Head of Dispute Resolution | Head of Procurement | Banking & Finance
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In our previous article, we discussed future plans for the Debt Respite Scheme (Breathing Space Moratorium and Mental Health Crisis Moratorium) (England and Wales) Regulations 2020 ("the Regulations") which are expected to come into force in early summer 2021 and will allow eligible debtors to enter into moratoriums, which will prevent creditors from charging interest, penalties or fees and from enforcing or recovering debts whilst a moratorium is in place.
The Regulations are just one example of the many legislative changes that have been enacted in response to the COVID-19 pandemic, to give 'breathing space' to those who find themselves unable to fulfil their contractual obligations. In their "Breathing Space" series ("the Series")the British Institute of International and Comparative Law ("BIICL") has suggested that giving the concept of 'breathing space' an even broader reach, could help combat the risk posed by the COVID-19 pandemic of a "deluge of litigation and arbitration placing a strain on the system of international dispute resolution, and reducing the prospect of more constructive solutions and increasing the prospect of uncertainty of outcome".
The Series was born out of a meeting hosted by the BIICL in April 2020 and attended by several academics and senior judges, including Lord Neuberger. It comprises of a number of concept notes examining the effect of the pandemic on commercial contracts. Concept Note 1 considered how the legal and business communities could foster economic recovery in their response to the COVID-19 pandemic and Concept Note 2 considered how existing legal principles could be applied to contractual disputes in the context of the COVID-19 pandemic. The recently published Concept Note 3 contains a series of guidelines ("the Guidelines") which could be adopted by parties to contractual disputes to encourage a more conciliatory approach, without prejudicing or altering their legal rights.
The guidelines (which can be accessed in full here) are split into three sections:
1. Covers interactions between contractual parties and the behaviour expected - it encourages parties to:
2. Covers behaviours aimed towards resolution and/or avoiding escalation – it encourages parties to:
3. Covers behaviours aimed towards efficient legal proceedings and resolution using Alternative Dispute Resolution ("ADR") techniques/procedures – it encourages parties to:
The Guidelines are voluntary, so it remains to be seen what the take up will be like in contractual disputes. However, regardless of whether parties choose to adopt them, they serve as a helpful reminder of the behaviour that is expected and the steps parties should be taking before embarking on formal legal proceedings. In particular, we think that there are three key take-aways from the Guidelines for those dealing with disputes post COVID-1
1. Will 'breathing space' be useful and are you in a position to give this?
As the BIICL point out in Concept Note 2, in disputes born out of the pandemic, the simplest solution is often to allow a short 'breathing space' until normal contractual performance can be resumed. Parties might want to consider whether a short moratorium by consent would be useful and appropriate in the circumstances. This might allow the defaulting party to resolve particular issues that are preventing them from performing (for example issues further up their supply chain) or to raise additional funds for payment.
2. If the contract is viable, can it be preserved?
Of course, the desire to preserve a contractual relationship will vary on a case by case basis, but in many circumstances, the contract was viable before the pandemic and is capable of being viable again. In this instance, the parties may want to follow the Guidelines and shift their focus to the ongoing contractual performance. Parties might be minded to consider whether the dispute can be ring fenced and put on hold for a short time, which might be especially relevant for disputes where you have determined that a 'breathing space' moratorium by consent is useful and appropriate. However, if you are considering going down this route, you should still obtain legal advice on the applicable limitation periods and conduct a thorough review of the contract documentation to ensure it does not prejudice your position/available remedies under the contract.
3. Seriously consider a form of ADR
Some contracts contain provisions that dictate that disputes must be referred to a particular form of ADR, so the starting point should always be a review of the contract documentation to check for any such requirements. However, regardless of this, we are of the view that all parties should be engaging in at least some form of ADR before issuing proceedings and this would certainly be required under the Guidelines. If you can settle your dispute, you are likely to save time and money and you are likely to be able to obtain a resolution far quicker than you would by going through the Courts. We discussed this in more detail in our previous articles on ADR and Pre-Action Conduct.
If you would like further information on the Guidelines or you are encountering difficulties with your contractual relationships and would like advice on your legal position or further guidance on formulating an effective strategy for disputes, please do get in touch.