contractual performance related to the pandemic. Although force majeure has no automatic application in English law, a force majeure clause of some kind is included in most commercial English law contracts. Such a clause typically suspends or extinguishes a party’s obligation to perform the contract in specific, often so-called ‘emergency’ circumstances. Because the concept has no legal meaning outside this which is drafted in the contract, much will turn on the specific drafting of the clause. The range of circumstances in which the specific clause applies will be of particular importance, and in some cases, it will be unclear whether the pandemic is covered – for instance, we anticipate at least some litigation over whether the pandemic can be characterised as an ‘act of God’. More broadly, unless there is effective government action which clarifies the issue (such as the issuance by the Chinese Government of ‘force majeure’ certificates, or the legislation in Singapore which prescribes temporary relief from the inability to perform obligations arising under certain types of contracts), we expect to see force majeure cases preoccupying English courts for some time.
In order to benefit fully from any potential leniency though, borrowers facing faltering cashflows and potential covenant breaches should consider making proactive approaches to lenders, rather than waiting until an event of default has occurred or is inevitable.
Borrower-lender relations
With COVID-19 impacting both demand and supply, many businesses are inevitably going to suffer disruption to their cashflows leading to an increased demand for short-term credit and, for those already borrowing, to a greater likelihood of defaulting on debt or covenants. For many borrowers, this will outweigh the advantage of cheap financing options encouraged by the Bank of England’s emergency package to lower borrowing costs and improve the availability of finance. In short, the pandemic and the resulting shockwaves in the global economy will drastically change the dynamic between lenders and borrowers.
Part of that dynamic is the legal issues that could arise. First, there may be situations where lenders have not made finance available despite the government support for such. Some lenders may have been slow to adjust their usual policies and procedures, resulting in an inappropriate denial of credit, or may simply have been overwhelmed, in circumstances where delay could be very damaging to the would-be borrower. Second, in the context of existing lending, borrowers may have a remedy in damages in a variety of situations where a lender has acted wrongfully. These include: (i) where a lender has used a wrongfully called event of default as grounds not to make further funds available in breach of contract; (ii) where a lender has enforced against security after wrongfully calling an event of default; (iii) where an enforcing lender has not obtained the best price reasonably obtainable for the secured asset (this being particularly contentious in a global economic slowdown); and (iv) where an enforcing lender acting through representatives on the company’s board breaches its duties as a ‘shadow director’.
As such, claims in negligence and fraud both tend to increase in frequency during economic slowdowns – see the collapse of the Madoff fund empire in the wake of the global financial crisis in 2008.
In this context, relevant guidance has been given by the UK’s Prudential Regulation Authority in a Dear CEO letter to lenders, urging them to exercise caution when responding to potential breaches of lending covenants arising from the pandemic. In order to benefit fully from any potential leniency though, borrowers facing faltering cashflows and potential covenant breaches should consider making proactive approaches to lenders, rather than waiting until an event of default has occurred or is inevitable.
Offshore and fund litigation
Many investment funds operate through vehicles incorporated offshore, and as such, claims against or involving them will often most appropriately be dealt with in those offshore jurisdictions. Such claims become more common in economic slowdowns, as investors losing money due to precipitous falls in portfolio value seek remedies for their losses. In addition, greater scrutiny of the way in which funds have been managed, either through investor pressure or insolvency procedures, often uncovers negligence and/or fraud that might otherwise have gone undiscovered. For example, an issue that sometimes arises is that of ‘style drift’ –where fund managers have lost sight of or deliberately breached their stated investment strategy, and invested in asset classes or jurisdictions which do not conform with the agreed risk profile, which is particularly damaging in circumstances where markets are plummeting in value and increasingly illiquid.
As such, policyholders may be forced to rely on such broader heads of cover (for instance, cover for losses arising from a public health emergency) as are available under their policy, rather than relying on a cover for losses arising from a government order for closure of premises.
As such, claims in negligence and fraud both tend to increase in frequency during economic slowdowns – see the collapse of the Madoff fund empire in the wake of the global financial crisis in 2008. Fund investors would thus be well advised to push for greater clarity and transparency, and fund managers likewise to consider greater levels of communication and dialogue than in better times to try to get ahead of these issues.
Insurance cases
Already, disputes between insurers and insureds are making the news on a regular basis. Business interruption insurance, in particular, has garnered a lot of coverage, with whole sectors shut down by the UK Government’s stay-at-home rules. However, major insurers and their representative bodies have taken a consistent line that, in most cases, business interruption policies will not respond to losses caused by (i) the pandemic; or (ii) the Government’s response to the pandemic.
In times when each party in a dispute has been seriously impacted by the pandemic, and neither party can be blamed for its effects, many of our traditional common law remedies may no longer be appropriate.
In the face of proliferating threats of group legal actions, the UK Financial Conduct Authority has now announced that it will shortly be bringing court action designed to resolve promptly a selected number of key issues causing uncertainty in the insurance sphere. These are issues that could redirect the path of insurance law, such as the meaning of “physical damage to premises” in insurance policies, and the proper approach to causation in the face of cataclysmic events.
The latter issue was considered in Orient-Express Hotels Ltd v Assicurazioni Generalis SA [2010] EWHC 1186 (Comm). In that case, a policyholder was unable to recover losses resulting from damage caused by Hurricane Katrina on the basis that the claimant’s losses were caused not by the property damage, but by the wider economic shutdown resulting from the hurricane. In the current case, insurers may argue that even without the UK Government’s order specifically to close down restaurants and bars (and other businesses), these businesses would have sustained losses due to (i) regulations preventing people from leaving their homes, (ii) guidance exhorting people to stay at home, and/or (iii) people staying at home because of their fears about the virus. As such, policyholders may be forced to rely on such broader heads of cover (for instance, cover for losses arising from a public health emergency) as are available under their policy, rather than relying on a cover for losses arising from a government order for closure of premises.
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Transformational change
Developments in English law and in the UK court system tend to come about by gradual innovation, rather than wholescale transformation. The nature of a common law system is that incremental change is more likely than legal revolution. However, some legal professionals have begun to ask whether the COVID-19 pandemic could be utilised to transform our legal system and the access to justice which it provides (or on occasion, does not provide). Remote hearings, for instance, have the potential to decrease reliance on court buildings which often struggle to keep pace with modern technology and eradicate time spent travelling for everyone involved. Long-term advocates of online courts have been (at least partly) vindicated by the willingness of the legal profession to find alternative solutions for hearings in the time of COVID-19.
However, adaptations of procedure during the pandemic could go further still, to fundamentally change the norms of English litigation. The role and design of many aspects of litigation, including disclosure and witness evidence, for example, was extremely topical even before the pandemic. The current requirement to hold most hearings remotely, and an increasing backlog in English courts as many hearings are inescapably delayed, may add further impetus to the drive to reduce the prominence of (and some would argue overuse and over-emphasis on) disclosure during proceedings and witness evidence at trial.
We would also agree with the BIICL that rules on the implication of contract terms and the debate as to long-term relational contracts may well gain a heightened relevance in ‘Coronavirus Law’. In this way, some of the most enduring principles of English law could now be transformed.
Even more fundamentally, this could lead to a reappraisal of English law generally. In times when each party in a dispute has been seriously impacted by the pandemic, and neither party can be blamed for its effects, many of our traditional common law remedies may no longer be appropriate. As suggested by the British Institute of International and Comparative Law (the “BIICL”) in a concept note on the effect of the pandemic on commercial contracts, it may be that lesser-used legal remedies are now called into service. Equitable remedies, in particular, may soften the ‘winner-takes-all’ nature of English litigation; one question being whether the relations of parties to a contract can be equitably readjusted by the Court so that one will not be unintentionally enriched at the expense of the other because of the pandemic. We would also agree with the BIICL that rules on the implication of contract terms and the debate as to long-term relational contracts may well gain a heightened relevance in ‘Coronavirus Law’. In this way, some of the most enduring principles of English law could now be transformed.
Concluding thoughts
It is rapidly becoming clear that the effects of this pandemic on society will persist for years or even decades into the future. It seems certain to shape English case law, and English dispute resolution procedure, as the most prominent events of our history—among them the development of the European Union, the Second World War, the invention of the printing press—have before it. In times like these, the most effective legal routes may not be those that have been tried and tested, but ones to come, and as such, successful law firms will be those that can perceive change and development and adapt accordingly.
Written by: Jumana Rahman and Charlotte Ritchie, Cohen & Gresser LLP
