Dispute Management in a Time of Coronavirus
As the coronavirus situation continues to rear its ugly head, businesses along the supply chain are finding themselves increasingly on the back foot.
A key concern is the impact of the situation – which the World Health Organization (WHO) has declared to be a Public Health Emergency of International Concern – on their contractual obligations. For example, restrictions on the movement of manpower and materials have disrupted project and production timelines.
The problem of meeting one’s contractual obligations, especially in agreements where time is of the essence, has moved businesses to retrieve their contracts from the drawer to scrutinise the fine print with their legal advisers.
But whose fault is it anyway?
In uncertain times, it is not always clear whether and where contractual liabilities should lie. Indeed, quite unlike a situation where one party or the other “chooses” to default on its obligations, the Covid-19 situation is not one where a party is trying to wiggle out of a bad bargain.
Rather, the circumstances may well be considered to fall beyond parties’ control, contemplation and circumvention.
Whether the force majeure clause in a given agreement applies to relieve an otherwise
defaulting party of its obligations depends on the precise wording of that clause, which may lend
itself to differing interpretations in different fora.
Legal commentators have, in recent days, focused their mind on force majeure clauses, which are often included in supply agreements. There have also been discussions on the applicability of the doctrine of frustration, which essentially allows a party to “throw up” a contract where it has become impossible to perform.
Despite the existence of such clauses and concepts, significant uncertainty resides over whether they will apply to the context and circumstances of an affected party. Whether the force majeure clause in a given agreement applies to relieve an otherwise defaulting party of its obligations depends on the precise wording of that clause, which may lend itself to differing interpretations in different fora.
While the China Council for the Promotion of International Trade (CCPIT) has issued more than 1,600 force majeure certificates to “shield companies from legal damages” arising from the outbreak, the weight that will be assigned to them will depend on several factors, including where the contract is being enforced. For example, a French oil company has rejected such a certificate from a Chinese gas buyer.
The applicability of the frustration doctrine can also be well, frustrating – the renowned jurist Arthur Lehman Goodhart has been quoted as saying that “no branch of the law of contract is so difficult to explain or so uncertain in its effects than that dealing with frustration”. In any event, case law illustrates that it will be a rare case where a party succeeds on the basis of this doctrine.
The applicability of the frustration doctrine can be well, frustrating…
Preventing Differences from Becoming Disputes
Given the swirling uncertainty, businesses should weigh their options in consultation with their legal advisors, to prevent differences over contractual rights and responsibilities from brewing into full-blown disputes.
Where the relationship would not have soured but for unforeseen circumstances, mediation may be an appropriate forum for parties to understand each other’s interests and constraints.
Where negotiations between buyer and seller are unsuccessful, parties’ interests may not be well-served by escalating the matter to arbitration or litigation, without considering other means of managing their differences.
Especially where the relationship would not have soured but for unforeseen circumstances, mediation may be an appropriate forum for parties to understand each other’s interests and constraints, so that they can arrive at a mutually acceptable outcome.
The nature of mediation lends itself to creative outcomes beyond the mere termination of a contract – which sacrifices an otherwise valued relationship – and the payment of damages (which may be only be ordered after a relatively lengthy adjudicative process). For example, mediating parties may agree to vary the strict performance of some contractual terms until the coronavirus situation improves.
And while contracts are being retrieved from the drawer, it will also be useful to review the dispute resolution mechanisms in the agreement, and consider the use of tiered dispute resolution clauses, which require amicable means of dispute resolution before the commencement of adversarial proceedings.