It would appear that Coronavirus is already creating a number of contractual and insurance disputes, with far-reaching consequences for the economy.
As businesses struggle to fulfil contractual duties amid the coronavirus pandemic, so the disputes begin. Can lockdown restrictions trigger force majeure clauses, allowing parties to wrest free of their obligations?
With no easy answers, lawyers and the courts are likely to be busy for the foreseeable future, with much at stake for the wider economy. Another key battleground relates to ‘business interruption insurance’, and the extent to which policyholders can turn to insurers to mitigate the pandemic’s effects. But was business interruption insurance ever intended to cover a global pandemic?
In an unusual move, the financial regulator is seeking answers from the court by bringing its own test case against insurers.
Force majeure clauses will be a major issues for commercial lawyers over the foreseeable future.
Force majeure is intended to cover situations where a party cannot fulfil its contract obligations because of an unavoidable and unexpected event over which it had no control. But it is far from a ‘get out of jail free’ card.
The first thing to note is that force majeure is different in the civil and common law. Civil law recognises a ‘doctrine’ of force majeure, but this background framework does not exist in the law of English and Wales, where it all comes down to the precise wording of the contract itself.
I reality you are more likely to be able to claim force majeure due to Covid-19 in civil law jurisdictions such as France and Spain, than in English law – because of the ability to rely on legal doctrines of force majeure and of hardship.
For contracts governed by English law, force majeure clauses will fall broadly into two camps: i) those that specify a list of the events that will trigger force majeure, and ii) those with more ‘generic’ wording and, perhaps, more wiggle room.
Contracts that specify ‘pandemic’ as a force majeure event are rare and will normally involve a party from Asia who has already learnt lessons from SARS.
But even if ‘pandemic’ is listed, invoking force majeure may not be easy. It is that thought that Covid-19 can be considered a force majeure event as Ebola was. But in reality you have to look at what is being prevented and whether Covid-19 is really preventing it. If you’re running a restaurant, for example, it could be argued that it is government regulations, rather than coronavirus itself, that is the relevant event.’
And even if the regulations – rather than the virus itself – are capable of triggering the force majeure clause, this will not help every sector. The regulations don’t say that the construction industry is shut down, but in March and April most of the sites were closed because employers were doing the right thing to keep people safe. This means that in a construction dispute, the other party will say – what was stopping you from fulfilling the contract? Not the regulations.’
One concept sometimes listed as giving rise to force majeure is an ‘act of god’ – an uncontrollable, unpredicted, natural event. So is coronavirus an act of god? Again, there is the question of whether the virus itself caused the loss, or government intervention.
There is also the question of foreseeability. Back in December, you could say that a pandemic was not foreseeable, but you couldn’t say that in April or May. There is a strong argument – from 19th century case law – that an act of god needs to be unforeseeable; so you probably can’t rely on an act of god for contracts entered into after coronavirus became known.
Parties may also seek to invoke ‘change in law’ provisions in their contracts to free them of obligations. If there has been a “change in law”, then relief can be obtained. What is interesting about change in law clauses is that they are not generally restricted to “law” in the sense of decisions by parliament or the Supreme Court.
‘But “law” often includes things like mandatory guidance, and much of what has happened in relation to coronavirus has been in the form of mandatory guidance, or edicts issued by government.
There was a week or so between the instruction given by the Prime Minister to “stay home” and the Coronavirus Act in which the regulations were made law. That means that during that period it was just mandatory guidance that was in force.
Even if parties can establish that the pandemic itself, or the Covid-19 rules, fall into the contract’s definition of force majeure, that will not be the end of the matter. Depending on the wording of the clause, they will probably still need to show that they were prevented from fulfilling their obligations and could not have fulfilled the contract in another way.
With so many legal questions thrown up by the pandemic, the approach taken by the courts will be crucial.
Behind closed doors
With a potential torrent of litigation on the horizon, the Cabinet Office recently urged parties to consider mediating disputes so to avoid overwhelming the courts.
Two former Supreme Court presidents, Lord Neuberger and Lord Phillips, have made similar calls.
Is this viable? ADR will be attractive in sectors where parties want relationships to continue – such as construction, where projects are likely to be delayed rather than cancelled.
But in sectors where pricing is linked to oil, many parties may want to extract themselves from loss-making contracts with no end in sight. In that scenario, the chances of a successful mediation aren’t good.
International arbitration – which already allows for pleadings and witness hearings to be done electronically – is well placed to deal with disputes in the current climate. But there is one important drawback: unlike court decisions, arbitrated disputes will not provide any binding authorities to develop the law.
The Covid 19 crisis will be an opportunity for the Court of Appeal and Supreme Court to provide useful clarification and develop contract law. So we do need to hope cases do end up in open court and not all are done behind closed doors in arbitration tribunals. If so there will be a lot of case law from around 2020/21 in future text books.
When it comes to coronavirus-related disputes, the arguments are not just between contracting parties. There are also major rows with insurers.
With so many businesses of all sizes unable to carry on trading, have insurers ridden to the rescue? Those who purchased business interruption insurance (BII) may have assumed that it was suitable for the current situation, but in practice its impact is likely to be minimal.
In a relatively small number of cases, BII was purchased in its own right, unrelated to a business’s property insurance, and these policyholders are in a better position. But the vast majority of policies were bought as part of a business’s property damage insurance and were either included as part of the package or bought as an add-on. These policyholders face a huge hurdle because they need to be able to show damage to their property for any claim to succeed. Could that be possible?
Setting aside the question of physical property damage, there are other problems facing Covid-related BII claims. The policies will list insured perils, most of which will be unhelpful – such as fire or storm. Sometimes the cover can include ‘denial of access’ to the premises. This was used, for example, by businesses cordoned off after the 2005 Buncefield oil depot explosion. There could be a debate as to whether the coronavirus restrictions can amount to a denial of access.
More directly relevant will be clauses that specify infections or ‘notifiable diseases’ as a trigger for cover. These can relate to an incident on the policyholder’s premises, or within a specified geographical area.
Does Covid-19 count as a ‘notifiable disease’? Only from 6.15pm on 5 March, which is when the government added it to the list of notifiable diseases under the relevant regulations. ‘Many people are upset by the government’s delay in deeming it a notifiable disease. There are also arguments over whether the disease had to be notified at the inception of the policy, or whether the policy allows new diseases to become notifiable. There is a good argument to say that the policy is the insurer’s document, so if the insurer didn’t want to include new notifiable diseases, it should have specifically excluded that.
From an insurer’s standpoint, BII was never intended as insurance for a global pandemic. If that is what policyholders wanted, then that is what they should have bought – and it would have cost much more.
With the BII arguments raging, and so many small and medium-sized businesses affected, the Financial Conduct Authority has taken an unusual step.
The regulator is bringing a test case to get court guidance on 17 common BII policy wordings, which it selected after wading through 500 relevant policies from 40 insurers. Eight insurers are participating in the case. But it is worth noting that in April the regulator conceded that insurers will not need to pay out in relation to the coronavirus pandemic ‘at least in the majority of cases’. It says the test case is focused on ‘the remainder of policies that could be argued to include cover’.
The FCA has said it is bringing the test case to provide ‘clarity and certainty’ for those involved in BII disputes. It’s all about achieving certainty for the market. But the reason for the urgency is so that people can get their money. They have businesses that are struggling and they thought they were covered for this. The FCA hasn’t read the mood of policyholders. This is not a point of principle for them, it is about getting their claims paid.
Whether the arguments revolve around insurance or contractual issues, it is clear that the Covid-related disputes to come before the courts will have far-reaching consequences.