Coronavirus - Could ADR prevent or cure Coronavirus disputes - the UK

• United Kingdom

• Commercial litigation
• Coronavirus
• Litigation and dispute management

10-03-2020

As governments around the world battle to contain Coronavirus, the scale of economic disruption and impact on businesses cannot be underestimated. It is easy to see why some have predicted a rise in disputes work arising out of the unfolding global health emergency. However arbitration or litigation can be costly and time consuming and a formal court or arbitral dispute is unlikely to provide immediate short term relief to acute cash flow issues or the inability to perform contractual obligations. These forms of dispute resolution are not designed to provide interim commercial solutions to an evolving situation that is hoped will be of limited duration. Might, therefore, Alternative Dispute Resolution (‘ADR’) provide the solution instead?

ADR uses the skills of an experienced mediator or independent neutral third party (“Neutral”)  to help broker an agreement or provide a non-binding assessment on the merits of the dispute.  We have seen renewed focus on ADR within the court system recently and whilst the Civil Justice Council ADR Working Group in its final report stopped short of recommending compulsory ADR (see our briefing), it made clear that substantial changes are likely to follow.  In the meantime, parties should use ADR where appropriate.  The Business & Property Court is strongly encouraging the use of Early Neutral Evaluation (“ENE”) in its court user forums and the Court of Appeal held in Lomax v Lomax[1] that ENE could be ordered even if the parties did not consent. 

But ADR should not be viewed as being exclusively available within existing proceedings.  It can be an incredibly helpful tool to finding commercial solutions even at the pre-action stage.  By disarming disputes before they become litigious, could ADR provide the cure to coronavirus disputes or better still, prevent them altogether?

So far, thought has been given as to how contracts might have provided for the current situation. However, arguments relating to force majeure or frustration are not straightforward.  Regardless of our assessment of how  the courts may treat those arguments, the lack of clarity on them means that disputes will inevitably arise.  Even where the essential elements of causation and loss can be made out, there remain big questions over the recoverability of losses caused by a virus-related contractual breach.  Parties may argue that losses were not reasonably foreseeable or that they are too remote to be recovered.  Questions as to how the insurance industry may react add fuel to the large amount of uncertainty about how Coronavirus losses might be recovered.

Our Coronavirus Legal Hub contains our updated thinking on many of these issues, as the situation unfolds.  However, what is clear already is that where large sums of money are being lost as a result of cancelled or frustrated contracts, we can expect to see a rise in commercial disputes.  Parties will inevitably seek to recover what they see as no-fault losses arising out of the Coronavirus outbreak, including but not limited to:

• contractual claims, arising from parties seeking to avoid, delay or terminate their contractual obligations, involving arguments around frustration, force majeure and other contractual terms as well as arguments about remoteness and foreseeability of any damage or losses
• insurance disputes, such as coverage issues in relation to losses sustained
• employment disputes relating to pay and terms of working and potential claims for breach of duty of care or discrimination from employees
• insolvency and other enforcement action arising from the predicted financial decline which may impact financial obligations
• regulatory disputes

The temporal duration of the Coronavirus outbreak and its impact on parties trying to perform contractual obligations is unknown. Steps to terminate contracts provide a possible legal solution. But termination will not be a realistic commercial option in many cases, particularly if, as many hope, the impact of the outbreak is for a limited period of time. Parties may be better served by seeking to modify performance obligations. Actually achieving an agreement on the specifics, may be difficult due to the uncertainty of the situation, especially where multiple parties are involved.

By instructing a Neutral, businesses may explore creative and non-legally binding solutions to help unlock current difficulties and preserve future trading relationships. Arbitral tribunals and courts are limited as to what they can order. Outside of that process the parties are free to agree any mutually acceptable deal. This might (if the contract allows) include suspending contractual obligations, extending time limits or agreeing not to enforce penalties relating to the time or place of performance. The process may be even more effective in complex supply chains or multi-party disputes, where it could be difficult for two parties to settle without understanding the potential consequences that might be achieved in respect of their obligations to or from others. ADR can help parties reach an agreement and a Neutral can remain on standby to help with further negotiations if changes in circumstances require this. Just as the pandemic has seen businesses employ creativity and flexibility in how to deliver services, so have those involved in dispute resolution. Within the court system we have seen a rise in remote hearings and flexible directions and the ADR landscape is evolving similarly. Mediation can successfully be conducted remotely using remote conferencing facilities. Meanwhile Neutral facilitated techniques such as blind bidding, where parties make settlement offers remotely during several rounds of bidding across a day, resulting in a settlement where the bids overlap, can offer a highly effective and cost efficient alternative to meeting face to face.

[1] [2019] EWCA Civ 1467