COVID-19 Coronavirus: Preparing for and Managing Cross-border Commercial Disputes

In the current global economic environment, commercial disputes have already begun to arise, as businesses exhaust cash reserves and seek to avoid or renegotiate contractual obligations. This OnPoint provides practical advice to assist in-house counsel in preparing for and managing these disputes.

Pro-actively assess risks and pressure points

Before any dispute arises, identify any notice requirements, escape hatches and available remedies in the applicable contract(s). In particular:

• Analyze any clauses which would allow for the suspension or modification of contractual obligations. This would include force majeure, material adverse change, renegotiation, hardship and other similar clauses.
  
• In the absence of any such clauses, consider whether analogous legal doctrines may be applicable (such as force majeure in civil law jurisdictions, or frustration, impossibility and impracticability in common law jurisdictions).
  
• Keep an open dialogue with suppliers and customers in order to allow the maximum time for difficulties to be resolved before disputes are unavoidable.
  
• In advance of formally commencing a dispute, consider sending pre-action claim letters and perhaps draft notices of arbitration, which can escalate pressure on a counterparty and potentially lead to a settlement.
• If there is room to renegotiate force majeure and hardship clauses, consider using the model clauses for international contracts, recently provided by the ICC, which aim to overcome the difficulties associated with the differences in the concepts of force majeure and hardship from country to country.¹
  

Consider alternatives to litigation

If the relevant contract is silent regarding forum selection or provides for disputes to be resolved through litigation, consider the benefits of a submission agreement by which the parties agree to submit their disputes to arbitration, which has the following advantages over litigation:

• The parties have control over the selection of the decision-maker and the procedure, which results in a greater flexibility than litigation governed by set rules;
  
• Arbitration proceedings are generally faster and less expensive than litigation, particularly considering that national courts will be experiencing a significant backlog in the coming months and years;
  
• Arbitration proceedings are private and confidential; and
• It is generally easier to enforce an arbitral award, compared to a national court judgment, in a foreign jurisdiction.

Ensure that the submission agreement is valid and enforceable by:

• Complying with any modification requirements in the underlying contract;
• Clearly demarcating the issues that can be referred to arbitration;
  
• Confirming that the governing law of the submission agreement is the same as that of the underlying contract, unless there are good reasons for a change;
  
• Specifying the rules of a particular arbitral institution, or, if the parties prefer the greater flexibility of an ad hoc arbitration, the agreement should provide for the arbitration to be conducted under the UNCITRAL Rules or an equivalent;
  
• Specifying the number of arbitrators (one or three) and the language of the arbitration;
  
• Choosing the seat (i.e., legal place) of the arbitration, which should be an arbitration-friendly jurisdiction that is a signatory to the New York Convention for the enforcement of arbitral awards; and
• Executing the arbitration submission agreement by an authorized representative with proof of the necessary legal or statutory authority to agree to arbitrate the dispute covered by the submission agreement.

Consider mediation as a prior step or an alternative to arbitration. Mediation has certain benefits which are particularly relevant in the current circumstances, including:

• It is generally quicker and cheaper than both litigation and arbitration;
  
• It can lead to a narrowing of the dispute so that, even if it proceeds to arbitration, the arbitration can be more cost-efficient;
  
• It is well-suited to the preservation of an existing commercial relationship, even if the mediation does not lead to a settlement; and
• Although a mediator cannot impose a resolution on the parties, any settlement agreed by the parties through mediation may be enforceable pursuant to the United Nations Convention on International Settlement Agreements Resulting from Mediation (the Singapore Convention)^.2

Consider procedures designed to increase the speed and cost-efficiency of arbitrations

If a dispute is submitted to arbitration, there are procedures available to increase the speed and cost-efficiency of the proceedings, including:

• Employing innovative means to limit the costs of legal representation, such as contingency fees, blended rates, fee estimates and fee caps, portfolio pricing, and using counsel with dedicated pricing specialists.
  
• Making use of third-party funding, which can reduce the costs and risks of arbitration not only for impecunious claimants but also businesses with strong balance sheets that wish to reduce their legal expenses, provided it is legal in the relevant jurisdiction(s);³
  
• Modifying or waiving any contractually stipulated pre-dispute steps such as a defined period of good faith negotiations;
  
• Bifurcating a case into discrete issues for determination (usually jurisdiction, merits and quantum), which can allow the parties to either dispose of the entire case at an early stage or narrow the issues in dispute and thus increase the chances of a settlement;
  
• Using any expedited procedure in the applicable arbitration rules to shorten the time-frame of the dispute, though the arbitration will still need to be carefully managed by the arbitrator(s) to ensure it finishes within the stipulated time-frame (usually six months);⁴
  
• Disposing of spurious claims or defenses through any summary judgment mechanisms in the applicable arbitration rules;⁵
  
• Interim relief procedures, including emergency arbitrators, which can be used to preserve the parties’ underlying business as much as possible and increase the chances of a negotiated settlement;⁶
  
• Virtual hearings, which arbitrators and arbitration counsel are accustomed to using (and have been using since long before the COVID-19 pandemic erupted), can circumvent travel restrictions and significantly reduce time and costs; and
• Modifications to “typical” arbitration procedures, such as dispensing witnesses (fact or expert) in favor of a documents-only arbitration, agreeing to limited or no document production, appointing one arbitrator rather than three, limiting the number and length of written submissions, and forgoing post-hearing briefs.

Conclusion

The coronavirus crisis needs to be met with a healthy dose of flexibility and empathy for one’s contractual counter-parties coupled with a thorough analysis of the contract and the rapidly changing legal norms. Dechert has an experienced team of specialists in arbitration, litigation, and all forms of dispute resolution who can advise you in relation to any disputes that might arise or how to manage disputes that are already underway.

We would also like to thank Michael Losco, Seth Cumming and Alasdair Austin for their contributions to this OnPoint.

Footnotes

1) For more details on the ICC Model Clauses, see ICC Force Majeure and Hardship Clauses (March 2020).

2) At the time of writing, 52 countries have signed the Singapore Convention (including China, India, Iran, Israel, Malaysia, Nigeria, South Korea, Saudi Arabia, Turkey, Ukraine, the United States of America, Uruguay, and Venezuela), though only three have ratified it (Fiji, Qatar and Singapore).

3) Jurisdictions in which third-party funding is legal include Australia, Canada, England and Wales, France, Germany, Hong Kong, Singapore, Sweden, Switzerland, and various states and territories of the United States of America. The Dechert International Arbitration team has acted as counsel in a number of third-party-funded arbitrations. The members of the team in Singapore are counsel in one of the first third-party-funded arbitrations in Singapore, for which they were highly commended in the Financial Times 2019 Asia-Pacific Innovative Lawyers Report.

4) For examples of expedited procedures, see HKIAC Administered Arbitration Rules (2018), Rule 42; SIAC Rules (2016), Rule 5; ICDR International Dispute Resolution Procedures (2014), Article E-1; CIETAC Arbitration Rules (2015), Article 56; SCC, Rules for Expedited Arbitrations (2017); ICC Arbitration Rules (2017), Appendix VI.

5) For examples of summary dismissal procedures, see SIAC Rules (2016), Rule 29; SCC Arbitration Rules (2017), Article 39; and HKIAC Administered Arbitration Rules (2018), Article 43. Furthermore, it is generally accepted that it is within an arbitral tribunal’s inherent power to dismiss a manifestly meritless claim at an early stage. See, e.g., ICC Note to Parties and Arbitral Tribunals on the Conduct of the Arbitration under the ICC Rules of Arbitration (2019), paragraph 74.

6) Virtually all arbitral institutions allow the parties to seek interim relief. For examples of emergency arbitrator procedures, see ICDR International Dispute Resolution Procedures (2014), Article 6; CIETAC Arbitration Rules (2015), Appendix III; HKIAC Administered Arbitration Rules (2018), Article 23; SIAC Rules (2016), Rule 30; ICC Rules of Arbitration (2017), Article 29; LCIA Arbitration Rules (2014), Article 9B; SCC Arbitration Rules (2017), Appendix II.