Conventional wisdom is that an economic shock of the scale of the worldwide Covid-19 pandemic will result in a significant increase in commercial litigation, but statistics in relation to court claims show that this has not happened. However, companies should not be complacent.
After a year of the pandemic, the number of cases being launched in court is still well below pre-pandemic levels. Legal cases related to the pandemic that are being reported are, by and large, in industries that have been directly and catastrophically affected by events – for example, the aircraft leasing industry – but the expected tsunami of claims across the wider business community has not materialised.
With delays and backlogs across the court system, it has not been an attractive environment to resolve an important dispute
One explanation for this has come out of an EY survey published in April. Among the headline figures from the survey, around two-thirds (63%) of the corporate respondents said that they had adopted a conciliatory approach to disputes since the start of the pandemic. This was manifested by applying reliefs to contract terms (81%), granting or receiving time extensions (69%), and renegotiating other contract terms (59%).
Another interesting statistic was that around three-quarters of companies surveyed had used alternative dispute resolution (ADR) to resolve legal issues. It is likely that this will include a significant use of mediation as a tool to resolve more complex or higher value disputes.
The main mediation providers have indeed stepped up to meet the challenges of lockdown, the traditional roundtable mediation being replaced by a virtual version.
Fending off litigation
The optimistic view is that this reduction in litigation and increased use of ADR shows that businesses are collaborating to get through the pandemic and heeding the official guidance issued by the Cabinet Office in May 2020.
In this guidance, the government set out objectives for responsible and fair performance and enforcement of contracts during the public health emergency – the clear message being that businesses should act responsibly and fairly in the national interest to protect jobs and the economy.
Commercial disputes need to be factored into the financial picture being prepared by accountants
However, there are less altruistic reasons for a decline in litigation during the pandemic. These are largely structural and only a temporary check on pursuing claims via litigation.
The structural reasons for avoiding litigation in a time of Covid-19, and why these are temporary, can be summarised as follows:
- Commercial self-interest. Companies will renegotiate contracts when everybody is in the same boat. They will be happy to be seen to be pulling together to row out of a crisis and may depend on a wider supply chain that must be supported. However, as the immediate crisis recedes and an imbalance of strength and negotiating power emerges, it is likely that those in the position of strength will seek to use it to improve their commercial position.
- Companies not having the time. Inhouse legal teams have been distracted by day-to-day issues arising from the pandemic (eg the legal impact of furloughing employees) and keeping the lights on. As the crisis recedes, they can now turn their minds to issues that arose because of the pandemic or that were put on the back burner because of it.
- Companies not having the money. Many businesses did better than they expected in cash terms, and the availability of government loans has given them a fighting fund to pursue subsisting claims.
- Legal bars on bringing litigation. Some types of litigation have been restricted during the pandemic (eg in the landlord and tenant and insolvency spheres). It is almost certain that there is pent-up demand in these areas that will be released when the restrictions are removed.
- The effect of the pandemic on the courts. With physical hearings being cancelled and replaced by virtual ones, and with delays and backlogs across the court system, it has not been an attractive environment to resolve an important dispute.
Once these structural barriers come down, the pessimistic view is that businesses will cease to be altruistic and will focus on improving shareholder value in the longer term.
Glut of claims to come?
The survey does not tell us the percentage of existing claims that have been resolved by ADR or settlement; the assumption is that there are pent-up claims that will be pursued. This conclusion is reflected in responses to the EY survey, which found that respondents expected to see more claims in 2021 than during a normal trading period.
The types of claim that businesses may bring or need to defend post-crisis (in addition to pre-existing claims put on the back-burner during the pandemic) are likely to be:
- contractual disputes, especially around force majeure clauses and the impact of non-performance
- insurance claims, including business interruption cover
- landlord and tenant disputes, when physical space may no longer be required
- insolvency-related disputes
- fraud-related disputes
- employment disputes, as workforces adjust to going back to the office (or not)
In summary, the indicators suggest that there will be a surge in legal claims once the crisis recedes. While ADR will continue to be an important tool, it is likely that there will be an increase in commercial litigation during 2021/22.
With the impacts of Brexit having been masked by the pandemic, the prediction is that commercial disputes will feature high on the board agenda of many UK companies for some time and need to be factored into the financial picture being prepared by the accountants advising them.