CATALYST // PRESSURE POINTS:
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Rarely have events accelerated so rapidly or so radically as they have in the course of the Covid-19 pandemic. Governments have taken exceptional measures to protect citizens and suppress the spread of coronavirus disease. In tandem, fiscal support schemes of historic proportions have been introduced to preserve skills and stave off business failure. But despite these measures, the pandemic has taken a heavy toll in human terms, as well as leading to unprecedented disruption to economic activity on a global scale. Inevitably, that will lead to disputes.
In these pages we explore a number of areas in which we anticipate that disputes may arise around the globe as a result of the pandemic or associated disruption. These include contractual disputes, where parties may take steps to terminate a contract or claim damages if their counterparty is not performing, or conversely may be looking to rely on contractual or other mechanisms to excuse their own breach. Class actions may be brought where groups of individuals or businesses have similar claims arising out of the pandemic, for example shareholder, employee, competition or data breach claims. The recent disruption has put many businesses at risk of insolvency, which in turn has increased the risk of insolvency litigation including claims brought by creditors and officeholders. The pandemic may also lead to an uptick of claims against the state by way of judicial review or other similar routes, and the actions and decisions of various governments may be scrutinised in a public inquiry (which may also involve commercial entities as participants). There is also the potential for investor/state claims under treaties designed to protect foreign investment.
Summary
We explore each of these means of managing liquidity in greater detail and suggest steps that companies should consider in the short term and in the months ahead. We would expect various combinations of these options to be adopted by companies facing a cash crunch. In every instance, directors must take particular care to discharge their legal duties to the company and its shareholders and creditors. Click a above box to read more.
POLLING DATA AREA
Contractual disputes
Class actions
Insolvency disputes
Many businesses may be (or have been) unable to meet their contractual obligations, or may find that counterparties are unable or unwilling to perform. Parties may want to claim damages for any breach, or conversely may look to rely on contractual provisions to suspend their obligations or avoid liability. In some cases, parties may seek to terminate the contract, whether under an express provision or under a legal right to terminate for beach, or may argue that the contract has been brought to an end automatically.
The disruption caused by the Covid-19 pandemic spans numerous industries and sectors. In many instances it will have caused losses that are not unique to an individual or business, but are common to many. That provides a fertile environment for class actions, in jurisdictions which have a procedural mechanism for grouping similar claims. Inevitably, this is something that claimant firms and litigation funders (who are often the instigators of class actions) will be looking at with a keen eye.
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Already a growing trend given the interest of litigation funders, the disruption caused by the Covid-19 pandemic has put even businesses which would otherwise be performing strongly at risk of insolvency. Increased restructuring and insolvency activity produces increased insolvency litigation, including between creditors to ensure recoveries are maximised, as well as insolvency officeholders investigating the reasons for a company’s collapse and any mismanagement, negligence or fraud by its officers. Proceedings are likely also to result from the uncertainty caused by insolvency reforms in many jurisdictions on an emergency basis.
Public inquiries and judicial review
The pandemic has led to a number of governments passing emergency legislation and issuing guidance at a rapid rate – often with little or no scrutiny by legislative bodies. This may lead to challenges from individuals or commercial bodies who are disproportionately impacted or where the legislation has been misapplied. Further down the line, the actions of all governments are likely to be scrutinised, and we may see independent public inquiries set up. Such inquiries may well ask for evidence from commercial entities from sectors at the heart of the response.
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April 2020
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Companies should review all discretionary spending and cut it out where possible. Some costs, such as travel and hospitality, will reduce by virtue of the restrictions put in place by governments around the world but companies should review all expenditure to identify where cost savings can be achieved both in the short term, while work patterns are disrupted, and looking ahead as normality resumes.
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The contents of this publication, current at the date of publication set out above, are for reference purposes only. They do not constitute legal advice and should not be relied upon as such. Specific legal advice about your specific circumstances should always be sought separately before taking any action based on this publication.
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Investor/state disputes
States have had to make difficult decisions in response to the spread of the virus, trying to mitigate both societal and economic damage in the short and longer term. However, even in times of crisis, states should be mindful of their obligations to foreign investors under the matrix of treaties that exist across the globe that are designed to protect foreign investment. If measures introduced by a state in response to Covid-19 breach the protections offered by one or more of these treaties, we may see investors taking direct action against that state to claim for the losses caused.
The most immediate action a business facing a collapse in revenues can take is to reduce its costs and expenditure.
Immediate Steps
Looking further ahead
Identify any agreements where performance is or may be affected Identify relevant force majeure clauses and comply with any notification and/or mitigation requirements Consider any other relief that may be available under the contract or at common law Ensure appropriate records are kept to support your position if a dispute arises
Continue to review the situation and identify any performance issues Maintain comprehensive and contemporaneous records including the effect on the business and steps taken to mitigate
Many commercial contracts will contain force majeure clauses, which will typically suspend the parties’ contractual obligations where performance is prevented (or hindered or delayed) as a result of some event outside the parties’ reasonable control. Such a clause may also give one or both parties a right to terminate the contract if the force majeure event continues for a specified period of time. In some jurisdictions, there may be a statutory entitlement to invoke force majeure independent of any contractual provision. The analysis of force majeure events and clauses may need to be reconsidered should the impacts of Covid-19 broaden, or a so-called “second wave” of movement restrictions and public health measures be required in any particular country or region. For more on this see Force majeure considerations in a potential "second wave" of Covid-19 here.
Cutting costs
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ASSET DISPOSALS
Last updated 14 July 2020
Immediate steps
LOOKING FURTHER AHEAD
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Parties may claim damages for breach, or conversely may argue that obligations are suspended due to force majeure. In some cases, parties may seek to terminate the contract or argue that it has been brought to an end automatically.
Click through for more country-specific overviews of the available avenues for relief, or have a look at our publication Covid-19: Force majeure: A global perspective which provides a high-level overview, set out in table format, of the approach taken to force majeure clauses in: Australia; China; France; England & Wales; Germany; Hong Kong; Indonesia; Italy; Japan; Russia; Saudi Arabia; South Africa; Spain; Thailand; and United States (California, New York & Texas).
Regional insights
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“Force majeure” provisions
Where a contract has become uneconomic or undesirable, a party may wish to limit its losses by terminating the contract. Parties will need to consider:
Termination of the contract
What are the express termination provisions under the contract? There may for example be a right for one or both parties to terminate on notice and without cause. Or there may be specific termination rights that are triggered in the circumstances that have arisen (putting aside force majeure provisions, which are considered above). Is there a right to terminate under the general law governing the contract? Depending on the legal system in question, such a right may arise, for example, if the counterparty has committed a serious breach of contract or has clearly demonstrated an intention not to perform the contract in some essential respect.
A number of legal systems provide for a contract to come to an end, immediately and automatically, if performance has been dramatically affected by circumstances outside the parties’ control – so, for example, if performance has become impossible or illegal or been rendered radically different from the obligations the parties thought they were taking on at the time of entering into the contract.
Automatic discharge of the contract
Covid-19 may give rise to attempts by counterparties to invoke other contractual provisions, for example:
Change of law clauses – some contracts may contain a separate clause entitling either party to terminate or renegotiate the contract where a change in relevant provisions under the applicable law makes it impossible or impracticable for a party to perform its contractual obligations (rather than including this under a force majeure clause). Price adjustment clauses – parties may seek to adjust all or part of the contract price for a commodity due to increased costs as a result of Covid-19, eg due to increased supply chain strain. Limitation or exclusion clauses – parties may increasingly seek to rely on limitation or exclusion clauses to limit or exclude liability for non-performance, particularly if there is no force majeure clause or it cannot be invoked.
Other contractual provisions
UK
Germany
Spain
Russia
South Africa
US
Australia
France
China
UAE
Hong Kong
Italy
Indonesia
Belgium
Netherlands
Asia
Competition law issues
Ensure appropriate records are kept to support your position if a dispute arises
Maintain comprehensive and contemporaneous records including the effect on the business and steps taken to mitigate
There is a key distinction between two broad types of class action mechanism, known as “opt-in” and “opt-out” regimes:
Class action mechanisms
Intro text area
The disruption caused by the Covid-19 pandemic provides a fertile environment for class actions, in jurisdictions which have a procedural mechanism for grouping similar claims.
Class actions arising out of the Covid-19 pandemic are likely to be brought in many areas where multiple parties are affected by the same alleged wrongdoing. In many jurisdictions these claims are likely to be driven, or at least encouraged, by claimant firms, claims management companies and litigation funders who see class actions as a significant potential source of income.
Some of the more obvious areas for potential claims are considered below. Employee claims: Employers in most jurisdictions will have duties to ensure safe working conditions for their staff. Where there are failures, so that employees are required to work in close quarters and/or with insufficient protection, for example, the risk of claims is obvious. Claims can also arise where a business does not have employees on site, for example where employees are made redundant, or furloughed, or the employer seeks to alter their working hours or other terms and conditions. Any failings in the employer’s consultation processes and decision-making in such circumstances could well lead to claims. Insurance claims: The global impact of the pandemic has given rise to the unprecedented scenario of multiple policyholders in numerous jurisdictions facing the same cause of loss. Where that loss might be covered by insurance, the likelihood of groups of policyholders (who share risks written under separate but identical insurance contracts) coming together to claim against insurers is heightened. Indeed, this has already been borne out in certain jurisdictions where policyholder group actions against insurers have been commenced. Securities class actions: Given the volatility in the markets that Covid-19 has prompted, and the associated impact on the oil price and uncertainty as to the future global economic outlook, we have entered a period of increased litigation risk for companies making public statements. Where statements are (or are said to be) inaccurate or misleading, securities class actions may well follow. Competition issues: The pandemic has generated high levels of demand for certain products, such as hand sanitiser and personal protective equipment (PPE). Business who are found to have fallen foul of relevant competition rules in their response to the pandemic, for example by inflating prices, may run the risk of class actions pursued by or on behalf of affected consumers. Privacy and cyber and data security issues: The widespread move to working from home inevitably increases the risk of cyber and data security incidents, including personal data breaches and incidents affecting the integrity of information. By extension, this leads to an increased potential for group litigation arising out of any such incidents. Separately, with governments and public authorities increasingly turning to technology and data in their efforts to understand and contain the spread of the virus, it is easy to foresee claims arising in relation to potential misuse of individuals’ private information – whether against relevant public bodies or those concerned with delivery of the relevant technology. Supply-chain issues (BHR / ESG): The pandemic has led to widespread disruption to the supply chain. In many cases businesses are cancelling orders or delaying payment, and the consequences of these actions are being felt particularly acutely by suppliers in developing markets. In responding to the Covid-19 crisis, businesses must be careful to live up to any public statements made on business and human rights (BHR) and environmental, social and governance (ESG) issues. Any failings are likely to attract scrutiny and, as well as the obvious potential for reputational damage, there is a risk of claims. Consumer protection issues: The pandemic has had a dramatic impact on the daily lives of individuals, with many aspects of life essentially having come to a halt for extended periods. Cultural and sporting events have been cancelled in many parts of the world, memberships in gyms and sports clubs have been unusable, and travel has been strictly curtailed for both leisure and business purposes. How businesses have dealt with these issues, such as by offering vouchers or extending membership periods, has come under much scrutiny and, in some circumstances, may lead to consumer related group actions.
Potential sources of Covid-19 related claims
Opt-in: In an opt-in regime, the claim is brought on behalf of those (and only those) claimants who are identified in the proceedings and authorise the claim to be brought on their behalf. Opt-out: In an opt-out regime, the claim is brought on behalf of all those who fall within a defined class of claimants unless they take positive steps to opt out. There is no need for the individual class members to be identified or to authorise the claim to be brought on their behalf.
Opt-out class actions will be familiar to many as a result of the US class action procedure, which is probably the most well-known internationally. In general terms, it is likely to be easier to get a class action off the ground in a jurisdiction which permits opt-out claims.
Click through for more country-specific overviews of the procedural mechanisms for bringing class actions, and the sorts of actions that are likely to arise out of the pandemic.
Companies should review the headroom under their existing debt facilities and any weaknesses in the capital structure. Whether or not facing an immediate liquidity crisis, they should consider whether to draw down on existing facilities and whether they may need increased committed borrowing facilities.
Consider exposure to potentially distressed counterparties and whether contractual arrangements should be revisited.
The impact of the insolvency reforms in several jurisdictions, often making it more difficult for creditors to wind up companies (or even threaten to wind them up) and for creditors to exert all of their rights, will only be seen over the next 18-24 months. Will the reforms be effective to minimise insolvencies? And will they create uncertainties for creditors to exploit via strategic litigation?
Litigation in restructurings is often focused on ensuring the best possible outcome for creditors, sometimes as a strategic tool in order to exert leverage in negotiations. Payment waterfalls, intercreditor arrangements and the validity of existing security may all be in issue. The scope for disputes increases on an insolvency filing. The appointment of an insolvency officeholder to investigate the conduct of the company’s affairs exposes the company’s officers to the risk of civil and criminal liabilities, investigations, public enquiries and reputational harm. It is often in insolvency that historic wrongdoing is first revealed. Simultaneously, the officeholder will be investigating claims against third parties, whether they precipitated the insolvency or not. Often, efforts are made to avoid the company’s transactions, for example as a result of breach of duty by the company’s officers or financial misselling. Increasingly, there is a secondary market in claims arising out of these events –via litigation funders’ investment in the claim, transfer of the claim to others or creditors (often those that have bought in at a late stage at a deep discount) funding the officeholder.
Accessing resources / supplies / components
It is undeniable that Covid-19 has had a significant financial effect on many businesses. Even those businesses which appeared fundamentally sound will likely have experienced liquidity issues in past months. As public support schemes around the world come to an end, and as businesses are expected to return towards more normal operations albeit potentially with increased costs and reduced turnover, there is an increased risk of restructurings and insolvency filings.
United Kingdom
EU
Click through for more country-specific overviews of the relevant product rules.
Increased press and political focus on corporate collapses, the availability of litigation funding capital, enhanced corporate governance frameworks, willingness to pursue corporate mismanagement and the likely increase in insolvency filings in which an officeholder will be obliged to investigate the reasons for insolvency lead to a fertile insolvency litigation landscape.
See specific information and guidance relevant to your jurisdiction. Further regional insights will be added soon.
Public Inquiries and judicial review
Companies may choose to look to their shareholders for additional funding.
Public authorities, including regulators, have to act lawfully when introducing any changes to legislation or guidance. Organisations should consider if any legislation or guidance is causing particular concern to them – particularly if any legislation or guidance is being unfairly applied or is particularly disproportionate.
Organisations should seek specialist advice if they consider that their industry/sector is likely to be the subject of a public inquiry or equivalent process.
Governments across the world have had to act rapidly to meet the challenges of the pandemic. This has meant that governments have had to give new powers to the police and other state institutions through new emergency legislation and guidance – often with minimal oversight from legislative bodies. In due course, individuals and organisations may look to challenge aspects of such legislation. This may be because such legislation is introduced unlawfully or if it is misapplied. The implementation of such legislation may also impact on the human rights of individuals and organisations. There are also likely to be calls to scrutinise the response of the government through public inquiries or equivalent processes in different countries.
Government decision-making is likely to be the subject of much legal scrutiny in the coming months, and this is likely to give rise to litigation proceedings brought by individuals and commercial organisations.
There are also likely to be calls to scrutinise the response of the government through public inquiries or equivalent processes in different countries.
Where measures introduced by particular states raise concerns, investors should look at the investment structure underpinning their investment and identify potentially relevant treaties. Investors should keep contemporaneous records of the impact of state action on their investment(s). Any communications with states, particularly those seeking or receiving assurances as to treatment, should be carefully recorded. Investors may also want to consider obtaining external legal advice to identify and assess any potential claim, and to help ensure that any discussions with a host state get off on the right foot.
Investors may want to look beyond the measures introduced by states in the immediate response to the pandemic to consider whether a breach of a treaty may have occurred. For example, in the aftermath of the pandemic states may try to extract higher payments, deny tax benefits or impose higher tax rates to manage the economic fallout. States may also continue to use emergency legislation or state powers introduced for Covid-19 for other purposes.
What are investment treaties and how are they relevant?
An investment treaty is an agreement between states which contains reciprocal undertakings for the promotion and protection of private investments made by the nationals of one state in the territory of the other state.
Whether or not a specific state’s actions in response to Covid-19 could result in a breach of treaty protections, and whether an actionable claim arises for a specific investor as a consequence, will be heavily fact- and treaty- specific. Please contact Andrew Cannon or Christian Leathley to discuss.
When managing the impact of state actions in response to the pandemic, businesses may not immediately turn to international law. But the matrix of investment treaties entered into by states may provide potential avenues for redress for some businesses.
Public enquiries and judicial review
Investment treaties tend to offer similar protections, although the scope of the protections may vary and it is important to look at the specific provisions. Some of the common protections offered include:
What protections do they offer?
For a foreign investor to be able to rely on investment protections there needs to be an applicable treaty between the host state taking the measures affecting the investment, and that foreign investor’s “home” state (commonly, in the case of a company, the state of its incorporation). That foreign investor also needs to have an “investment”. Each treaty will usually contain its own definition of “investment” and it is important that an investor is able to show that their activity falls within this definition.
Who can rely on an investment treaty?
Protection against the unlawful expropriation of an investment without adequate compensation. A guarantee of fair and equitable treatment. A guarantee of full protection and security for the investment and the investor. Guarantees that the treatment for the investor is no less favourable than that given to nationals of the host state or investors of third states.
Legitimate questions may exist regarding whether the extent of the measures imposed in certain jurisdictions is justified, and whether they are proportionate. The measures may also have an unequal impact on one sector, group or type of company or individual. Whether this then results in a breach of one of the protections, will depend heavily on the nature of the state action and the circumstances in which it was taken, and the wording and interpretation of the treaty. The treaty may also permit the state to take actions to protect public health or public order, and there may be defences available to a state under international law (e.g. necessity or force majeure).
How might these treaties apply in the context of the pandemic?
Significantly, whilst these are state-to-state agreements, they usually contain provisions allowing a private investor from one state to enforce the protection their investment is afforded in the host state. That enforcement is usually through international arbitration.
How would an investor pursue a breach of a treaty against a state?
The Cabinet Office of the UK Government has published non-statutory guidance on responsible contractual behaviour in the performance and enforcement of contracts impacted by the Covid-19 emergency. The guidance does not have the force of law but the Government strongly encourages all individuals, businesses (including funders) and public authorities to act responsibly and fairly in the national interest in performing and enforcing their contracts, to support the response to Covid-19 and to protect jobs and the economy.
Responsible contract behaviour
Particular points to consider include:
Click here to access our quick reference tool to help assess the availability of force majeure relief under English law, either in respect of a party's own contractual obligations or those of its counterparty, as a result of the Covid-19 pandemic or related circumstances.
To remain eligible for the scheme, employers must ensure “eligible employees” receive at least AUD$1,500 per fortnight, and must provide monthly updates to the Australian Taxation Office (ATO) identifying their “eligible employees”. More details on the JobKeeper payments are available here.
If seeking to rely on an express termination provision, any contractual requirements, such as notice provisions, should be strictly observed. Parties should also remember that, where a contract is terminated under an express contractual right, there will generally be no entitlement to “loss of bargain” damages for future non-performance. (Note that measures in the Corporate Insolvency and Governance Act 2020, referred to above, may restrict a supplier’s ability to rely on contractual termination provisions in some circumstances: see Governance: Corporate Insolvency and Governance Bill: Impact on supply chains and their customers (UK) here). A right to terminate at common law will arise, most commonly, if the counterparty is in repudiatory breach of contract (ie if the breach deprives the innocent party of substantially the whole benefit of the contract) or has clearly demonstrated an intention not to perform the contract in some essential respect. Where a force majeure clause has been triggered, the question of whether the counterparty can still terminate at common law will depend on the construction of the clause.
Force majeure is principally a contractual concept. In general, there is no statutory entitlement to claim force majeure, and no standard or accepted definition of what constitutes force majeure. Consequently, the relief provided by a force majeure clause is dependent on the precise language used in the relevant agreement. A typical force majeure clause will excuse one or more parties from performing their contractual obligations if they are prevented (or, depending on the scope of the force majeure clause, if they are hindered or delayed) from doing so by an event or circumstances outside their control. In considering whether a force majeure clause can be invoked there are a number of points to consider:
Do the events or circumstances fall within the definition of a force majeure event under the contract? So, for example, does the clause cover an epidemic or pandemic, a change of law or regulation, or an act of government? Or is there sweep-up wording to cover other events beyond the reasonable control of the parties? If so, has the relevant event prevented, hindered or delayed performance? Typically, a force majeure clause will be triggered only if that is the case. A change in economic or market circumstances which makes the contract less profitable or performance more onerous has not generally been regarded as sufficient to trigger a force majeure clause. Are there requirements that must be satisfied before the clause can be relied on? It is common for force majeure clauses to include obligations to notify the counterparty of the force majeure event and to seek to mitigate its effects. A failure to comply with these requirements may mean a party cannot rely on the clause. What is the effect of reliance on the clause? It is typical for the parties’ obligations (or some of them) to be suspended without liability while the impact of the force majeure event continues. Often there will also be a right to terminate the contract if the force majeure event continues for a specified period of time.
"Force majeure" provisions
A contract may also be “frustrated” – ended at law – if, as a result of the Covid-19 crisis, further performance of the contract has become impossible or illegal or the relevant obligations would be radically different from those contemplated at the time of contracting. A party hoping to rely on frustration to avoid further performance of the contract should remember:
The doctrine of frustration will not come into play where the contract expressly provides for the event which has occurred, such as under a force majeure clause. The doctrine tends to be applied narrowly. Events which make performance more onerous or more expensive will not generally be sufficient. The requirements to establish frustration may be particularly difficult to satisfy in the context of a long term contract, particularly if the disruption is likely to be temporary. The effect of frustration is to bring the contract to an end, immediately and automatically. Where the contract is governed by English law, the Law Reform (Frustrated Contracts) Act 1943 provides that parties can recover sums paid under the contract before it was discharged, subject to an allowance for expenses incurred by the other party at the court’s discretion.
The Corporate Insolvency and Governance Act 2020 is likely significantly to impact many supplies of goods and services to companies that are or may be in financial distress, and indeed could affect the balance of rights in all supply chains. For an analysis of the impact on supply chains see Governance: Corporate Insolvency and Governance Bill: Impact on supply chains and their customers (UK) here.
Insolvency reforms
contractUAL DISPUTES: UK
Last updated 8 July 2020
contractUAL DISPUTES: FRANCE
Parties to a contract governed by French law and entered into after 1 October 2016 may seek to rely on the doctrine of hardship (imprévision) codified at article 1195 of the French Civil Code to try to renegotiate their contract when an unforeseeable change of circumstances makes performance excessively burdensome for a party that had not agreed to assume such a risk. If the parties cannot reach an agreement on renegotiation of the contract, either party may apply to the courts for the contract to be amended or terminated. However, parties can also exclude article 1195 of the Civil Code, or make adjustments to the conditions under which it applies, especially as concerns renegotiation or recourse to the courts. For more on Covid-19 and hardship under French law see here.
Hardship and contractual renegotiation under French law
Article 1218 of the French Civil Code specifically provides a statutory regime for force majeure in contracts governed by French law, even where the contract does not contain a force majeure provision. Article 1218 provides that a party can invoke force majeure to excuse its failure to perform its contractual obligations if: (i) the event was beyond the control of the non-performing party; (ii) the event was not reasonably foreseeable at the time of entering into the contract; and (iii) the non-performing party could not have avoided the effects of the alleged force majeure event with appropriate measures and is therefore unable to perform its contractual obligations. The statutory regime is not mandatory, however, and parties can opt out of it completely or vary it by including force majeure clauses in their contracts, in which case there are a number of points to consider, including:
For more on COVID-19 and force majeure under French law, see here and here.
Do the circumstances fall within the definition of a force majeure event under the contract? So, for example, does the clause cover an epidemic or pandemic, a change of law or regulation, or an act of government? Or is there sweep-up wording to cover other events beyond the reasonable control of the parties? If so, has the relevant event prevented, hindered or delayed performance? Typically, a force majeure clause will be triggered only if that is the case. A change in economic or market circumstances which makes the contract less profitable or performance more onerous has not generally been regarded as sufficient to trigger a force majeure clause. Are there requirements that must be satisfied before the clause can be relied on? It is common for force majeure clauses to include obligations to notify the counterparty of the force majeure event and to seek to mitigate its effects. A failure to comply with these requirements may mean a party cannot rely on the clause. What is the effect of reliance on the clause? It is typical for the parties’ obligations (or some of them) to be suspended without liability while the impact of the force majeure event continues. Often there will also be a right to terminate the contract if the force majeure event continues for a specified period of time.
Parties to a contract governed by French law and entered into after 1 October 2016 may seek to rely on the doctrine of hardship (imprévision) codified at article 1195 of the French Civil Code to try to renegotiate their contract when an unforeseeable change of circumstances makes performance excessively burdensome for a party that had not agreed to assume such a risk. If the parties cannot reach an agreement on renegotiation of the contract, either party may apply to the courts for the contract to be amended or terminated. However, parties can also exclude article 1195 of the Civil Code, or make adjustments to the conditions under which it applies, especially as concerns renegotiation or recourse to the courts. For more on COVID-19 and hardship under French law see here.
contractUAL DISPUTES: GERMANY
If the contract does not contain any provision on force majeure applicable for the effects of Covid-19, the statutory provisions apply. In any case, the concrete contractual obligations as well as the extent and reasons of the effects of Covid-19 on these obligations need to be examined in detail. In particular, the following statutory provisions are to be considered: Release from the obligation to perform due to objective impossibility, s.275 (1) German Civil Code The contractual obligation to perform is released if the performance of the service is impossible. In this case, the obligation of the contractual partner to provide the counter-performance is also released. However, the legal system sets high demands on these requirements. In principle, each party bears the risk of the usability of the service. For example, an impossibility of performance cannot already be assumed in the case of illness of all employees, as long as the fulfilment of the contractual obligation is possible through the engagement of third parties. The effects of Covid-19 could lead to the release of the obligation to perform in the case of absolute fixed-date transactions. Right to refuse performance due to economic impossibility, s.275(2),(3) German Civil Code It will often be the case that, although it would be objectively possible to perform a service, the effort required to do so would be immense. Therefore, the debtor has a right to refuse performance if such performance: (i) requires expenditure which is grossly disproportionate to the creditor's interest in performance; or, (ii) after weighing the obstacle to performance against the creditor's interest in performance, is not reasonable. However, such a right to refuse performance can only be considered in the case of obstacles to performance which could only be removed with considerable, unreasonable effort. In this case, the debtor's expenditure (eg costs, labour input, etc) must be weighed against the customer's interest in performance (asset value of the performance, substance and use interests) as well as any share of fault. It will be difficult to justify such a right to refuse performance based on the effects of Covid-19. If the debtor is released from its obligation to perform due to objective or economic impossibility, the creditor's claims for damages have to be examined (see below). Right to terminate the contract for a compelling reason The right of termination for a compelling reason can be based on contract or law. Therefore, it is primarily to be examined whether compelling reasons for termination are explicitly mentioned in the contract and whether one of these reasons could cover the effects of Covid-19. A termination for a compelling reason based on the law (eg sections 314, 626, 648a German Civil Code) exists if, taking into account all circumstances of the individual case and weighing the interests of both parties, the continuation of the contractual relationship until its scheduled end or until the notice period has expired is not reasonable. This is a question of the individual case. Right to adapt or terminate the contract in case of interference with the basis of the transaction, s.313 German Civil Code One party has the right to adapt or, if an adaptation is impossible or unreasonable, to terminate the contract if there is an interference with the basis of the transaction. The law provides for the following requirements: (i) circumstances which became the basis of the contract have significantly changed since the contract was entered into; (ii) the parties would not have entered into the contract or would have entered into it with different contents if they had foreseen this change; and (iii) adherence to the unchanged contract would be unreasonable for one party, taking into account all circumstances of the individual case, in particular the contractual or statutory distribution of risk. Whether a circumstance which leads to an impediment to performance (such as the effects of Covid-19) concerns a question of the basis of the transaction must always be assessed on a case-by-case basis on the interpretation of the contract. Exemption from the obligation to pay damages or contractual penalties The extent to which the contractor can be accused of fault depends largely on the circumstances of the individual case. In principle, the effects of Covid-19 can lead to the fact that the debtor is not liable for the non-performance or the delay in performance. In particular, the debtor is not responsible for the non-performance/delay if it was unforeseeable and unavoidable. It therefore depends on whether the debtor knew or should have known at the time of conclusion of the contract that it would not be able to fulfil his obligation to perform (on time) due to the ongoing COVID-19 pandemic. It must also be examined whether the non-performance or the delay could not have been avoided by reasonable measures. The debtor must prove that it has taken all reasonable steps to prevent the event of non-performance or delay. If the non-performance/delay is not attributable, there is in principle also no obligation to pay damages or contractual penalties.
Statutory provisions
German law recognizes force majeure generally only if it is explicitly addressed under a contract. Although there are statutory provisions that mention the concept of force majeure (eg in s.7(2) Road Traffic Act, s.206 German Civil Code), a generally applicable definition and clearly defined legal consequences for contracts are not provided. If the contract contains a force majeure clause, it should be carefully examined whether the clause has been effectively included in the contract (especially under the law for general terms and conditions). If a clause is effectively included, the parties will have to assess whether the effects of Covid-19 can be seen as force majeure. A lot of force majeure clauses explicitly name pandemics as a case of force majeure. If pandemics are not explicitly mentioned in the clause, the interpretation must be based on the relevant principles of the "force majeure" case law. Force majeure is predominantly understood as an exceptional, external, non-culpable and unpredictable event that cannot be avoided even by extreme care. Whether the effects of Covid-19 can be considered force majeure according to the clause depends on the time the contract was concluded, the legal framework during that period, and the information available to the parties at that time. It can often be assumed that the effects of Covid-19 constitute a force majeure event. If, however, contracts are concluded although one party could have already known that it will not be able to fulfil his contractual obligations properly due to the Covid-19 pandemic, no force majeure can be assumed for him. Force majeure clauses usually make provisions on the following points:
definition of force majeure; release from the obligation to perform for the duration of the disruption; right to terminate the contract; duty to mitigate damages; and exclusion of claims for damages.
Since the Covid-19 pandemic has been ongoing for some time, force majeure clauses in newly concluded contracts will probably not cover the effects of Covid-19. Therefore, parties must be advised to include specific contractual clauses on the effects of Covid-19 in newly concluded contracts.
Force majeure
contractUAL DISPUTES: ITALY
Where a contract has become uneconomic or it impossible to perform it, a party may wish to limit its losses by terminating the contract. First, the parties should verify whether there are specific termination provisions under the contract. There may be, for example, a right for one or both parties to terminate or withdraw on notice and without cause. Or there may be specific termination rights that are triggered in the circumstances that have arisen (eg conditions subsequent or termination for prolonged force majeure events). Any contractual requirements, such as notice period provisions, should be strictly observed. In addition, possible compensation provisions must be carefully examined to assess the direct economic impact of termination/withdrawal. In addition to specific termination terms under the relevant contract, a party may be entitled to terminate or withdraw under certain statutory Italian law provisions or principles, to the extent that they have not been waived by the parties:
Under article 1256 of the Italian Civil Code, a contractual obligation is terminated due to supervening impossibility not attributable to the relevant party (applying the test under article 1218 of the Italian Civil Code, outlined above). If the supervening impossibility is temporary, the obligation will terminate at the point in time when the party required to perform can no longer be deemed liable or the counterparty can no longer be deemed to have an interest in the performance. Under article 1464 of the Italian Civil Code, if the supervening impossibility regards only a portion of the contractual obligations, the counterparty is entitled to withdraw from the contract if it does not have any interest in the partial performance. Pursuant to article 1467 of the Italian Civil Code, if under a contract providing for obligations to be executed over a period of time, the obligations of a party become excessively burdensome due to extraordinary and unforeseeable events, such party may apply to the relevant court to terminate the contract. However, the other party may propose to amend the agreement in order to avoid the termination. The termination remedy does not apply if the increased burden falls within the typical economic risk regarding the contract. In accordance with the assumption principle (presupposizione) developed by case precedents, a party may withdraw from a contract if a matter of fact or law, which was known by all contractual parties to be the reason for that party to enter into the contract, no longer exists due to unforeseeable events.
Termination / discharge of the contract
Usually contracts under Italian Law include detailed “force majeure” provisions, providing that upon occurrence of events which are outside the invoking party’s control and impede proper performance of its obligations, if certain tests are met the invoking party will be excused. Usually, these tests require inter alia, to check if:
Depending on the text of the relevant clause, effects of force majeure usually include:
If no specific force majeure clauses are provided for in the contract, a party may still try to invoke “supervening impossibility” under article 1218 of the Italian Civil Code. According to this provision, a party can avoid liability for failure to fulfil an obligation if it can demonstrate that:
the relevant event is included amongst the force majeure events; the relevant event was unforeseeable and unavoidable using the appropriate standard of diligence; and the invoking party informed the other party in the agreed timeframe.
excusing failure to perform; extending time for performance (subject to each party’s obligation to bear its own costs incurred due to occurrence of force majeure); relieving the non-affected party from the obligation to pay the consideration strictly related to the obligations that are not performed due to force majeure; and prompt resumption of the relevant obligations upon end of the force majeure events.
it is impossible for that party to perform its obligations; the impossibility is due to causes not attributable to the party invoking force majeure; and the impossibility is “absolute” and “objective” (ie a “subjective” impossibility may not excuse the non-performing party).
According to case precedents, orders of public authorities or new governmental regulation (so called factum principis) can, at least in theory, be legitimate circumstances of supervening impossibility. In addition, pursuant to article 1256 of the Italian Civil Code, if the supervening impossibility is temporary, the relevant party is excused for late performance.
Covid-19 may have an impact on other provisions in an Italian law governed contract:
Change in law clauses: contracts may include provisions allowing a party to request amendments to the agreed commercial terms if a change in law occurs and providing the right of such party to withdraw from the contract if an agreement is not reached. Price adjustment clauses: parties may be entitled to an increase of the contract price. Under Italian law a party to certain types of contract may be entitled to a price adjustment regardless of an express provision being included in the contract (eg under articles 1660, 1661 and 1664 of the Italian Civil Code in relation to works contracts and service agreements) unless such right is contractually waived. Suspension right clauses: a party may be entitled to suspend performance of its obligations if the other party is not performing its obligations. This right is also provided by article 1460 of the Italian Civil Code.
contractUAL DISPUTES: SPAIN
If a force majeure event takes place, the parties to a contract cannot be held liable for failure to fulfil obligations that become impossible to comply with (ie not just any obligation) as a result of the exceptional or extraordinary event. This does not entail automatic termination of the contract. The non-defaulting party would not be entitled to claim damages or request termination of the contract.
Under article 1105 of the Spanish Civil Code, force majeure is defined as: “Apart from the cases expressly mentioned in the law, and those cases in which the obligation so declares, no one shall be responsible for those events which could not have been foreseen, or which, if foreseen, were inevitable.“ Parties can also contractually seek to define force majeure more narrowly. Broadly, an event or circumstance should qualify as a force majeure event if it is extraordinary, caused by external forces, not foreseen and it would not have been possible to foresee nor avoid it even applying the greatest diligence. The Spanish Supreme Court has ruled that, as well as the event being unforeseeable, the event must have been inevitable or unstoppable. In general terms, it could be argued that force majeure will apply where fulfilment or performance of an obligation has become impossible, either on material or legal grounds directly linked to the COVID-19 health crisis. The following must be taken into account:
the contractual provisions (if any) governing special situations leading to a force majeure event and the consequences of that event; the circumstances in each case; the means available to the party which is required to perform; and its ability to react to the unforeseen event.
contractUAL DISPUTES: AUSTRALIA
If seeking to rely on an express termination provision, any contractual requirements, such as notice provisions, should be strictly observed. Parties should also remember that, where a contract is terminated under an express contractual right, there will generally be no entitlement to “loss of bargain” damages for future non-performance. A right to terminate at common law will arise, most commonly, if the counterparty is in repudiatory breach of contract (ie if the breach deprives the innocent party of substantially the whole benefit of the contract) or has clearly demonstrated an intention not to perform the contract in some essential respect. Where a force majeure clause has been triggered, the question of whether the counterparty can still terminate at common law will depend on the construction of the clause.
A contract may also be “frustrated” – ended at law – if, as a result of the COVID-19 crisis, further performance of the contract has become impossible or illegal or the relevant obligations would be radically different from those contemplated at the time of contracting. A party hoping to rely on frustration to avoid further performance of the contract should remember:
The doctrine of frustration will not come into play where the contract expressly provides for the event which has occurred, such as under a force majeure clause. The doctrine tends to be applied narrowly. Events which make performance more onerous or more expensive will not generally be sufficient. The requirements to establish frustration may be particularly difficult to satisfy in the context of a long term contract, particularly if the disruption is likely to be temporary. The effect of frustration is to bring the contract to an end, immediately and automatically. Where the contract is governed by the laws of New South Wales, South Australia or Victoria, the Frustrated Contracts Act 1978 (NSW), Frustrated Contracts Act 1988 (SA) or Australian Consumer Law and Fair Trading Act 2012 (VIC) respectively may apply and govern the financial consequences of frustration.
contractUAL DISPUTES: SOUTH AFRICA
As stated above, usually force majeure clauses provide for the election to cancel the contract should the force majeure event persist. Common law relief can be found in the doctrine of supervening impossibility of performance. This common law remedy requires that the performance of certain obligations is rendered objectively impossible due to either an act of God (vis maior) or accident (casus fortuitous). Performance under a contract is suspended during any temporary period of impossibility, or alternatively is entirely extinguished in circumstances of objective impossibility of performance:
Partial impossibility of performance under common law does not extinguish the obligation but, if the counterparty cannot be reasonably expected to accept partial performance, it is entitled to terminate the obligation. Insofar as performance is extinguished, performance of the counter-party’s corresponding obligations is also extinguished. Any prior performance can be claimed back through the mechanism of unjustified enrichment. The contract, however, will not automatically be terminated. Usually, no claim for damages will exist if the party seeking the relief is not responsible for the cause of the impossibility.
Insofar as force majeure has been regulated by a contract, the courts will be slow to grant relief in terms of the common law (in accordance with the doctrine of supervening impossibility of performance).
Force majeure only applies in accordance with the terms agreed between the parties. Usually, the parties agree on either a closed or open list of instances which would constitute a force majeure event. As a result parties will need to identify whether the definition in their contract is wide enough to include Covid-19. Usually, such clauses provide for the suspension of obligations for a period of time, followed by an election to cancel the contract should the event persist.
Force majeure only applies in accordance with the terms agreed between the parties. Usually, the parties agree on either a closed or open list of instances which would constitute a force majeure event. As a result parties will need to identify whether the definition in their contract is wide enough to include COVID-19. Usually, such clauses provide for the suspension of obligations for a period of time, followed by an election to cancel the contract should the event persist.
contractUAL DISPUTES: RUSSIA
A defaulting party who has breached an obligation due to a force majeure event is not liable to the non-defaulting party for non-performance of its obligations (improper performance) under the relevant contract. However, the force majeure event does not release such party from performance of the obligation itself, if it remains possible to perform once the force majeure circumstances come to an end. However, commercial contracts usually contain provisions allowing for unilateral termination of the contract after a certain period of time has elapsed following the occurrence of the force majeure event, and subject to notification requirements. There are several options available to terminate the contract following a force majeure event (in addition to the parties’ mutual agreement): Termination of the contract at the initiative of the counterparty:
The non-defaulting party has the right to repudiate the contract if, as a result of the delay, it is no longer interested in receiving the benefit under the contract.
The contract may be automatically terminated if, in connection with certain circumstances arising after execution of the contract, there is an actual, objective and permanent impossibility of performance of obligations under the contract. However, it is unlikely that the current COVID-19 situation can serve a ground for termination of a contract due to actual impossibility given that containment and preventative measures are temporary.
Termination of the contract due to actual impossibility of performance:
A contract may be terminated if state or local authorities adopt legal acts or measures that make it impossible (ie illegal) to perform the obligations. However, it should be noted that, upon repeal of the relevant legal acts, the terminated obligation may be restored if the party that had previously been entitled to receive something under the contract does not repudiate the contract within a reasonable time.
Termination of the contract due to legal impossibility of performance:
A “force majeure” may excuse a defaulting party for non-performance of its obligations under the relevant contract and suspend performance of the obligations for a certain period of time. In order to invoke the benefits of force majeure the defaulting party should consider the following: Do the circumstances fall within the definition of a force majeure event under the contract or the law?
The existence of a causal link between the circumstances which the party in breach claims to constitute a force majeure event and the inability to perform the relevant obligations under the contract is essential to prove the legal grounds for its release from liability under the relevant contract. Are there requirements that must be satisfied before the clause can be relied on? It is common for force majeure clauses to include obligations to notify the counterparty of the force majeure event and to seek to mitigate its effects. A failure to comply with these requirements may mean a party cannot rely on the clause. The defaulting party should also act in good faith and take all necessary measures to properly perform its obligations under the contract to the extent possible and to minimise the impact of the force majeure event.
Has the relevant event prevented, hindered or delayed performance?
“Force majeure” is defined by unavoidability (it being objectively impossible for any market participant to avoid such a circumstance or its consequences) and extraordinariness (the exceptionality of the event in question, which occurrence is unusual in the relevant circumstances). Neither Russian law nor the Russian courts will give effect to so-called entrepreneurial risks as a force majeure event, including economic and financial crisis, delay or bankruptcy of the counterparty, devaluation of the national currency etc, unless such events and circumstances are otherwise specified in the contract. The fact that the contract becomes uneconomic or undesirable is not sufficient to invoke force majeure. Counterparties may designate in the contract a list of events or circumstances, the occurrence of which could be grounds for releasing each party from liability for breach of the contract (or otherwise change the grounds for liability of the parties). This is regardless of whether such circumstances are considered to be force majeure events by virtue of Russian law (for example, relating to the category of entrepreneurial risks). The fact of force majeure can be confirmed by a relevant certificate issued by the Russian Chamber of Commerce and Industry (for foreign trade transactions) or regional CCIs (for domestic transactions). Other evidence shall also be collected by the defaulting party.
Covid-19 may give rise to attempts by counterparties to amend their contractual provisions. A material change in the circumstances upon which the parties relied when executing the contract is a ground for modifying or rescinding the relevant contract. A change of circumstances is regarded as material when the parties’ circumstances have changed in such a way that the parties would not have entered into the contract at all, or would have entered into it on significantly different terms, had they been able to reasonably foresee the change. Courts usually refuse to classify events that fall into the category of entrepreneurial risk as a material change of the parties’ circumstances. However, it is also possible that measures taken in connection with the spread of COVID-19 could make the fulfilment of contractual obligations so burdensome for the parties that they will be categorised by the courts as a material change of circumstances, such that the parties will be able to rescind or modify the relevant contract. More details on the consequences of COVID-19 for contractual relations under Russian law are available here.
Rescission / modification of contract
COVID-19 may give rise to attempts by counterparties to amend their contractual provisions. A material change in the circumstances upon which the parties relied when executing the contract is a ground for modifying or rescinding the relevant contract. A change of circumstances is regarded as material when the parties’ circumstances have changed in such a way that the parties would not have entered into the contract at all, or would have entered into it on significantly different terms, had they been able to reasonably foresee the change. Courts usually refuse to classify events that fall into the category of entrepreneurial risk as a material change of the parties’ circumstances. However, it is also possible that measures taken in connection with the spread of COVID-19 could make the fulfilment of contractual obligations so burdensome for the parties that they will be categorised by the courts as a material change of circumstances, such that the parties will be able to rescind or modify the relevant contract. More details on the consequences of COVID-19 for contractual relations under Russian law are available here.
contractUAL DISPUTES: UAE
There is no definition of force majeure under UAE law. Rather, this is decided by the courts on a case-by-case basis. However, the concept of force majeure is well recognised in the UAE and the parties to a commercial contract often expressly account for force majeure events. In the absence of an express force majeure provision in a contract, the UAE Civil Code (Federal Law Number 5 of 1985) contains several provisions on force majeure which will apply and will provide for the cancelation of contractual obligations. The UAE Civil Code provides that if a force majeure event supervenes and renders performance of a contract impossible, all contractual obligations will cease and the contract will be automatically cancelled. If, however, part performance of the contract remains possible, the contract may only be part cancelled with the remainder of the contract continuing in effect. If a contract is cancelled by virtue of the application of the UAE Civil Code provisions, the parties are to be restored to their pre-contractual positions and, if that is not possible, damages may be awarded. The UAE Civil Code does not provide any definition of what constitutes force majeure, but does however state that a force majeure event will take place if it makes performance of the contract impossible. The requirement for parties to act in good faith pervades the UAE Civil Code and therefore parties will also need to consider this obligation when seeking to rely on any force majeure event. The UAE Civil Code also provides that where “exceptional circumstances of a public nature which could not have been foreseen occur as a result of which the performance of the contractual obligation, even if not impossible, becomes oppressive for the obligor so as to threaten him with grave loss”, the UAE courts may reduce the oppressive obligation to a reasonable level if required in the interest of justice. Again, there is no definition of “oppressive” or “grave loss” and this will very much depend on the circumstances in question and the terms of the contract. Historically, this has been interpreted narrowly and the Dubai Court of Cassation has found that the Global Financial Crisis was not sufficient to trigger this provision. However, the Dubai Rental Dispute Settlement Centre recently allowed a tenant to terminate a lease early without penalty due to an inability to pay as a result of the “exceptional circumstances” of Covid-19 (albeit, relying on a different provision of the UAE Civil Code addressing lease contracts). A party seeking to cancel the contract (in full or in part) will therefore need to establish that performance was impossible or more onerous as a result of Covid-19.
its non-performance was due to Covid-19; Covid-19 was not envisaged at the time of conclusion of the contract; and the consequences of Covid-19 could not have been avoided.
Click here to access our Covid-19 Regional Cheat Sheet, addressing force majeure clauses across a number of jurisdictions in the Middle East.
Onshore UAE
Although there is no prescribed definition of a force majeure event in DIFC law, the DIFC Contract Law (DIFC Law No.6 of 2004) does recognise force majeure and states in Article 82(1) that: "Except with respect to a mere obligation to pay, non-performance by a party is excused if that party proves that the non-performance was due to an impediment beyond its control and that it could not reasonably be expected to have taken the impediment into account at the time of the conclusion of the contract or to have avoided or overcome it or its consequences." The force majeure event should not be capable of being reasonably foreseen and should be beyond the parties’ control. Article 82(2) of the DIFC Contract Law states that where the impediment is temporary, then the force majeure will only apply for the relevant period in which there is the impediment, and the contractual obligations will continue thereafter. The relevant temporary period of reliance on force majeure will depend on the facts of each case, such as the practicality of carrying out the contractual obligations and how it has been affected by Covid-19 and the purpose of the contract. DIFC law therefore recognises force majeure events and allows for termination of contractual obligations or temporary postponement of contractual obligations due to force majeure events. For the force majeure to apply however, there is a prerequisite to provide notice to the other party without undue delay as soon as a party becomes aware of the event in question. It will therefore be for the party seeking to rely on Covid-19 as a force majeure event to establish that:
its non-performance was due to COVID-19; COVID-19 was not envisaged at the time of conclusion of the contract; and the consequences of COVID-19 could not have been avoided.
In addition, for force majeure to apply, notice must be provided to the other party without undue delay as soon as a party becomes aware of a force majeure event. Article 82(2) of the DIFC Contract Law states that, where the impediment is temporary, the force majeure will only apply for the relevant period in which there is the impediment, and the contractual obligations will continue thereafter. The relevant temporary period of reliance on force majeure will depend on the facts of each case, such as the practicality of carrying out the contractual obligations and how this has been affected by COVID-19, and the purpose of the contract.
Dubai International Financial Centre (the “DIFC”)
contractUAL DISPUTES: CHINA
The statutory consequences vary, depending on whether force majeure prevented the performance of particular contractual obligations or the fulfilment of the object of the contract:
If force majeure prevents a party from performing its contractual obligations, that party may be excused from performance and be exempted from liability for failure of performance partially or wholly, depending on the facts and circumstances. If force majeure renders the object of the contract unable to be fulfilled at all, either party may terminate the contract by giving the other party notice.
Note however that, if upon receipt of the force majeure notice, the other party fails to take measures to mitigate its losses arising from the non-performance of the affected party, it shall not be entitled to claim the portion of its losses resulting from its failure to mitigate.
The term “force majeure” is defined in both the General Provisions of Civil Law and the Contract Law of the People’s Republic of China. It is “an objective event which is unforeseeable, unavoidable and insurmountable by the parties”. Parties are also free to agree in contract a broader scope of application and relief for similar events, which will generally be given effect to. However, in that case, the contractual provisions will apply, as supplemented by the force majeure provisions at law to the extent relevant, to those events which meet the requirements of “force majeure” under law. In contrast, those other events which do not meet the requirement of “force majeure” under law will be afforded relief and/or entitlement only as agreed between the parties. The onus is on the party seeking to rely on the statutory force majeure entitlement to prove that it applies. As a matter of PRC law, this generally involves establishing that :
the event is "objective", ie it occurred with no fault or intention of any party to the contract involved; the event is unforeseeable; and the event is unavoidable and insurmountable, ie the affected party is unable to avoid the occurrence of the event or its consequences despite having taken reasonable measures. This further requires:
establishing a causal link between such event and contractual performance; establishing that requisite notice has been given; and establishing that the affected party was not already delayed in its performance thereby causing it to be impacted by the event (ie had it not been for that party’s prior delayed performance, the event would not have prevented performance.)
contractUAL DISPUTES: HONG KONG
The doctrine of frustration will not come into play where the contract expressly provides for the event which has occurred, such as under a force majeure clause. The doctrine tends to be applied narrowly. Events which make performance more onerous or more expensive will not generally be sufficient. The requirements to establish frustration may be particularly difficult to satisfy in the context of a long term contract, particularly if the disruption is likely to be temporary. The effect of frustration is to bring the contract to an end, immediately and automatically.
contractUAL DISPUTES: US
The impact of the Covid-19 pandemic on contracts in the US will depend on the terms of the contract and whether a force majeure clause exists. However, there are several categories of events that are typically included in a force majeure clause that may apply to the Covid-19 pandemic. For example, many contracts provide that government intervention which makes performance impossible is a qualifying force majeure event. A clause that includes this language would presumably be found to cover government orders requiring shelter-in-place or the closure of non-essential businesses (assuming such events render contract performance impossible). If a contract is silent on force majeure, US courts will consider statutory and common law to determine whether to excuse performance. Depending on the jurisdiction, parties seeking to invoke force majeure may be able to rely on the following defenses:
Impossibility: Impossibility excuses performance only where performance has become objectively impossible as a result of a supervening event beyond the control of the parties that causes the destruction of either (i) the subject matter of the contract, or (ii) the means of performance. Impracticability under the UCC: Several states have adopted Article 2 of the Uniform Commercial Code (UCC). Section § 2-615(a) of the UCC provides that a seller is excused from timely delivery or non-delivery in goods (in whole or in part) where the seller’s performance has become impracticable because of either (i) unforeseen circumstances not within the contemplation of the parties at the time of contracting; or (ii) compliance in good faith with an applicable foreign or domestic governmental regulation or order (whether or not it later proves to be invalid). Frustration of Purpose: Frustration of purpose excuses performance where performance is still possible, but an unforeseen event substantially frustrates a party’s principle purpose for entering into the contract. In other words, the purpose for entering into the contract has been frustrated by the intervening unforeseeable event, and thus it makes little or no sense to continue performing the contract.
In the US, the applicability of a force majeure clause is contract-specific and clauses are typically interpreted narrowly. US courts will generally consider the following in determining whether a force majeure clause can be invoked:
Do the circumstances fall within the definition of a force majeure event under the contract? For example, does the clause cover an epidemic or pandemic, a change of law or regulation, or an act of government? Or is there “catch-all” language intended to cover other events beyond the reasonable control of the parties (though such language is construed narrowly)? If so, has the relevant event prevented, hindered or delayed performance? Typically, a force majeure clause will be triggered only if performance is truly impossible (not merely impracticable). A change in economic or market circumstances which makes the contract less profitable, or performance more onerous, is generally not regarded as sufficient to trigger a force majeure clause. Are there requirements that must be satisfied before the clause can be relied upon? It is common for force majeure clauses to require non-performance to be unforeseeable (which many US courts construe narrowly) and to include obligations to notify the counterparty of the force majeure event and to seek to mitigate its effects. A failure to comply with these requirements may mean a party cannot rely on the clause to avoid liability. What is the effect of reliance on the clause? It is typical for the parties’ obligations (or some of them) to be suspended without liability while the impact of the force majeure event continues. Often there will also be a right to terminate the contract if the force majeure event continues for a specified period of time.
contractUAL DISPUTES: INDONESIA
In order to assess whether COVID-19 constitutes a force majeure event under an Indonesian law governed contract, the starting point should be to check whether there are any express terms in the underlying contract that expressly refer to epidemics, pandemics (or equivalent wording) or other relevant events in the definition of force majeure. In the absence of any such provisions, it will be relevant for the parties to look into the provisions of the Indonesian Civil Code (ICC) in order to assess whether COVID-19 constitutes a force majeure event. Unfortunately, the ICC is not extensively clear about what constitutes a force majeure event. Article 1244 of the ICC, for example, only prescribes a force majeure event as “an unexpected event that cannot be imposed on the debtor” and Article 1245 of the ICC provides broadly that “no damages, costs and interests can be imposed upon a debtor if a debtor was unable [to perform its obligation] as a result of compelling or unintended circumstances”. Therefore under these provisions, it appears to be difficult to argue that COVID-19 or a pandemic does constitute a force majeure event. Having said that, the impact of a force majeure event differs from contract to contract and the question of whether a debtor can be excused entirely from its obligations under the contract will depend on how the relevant clause is drafted. In broad terms, however, the impact of a force majeure event may include:
extending time for performance of the contract; or excusing failure to perform; or rarely allowing suspension or termination of the contract.
In the event where a contract is silent on the impact of a force majeure event, the parties to a contract should once again, and as a general rule, look into the provisions of the ICC as to what obligations a debtor can be exempted from. Depending on the nature of the contract and the sector in which the parties engage in, they may also wish to review more specific regulations such as the construction law to make this assessment. In broad terms, unlike in any other event of default scenarios where the debtor may be required to pay for costs, damages and interest, the ICC exempts debtors to make such payments if the event of default is triggered by a force majeure event. If the contract includes a force majeure clause, the party seeking to rely on the clause must prove it has satisfied the contractual requirements, which generally involves establishing, among other things, that:
the circumstance that has occurred is within the scope of the force majeure clause and outside the party’s control; the circumstance caused the required degree of effect under the clause (prevents, hinders, renders impracticable or other formulation) on performance without any intervening voluntary act, or failure to mitigate; the circumstance is the sole reason for the failure to perform; the force majeure clause provides relief against that effect on performance; and any requisite notice has been given.
A claim may be begun or continued by or against one or more persons as representatives of any others who have the “same interest” in the claim, but the court’s permission is needed to enforce a judgment or order against anyone who is not a party to the action. The representative action procedure has not been widely used, in large part because of the restrictive manner in which the “same interest” requirement has been interpreted by the courts. It seems the procedure may, however, be used to bring data privacy claims seeking compensation for the loss of control over personal data, so long as the claimants do not rely on any personal circumstances affecting individual claimants (see this post on our Litigation Notes blog) – subject to the outcome of a pending appeal to the Supreme Court.
Representative actions
A GLO is an order which provides for the case management of claims which give rise to common or related issues of fact or law (referred to as the GLO issues). A judgment or order in relation to any of the GLO issues is binding on the parties to all claims being managed under the GLO.
Group litigation order (or GLO)
Competition collective proceedings
cLASS ACTIONS: UK
Collective proceedings relating to competition law infringements can be brought in the Competition Appeal Tribunal (CAT) on behalf of a class of businesses and/or consumers. Certain criteria must be met including that the claims raise the same, similar or related issues of fact or law and are suitable to be brought in collective proceedings. The CAT must also be satisfied that it would be just and reasonable for the person bringing the claim to be a representative of the class members. Collective proceedings may be authorised on an opt-in or an opt-out basis, at the CAT’s discretion.
In England and Wales, the main mechanism for bringing class or collective actions, the group litigation order (or GLO), proceeds on an opt-in basis. There are, however, two mechanisms that may proceed on an opt-out basis: the representative action procedure; and the collective proceedings order in the specialist Competition Appeal Tribunal. Each of these three mechanisms is described briefly below.
Unlike onshore in the UAE, the DIFC recognises Group Litigation Orders and representative actions. Group Litigation Order (or GLO) A GLO is defined as an order to provide for the case management of claims which give rise to common or related issues of fact or law (known as GLO issues). A GLO may not be made without the consent of the Chief Justice of the DIFC Court. Provided this consent is obtained, the DIFC Court may also make a GLO of its own initiative. The effect of a judgment or order given or made in a claim in relation to one or more GLO issues is that the judgment or order is binding on the parties to all other claims that are on the group register at the time the judgment is given or the order is made, unless the Court orders otherwise. The Court may also give directions as to the extent to which a judgment or order is binding on the parties to any claim which is subsequently entered on the group register. Representative Action Where more than one person has the same interest in a claim, the claim may be begun or the DIFC Court may order the claim be continued by or against one or more of the persons who have the same interest as representatives of any other persons who have that interest. Unless the Court otherwise directs, any judgment or order given in a claim in which a party is acting as a representative is binding on all persons represented in the claim, but may only be enforced by or against a person who is not a party to the claim with the permission of the Court. Neither the GLO nor the representative action procedures have been widely considered by, or used before, the DIFC Courts.
The Dubai International Financial Centre (the “DIFC”)
Class actions are not recognised onshore in the UAE. Therefore, any claims must be filed individually.
cLASS ACTIONS: UAE
cLASS ACTIONS: ITALY
Class actions were introduced in the Italian legal system through Legislative Decree No. 206/2005, the “Consumer Code” but they had not been widely used due to the narrow limits set out by the legal provisions. Things are likely changing thanks to a comprehensive reform (through Law no. 31 of 12 April 2019 which will entry into force in November 2020), which made several amendments to the existing law, with the aim of expanding the role of class actions in the Italian jurisdiction. The main changes made by the reform and applicable from November 2020 are the following:
Any case of contractual and tort liability could be dealt with class actions and not only consumers-related claims. Any individual or legal entity, as well as any non-profit organisation could bring class actions before Italian Courts and in particular anyone who holds "individual homogeneous rights" and not only consumers and users as it was before. There could be the possibility to join the class action also after the court issues a favourable decision on the merit (second opt-in mechanism).
In light of the above, notwithstanding that a limited number of class actions has been brought in Italy until today, it is likely that they will increase after November due to the legislative amendments.
It should be noted that another deterrent to bring class actions in the Italian jurisdiction is the fact that Italian Law does not recognise punitive damages. However, Italian Courts are changing their views and they have recently started to enforce foreign decisions which recognise punitive damages if certain requirements are met. This is likely to build up a favourable background for a more consistent use of class actions.
Punitive Damages
A number of class actions caused by the Covid-19 pandemic might soon be brought by associations and organisations against the Government for the mistakes made at the start of the Covid-19 outbreak. Other class actions will probably be brought against private nursing homes on the basis that they did not take the urgent adequate measures set out by the emergency legislation in a timely manner and have caused the quick spread of the virus with a high number of contagions.
Potential Covid-19 related class actions
cLASS ACTIONS: US
The U.S. has seen a significant increase in the number of filed proposed class action lawsuits in the wake of the Covid-19 pandemic, particularly in the areas of shareholder, consumer, employee, and insurance claims. As the 2007-2008 financial crisis showed, economic downturns can result in significant upticks in class action activity as individuals, shareholders and businesses seek to recover losses from events that affect significant numbers of class members in the same or similar manner. The impact of the current pandemic-caused economic downturn on class action activity in the U.S. is compounded by the health and safety impacts of Covid-19 on consumers and employees. Any individual or group of individuals may file a proposed class action lawsuit in the U.S. requesting class treatment for a defined class that meets the requirements of Federal Rule of Civil Procedure 23 for class certification. Generally, the Requirements of Rule 23 include that:
The number of class members is so great that joinder of each member as an individual plaintiff would be impractical; The class members share common questions of law or fact; The claims or defenses of the proposed class representative(s) are typical of the claims and defenses of the class members; and The proposed class representative(s) can fairly and adequately protect the interests of the absent class members. Fed. R. Civ. P. 23(a).
If a proposed class action lawsuit is not dismissed by the court for a defect in the pleadings at inception, the lawsuit will proceed to discovery, culminating in a motion for certification of the class filed by the plaintiff based upon the evidence developed in discovery. If the court certifies the proposed class, the case proceeds to trial or settlement. As a practical matter, certified class actions rarely proceed to trial as defendants are compelled to settle rather than risk potentially overwhelming liability if the representative plaintiff(s) prevail at trial due to the sheer numbers of class members (even if individual class members’ damages are small). Examples of currently-pending pandemic-related class action lawsuits in the U.S. include: a proposed class of employees of fast food chain McDonald’s claiming that the chain created a public nuisance (increased virus spread) by keeping restaurants open during the pandemic; a proposed class of ticketholders of cancelled Delta Airlines flights claiming that the airline breached a full refund guarantee by providing vouchers for future flights rather than cash refunds; a proposed class of consumers of sanitary goods purchased from Amazon.com claiming that the technology company charged unconscionably high prices for toilet paper and hand sanitizer; and a proposed class of families of elderly nursing home residents who succumbed to the virus claiming that the nursing home failed to take proper safety precautions and to properly care for their patients during the pandemic. Currently, there is legislation pending in the U.S. Congress and in a number of states concerning tort immunity for businesses against COVID-19 related lawsuits, particularly tort lawsuits, which could have an impact on the uptick in class action litigation in the U.S. Some state governors have already granted immunity by executive order to certain industries, including healthcare companies in particular. Nevertheless, we anticipate that the pandemic will be a continuing driver of increased class action litigation into the foreseeable future.
INSOLVENCY DISPUTES: UK
In the UK, insolvency litigation has been increasingly prevalent in recent years. That is largely a result of three factors.
First, the traditional difficulty for officeholders of insolvent companies of funding litigation (and providing security for costs) has in many cases been overcome by the increased availability of litigation funding and insurance products. Second, there is an increased willingness on the part of officeholders to realise value for a company’s asset via the sale of claims, including previously unassignable claims available only to an officeholder which permitted certain pre-insolvency transactions to be avoided. Third, high profile collapses can lead to investigations (including by Parliamentary Select Committees) and both potentially lead to follow-on civil claims. While not necessarily well-founded, the public profile alone can be sufficient to encourage claims and these need not be limited to claims against an insolvent company’s officers – professional advisers and counterparties who are seen to have played some role in the company’s demise can all be brought in. Equally, those investigations give rise to a culture of challenging perceived corporate excesses or mismanagement, including via the courts.
In many ways, England and Wales is an ideal forum for insolvency litigation. In relation to former officers of companies, the English process places an emphasis on often forensic investigation of their decision-making with the benefit of broad-ranging disclosure of documentation. The corporate governance regime is well established and relatively strict and, though it places significant weight on business decisions made by directors in good faith, their legal duties are onerous and provide traps for the unwary. Further, the ready availability of directors and officers insurance often means that there is a fund against which to enforce any successful claim. For claims between an insolvent company and a third party, the English courts are well used to hearing claims by insolvent companies whether that claim is related to the events leading to insolvency or not. The Commercial Court provides a more straightforward court process designed to ensure a speedier determination of commercial disputes by judges with a wealth of relevant experience. For third parties claiming against the insolvent company, the English process for determination of proofs of debt is expedited and relatively inexpensive compared to traditional litigation. In addition, the English law of property and fiduciary obligations, including via recognised beneficial ownership structures but also proprietary remedies, provides routes by which creditors can seek to claim a proprietary interest in the company’s property or even property which has transferred to third parties, maximising their returns. As to intercreditor disputes, the prevalence of English law in the financial markets (including many LMA and ISDA standard form agreements) means that the English legal market is well placed to resolve disputes between creditors. Though professionally drafted, well advised creditors can often find means to challenge the effect of contractual language (for example, relating to waterfalls for payment) including to obtain a strategic advantage in any negotiations. All of the above must now be seen in the context of the Corporate Insolvency and Governance Act 2020, passed by Parliament in a matter of weeks in response to the financial effects of the Covid-19 pandemic. The Act introduces radical reforms to English insolvency and contract law, in the form of a first debtor-in-possession procedure called a company moratorium and an ban on the exercise of termination clauses triggered by insolvency when a company enters an insolvency process. Both move slightly away from English law’s traditional creditor protection angle and are more debtor-friendly. Both measures are likely to be tested in the courts. Likely flashpoints include whether a moratorium is likely to promote the rescue of a company as a going concern (as required by the Act), the decisions of directors and the monitor during the moratorium and the ability of the court to permit termination of a contract on an insolvency ground where its continuation is causing the creditor “hardship”. The Act also introduces a new restructuring plan, effectively a supercharged scheme of arrangement under which even classes of creditors that vote against the arrangement can be bound if the court considers that no member of the class is worse off under the arrangement than they would be on the most likely alternative, often insolvency. Expect an increase in litigation from creditors dissatisfied by the voting outcome to challenge restructuring plans on the basis that their position is worse than in the most likely alternative or that the plan is otherwise unjust or inequitable.
In 2019, a new DIFC Insolvency Law came into force (DIFC Law No. 1 of 2019). Amongst other changes, the DIFC Insolvency Law introduced the concept of a Rehabilitation Plan which allows a DIFC company, which is or is likely to become unable to pay its debts, to apply for rehabilitation, if there is a reasonably likelihood that an agreement can be reached with its creditors. The Rehabilitation Plan grants an automatic moratorium of 120 days from the date the directors notify the court of the intention to propose a rehabilitation plan to the company’s creditors and, subject to limited exceptions, any termination or modification provision in any contract linked to an insolvency related term ceases to have effect during the moratorium period. Under Articles 113 and 115 of the DIFC Insolvency Law, if in the course of the winding up of a DIFC company, the company goes into insolvent liquidation, prior to the commencement of the winding up process one or more directors of the company ought to have known that there was no reasonable prospect of the company avoiding going into insolvent liquidation, and that person was a director of the company at the time, the director may be held accountable and be required to compensate the company. On 21 April 2020, the President of the DIFC issued the DIFC COVID-19 Directive (Presidential Direction No. 4 of 2020). The DIFC COVID-19 Directive introduced emergency measures which, unless revoked or amended, for the period until 31 July 2020 to address the impact that Covid-19 was having, and continues to have, on businesses in the DIFC. While the majority of the measures introduced deal with employee related issues, Section 15 of the DIFC COVID-19 Directive suspended the wrongful trading rules relating to directors’ actions in respect of DIFC established companies, as set out in Articles 113 and 115 of the DIFC Insolvency Law. The intention behind the suspension is to ensure that directors of DIFC companies are able to take decisions to continue to trade, incur new credit and make decisions in the current uncertain environment, which may otherwise cause directors concern about the potential for personal liability under the DIFC Insolvency Law’s wrongful trading regime. At present, it remains unclear how the DIFC Insolvency Law regime, as well as the insolvency-related emergency measures under the DIFC COVID-19 Directive will be used by DIFC companies.
The UAE Bankruptcy Law came into force at the end of 2016 (Federal Decree Law No. 9 of 2016) (as amended) and modernised the UAE bankruptcy regime. It applies to commercial companies and individuals who are considered merchants under the Commercial Companies Law. This was followed by the introduction of the UAE Insolvency Law in 2019 (Federal Decree Law No. 19 of 2019) which applies to those who do not fall within the scope of the UAE Bankruptcy Law, namely natural or civil persons. While there have been no amendments to the bankruptcy laws of the UAE in response to Covid-19, considerable care should be taken to ensure certain transactions cannot be attacked within the two year ‘voidable’ transaction period. Transactions should be conducted on the basis that they are for full value and do not prefer one creditor over another. This particularly important when the parties are selling or buying assets, granting or receiving new rights or interests (including money), or granting or receiving other valuable commercial benefits and burdens placed upon the parties. Further, under the UAE Bankruptcy Law, directors and de facto directors are held personally and criminally liable for certain acts or omissions, including “failing to maintain adequate books and records”. The Covid-19 crisis is unlikely to provide a sufficient excuse.
INSOLVENCY DISPUTES: UAE
Because of the global economic downturn caused by COVID-19, companies can expect an increase in US bankruptcy filings. The American Bankruptcy Institute, for example, reported a 48% increase in US bankruptcy filings in May 2020 over the prior year. If companies’ business partners or other counterparties file for bankruptcy, companies may need to file claims as creditors or take other actions in bankruptcy proceedings to protect, for example, payments owed by the debtor. Moreover, the US bankruptcy code generally imposes an automatic stay on all pending litigation with the debtor. In this way, companies engaged in litigation with bankruptcy filers may find their cases stayed. The pandemic may also affect the timing and status of pending bankruptcy cases. For example, bankruptcy courts may delay or suspend proceedings in Chapter 11 reorganizations under 11 U.S.C. § 305 if the court determines it is in the best interest of creditors. Using this authority, courts may attempt to delay or suspend proceedings in hopes that the effect of stay-at-home orders and other restrictions on the bankrupt entity’s business will lessen as those restrictions lift.
Bankruptcy proceedings
INSOLVENCY DISPUTES: US
INSOLVENCY DISPUTES: ITALY
the entry into force of the new insolvency code has been postponed to 1 September 2021; insolvency petitions, including voluntary submissions, filed between 9 March 2020 and 30 June 2020 are not admissible, save for those filed by public prosecutors to obtain precautionary measures aimed at protecting equities and companies. This period will not be taken into account for the calculation of the claw back period; all terms of the proceedings related to agreements among creditors, restructuring agreements, agreements for the composition of the crisis and approved consumer plans already approved and expiring after 23 February 2020 will be extended by six months; and debtors concerned by proceedings related to the aforementioned agreements ongoing as of 23 February, are entitled to: (a) request the Court to issue an extension (no longer than 90 days) for filing a new agreement; or (b) request an extension of up to 6 months to fulfil covenants in the agreements.
The Italian Government with the Law Decree no. 23 of 8 April 2020 (converted into law with Law no. 40 of 5 June 2020) adopted various urgent measures in the insolvency field, aimed at preserving the business of companies which were hardly impacted by the Covid-19 pandemic and with effects to both pending and new insolvency proceedings. The major amendment are listed below:
Insolvency reform
Public Inquiries and judicial review: UK
Last updated 20 November 2020
The Coronavirus Act 2020 (along with the key secondary legislation made under the Act and other existing acts) introduced a range of emergency measures to address the Covid-19 outbreak. The introduction of these measures has been rapid and, with plenty of ongoing uncertainty around the scope of some of the measures introduced. For example there is the risk of secondary legislation and other guidance falling foul of primary legislation including the Human Rights Act. There is also the risk of misapplication of the measures. There have, for example, already been reports of individuals being wrongly fined under the new legislation. The ongoing phased exit from lockdown (whether coordinated through guidance or legislation) is also likely to create further uncertainty. The erroneous introduction or misuse of these powers could provide another ground for litigation. This could take the form of test case claims for judicial review, most obviously on the grounds of illegality, procedural unfairness, or irrationality, with the result affecting the position of a wide class of people. Also, where the errors give rise to private law claims, most obviously torts such as breaches of the Human Rights Act 1998, this could give rise to class actions. For example, Covid-19 outbreaks in state institutions – such as in prisons – could well give rise to claims if appropriate measures are not taken.
Judicial review challenges
In the UK, the Prime Minister has committed to an independent inquiry into the Government’s handling of the coronavirus pandemic. set up in the aftermath of the pandemic. The structure of the inquiry is unclear at this stage, although the Prime Minister has been urged to confirm that the inquiry would be under the Inquiries Act 2005. The issues which any eventual independent inquiry will examine – which will be framed by the inquiry’s formal “terms of reference” – will no doubt depend in large part on the developing political landscape, and on how matters develop over the coming months. Some of the possible issues that we see an inquiry covering include issues around the supply of PPE, supply chain issues, the impact of the crisis on BAME individuals, and the Government’s actions in light of the scientific advice from groups such as SAGE. In practice, any inquiry is likely to be set up with a broad remit, with a number of individual investigations into particular aspects of its work. In that way organisations and individuals which have an interest or experience in particular aspects of the Covid-19 crisis would be able to contribute to that workstream without becoming heavily involved in the entirety of the inquiry. From the perspective of commercial organisations, the inquiry could cover a very wide range of sectors and industries. For instance, pharmaceutical companies may be called on to give evidence in relation to the development of a vaccine and treatments. If the inquiry looks at the economic aspects of the crisis, large banks and financial organisations may be approached for evidence. The key risks to organisations is reputational as inquiries can be very damaging if not approached in the right way. A critical report from a high-profile inquiry could attract considerable negative publicity. Click here to listen to our podcast on the possible establishment of a public inquiry into the handling of the coronavirus pandemic.
Public inquiries
The alternative to a public inquiry is the setting up of parliamentary select committees. For example, the Health Committee and the Science and Tech Committee have already launched a joint inquiry into the government’s response. They started hearing oral evidence in October 2020, and the topics they expect to cover as part of their inquiry include testing, social care, lockdown measures, modelling/stats, wider preparedness, government messaging and the impact on BAME communities.
Select committees
Public inquiries and judicial Review: US
As US federal and state agencies respond to the Covid-19 crisis, companies can expect that these agencies will issue new rules and decisions with limited notice and that may have adverse effects on their business. For example, although US federal agencies are generally required to issue public notice of proposed rules at least 30 days before the rules’ effective date, agencies may bypass such notice requirements and issue rules with immediate effect when the agency has “good cause” to find that the notice is “impracticable, unnecessary, or contrary to the public interest.” 5 U.S.C. § 553. Parties “suffering legal wrong because of [US federal] agency action, or adversely affected or aggrieved by agency action within the meaning of a relevant statute,” may seek judicial review of the agency’s action under the federal Administrative Procedure Act (APA). The statute relevant to the agency’s action may specify the form and forum of the judicial challenge; otherwise, such challenges may be brought in any US court of competent jurisdiction and may seek “any applicable form of legal action,” including declaratory judgments, injunction, or habeas corpus relief. 5 U.S.C. § 703. The challenges are usually brought against the relevant agency or its head or, where the underlying statute does not specify a review proceeding, the United States. Only “final” agency action is subject to judicial review, unless otherwise specified by statute. 5 U.S.C. § 704. As such, “preliminary, procedural, or intermediate agency action” is not typically subject to judicial review. Moreover, parties must usually “exhaust” their administrative remedies—e.g., by completing an appeal through the agency’s internal appeal process—before they may file suit in a US court to challenge the agency’s decision. The scope of judicial review is limited and generally deferential to agency decision making. 5 U.S.C. § 706. Courts may “hold unlawful and set aside” agency action that:
Is “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law,” which is a high standard requiring that an agency action “has relied on factors which Congress has not intended it to consider, entirely failed to consider an important aspect of the problem, offered an explanation for its decision that runs counter to the evidence before the agency, or is so implausible that it could not be ascribed to a difference in view or the product of agency expertise,” O’Keeffe’s, Inc. v. US Consumer Product Safety Com’n, 92 F.3d 940, 942 (9th Cir. 1996); Violates the US Constitution; Is “in excess” of the agency’s statutory authority; Failed to observe required procedures; Is “unsupported by substantial evidence” where the decision involved an administrative hearing (e.g., before an administrative law judge); or Is “unwarranted by the facts to the extent that the facts are subject to trial de novo by the reviewing court.”
i) ii) iii) iv) v) vi)
If the judicial challenge is successful, the reviewing court will “set aside” the agency action, returning the challenger to the status quo prior to the agency action. States, including New York, may have similar administrative procedure acts or regulations, which govern the agency rulemaking and decision process and how parties may judicially challenge agency decisions. See, e.g., N.Y. C.P.L.R. Art. 78. There may also be other remedies available to challenge administrative action. For example, in certain circumstances, parties may be entitled to a “writ of mandamus” from a court to “compel the performance of a ministerial act” by an agency—i.e., a clearly defined, non-discretionary agency act—where the party has a “clear legal right to the relief sought.” See, e.g., Morales v. Gugerty, 120 A.D.3d 1349, 1350 (App. Div. N.Y. 2014).
Public inquiries and judicial Review: AUSTRALIA
A large part of the Commonwealth and State and Territory governments’ response to the Covid-19 pandemic has involved making directions pursuant to statutory powers conferred on the relevant Chief Health Officer. These directions have, and are likely to continue to be, issued rapidly (with limited notice) and inevitably have adverse effects on businesses. Judicial review of a decision is available to persons who are “aggrieved” (for review under the Administrative Decisions (Judicial Review) Act 1977 (Cth)) or whose rights, interests or legitimate expectations are affected by a decision. However, overturning a direction via judicial review is difficult, requiring an error of law. Many of the powers exercised in the context of Covid-19 are enlivened by the decision-makers’ satisfaction of a matter of opinion or policy, such as whether a direction is necessary to deal with a public health risk. Courts may be inclined to defer to the decisions of public health experts. One potential avenue for challenge against such directions is on constitutional grounds, for example, that the direction (or its enabling legislation) contravenes an implied limitation on legislative power. Examples of constitutional challenges against Covid-19-related directions which have been brought include:
Constitutional or judicial review challenges
challenges to border closure directions in Queensland and Western Australia, on the basis that these directions infringe the freedom of interstate movement granted by s 92 of the Constitution; and challenges to prohibitions against public protests in support of the ‘Black Lives Matter’ movement made in reliance on community transmission risk.
Public Inquiries and Special Commissions of Inquiry have already been established in relation to various aspects of the pandemic. For example, a Special Commission of Inquiry has been established to investigate the Ruby Princess incident, in which a number of the passengers (all of whom were permitted to disembark) were subsequently found to have been infected with Covid-19. A public inquiry has also been set up in relation to the hotel quarantine program in Victoria, where issues with quarantine enforcement have led to a further outbreak of the coronavirus. Inquiries can also have substantially greater breadth. A useful illustration is the NSW Covid-19 public inquiry which covers “any matter relating to the NSW Government’s management of the Covid-19 pandemic” as well as “any other related matter”. The potential breadth of these inquiries means that a variety of organisations may be called upon to give evidence. Given their highly publicised nature, with transcripts and submissions being made publically available, organisations must take care to ensure that any contribution to an inquiry is approached correctly, so as to avoid risking reputational damage.
Public Inquiries and Special Commissions of Inquiry
Similar considerations apply to Select Committees, which are another alternative to public inquiries or commissions of inquiry. Select Committees, like inquiries, can be broad in scope, and will often invite submissions from organisations or individuals on any aspect of its work. A Select Committee into Covid-19 to inquire into the Australian Government’s response to the Covid-19 pandemic has already been set up, and is hearing evidence from evidence from industry groups and other organisations.
Select Committees
cLASS ACTIONS: GERMANY
In Germany, any type of group action proceeds on an opt-in basis in the wider sense. In so-called Model Declaratory Proceedings, which can be commenced only by specific Qualified Institutions, potential claimants may register in a claims register. As regards Capital Markets Model Case Proceedings, where one model claimant will litigate the dispute, individual actions will need to be filed in order to benefit from the outcome. In recent years, litigation funders, legal tech providers and specialised claimant law firms have driven mass-litigation specifically, but not limited to, in the B2C sphere by bundling claims by way of assignment.
Under the Model Declaratory Action (“MCA”) so-called qualified institutions can seek a declaratory judgment on factual and/or legal questions of relevance for many consumers. The consumers themselves are not party to the MCA but if they register in a claims register the limitation period for their individual claims will be suspended and the results of the MCA will have a binding effect. While a settlement with all registered claim holders can be struck in the MCA – a prominent example would be the Volkswagen case – consumers, absent such settlement, will need to pursue their payment claim individually. For more background see this post in our class action hub. It is worth noting that German consumer protection associations are actively monitoring the approach to the Covid-19 pandemic by specific industry sectors, including pharmacies, travel companies, airlines and event organisers.
Model Declaratory Action
Capital Markets Model Case Proceedings are limited in their scope to claims based on wrong, misleading or omitted information in the capital markets. The Capital Market Model Case Proceedings are aimed at determining overarching issues of fact and/or law which are relevant for many proceedings. No damages will be awarded in these proceedings but individual payment claims will have to be pursued separately. In order to participate in the Capital Markets Model Case Proceedings, individual claimants need to commence an individual action and then file an application for the institution of Model Case Proceedings. This application must be joined by at least nine further individual claimants. One of the claimants will be the model case plaintiff. The results of the model case proceedings will be binding upon the group of claimants. Unlike in the case of the Model Declaratory Action, an opt-in by a mere registration of claims is not available.
Capital Markets Model Case Proceedings
In recent years, specialist claimant law firms, legal tech providers and litigation funders have developed and furthered business models in which individual claims are bundled by way of assignment to claims vehicles. These claims vehicles then bring the bundled claims in one action. These types of litigation have occurred not only in consumer related matters, most prominently in connection with the Diesel revelations, but also in the context of cartel follow-on damage claims. In order to participate in a bundled action, claimants will need to assign their claims to the claims vehicle.
Bundling of claims by claims vehicles
