The Business Strategist – Disputes Edition

Business Disputes in a COVID World

Most of us have been working from home for a few weeks now. It has been a time of shock and transition for all of us as individuals and for the businesses we run and advise. From a legal standpoint, businesses had to focus their immediate attention on employment and cashflow issues.

In the U.S., that has included dealing with new laws such as the Families First Coronavirus Response Act (FFCRA), and the CARES Act, and state and local laws adopted in response to the emergency. Those issues continue to be important, of course, as evidenced by our Coronavirus Resources page.

In that first phase of the response to the crisis, commercial disputes largely took a back seat. That is changing.

Current Status of Commercial Disputes

In the first phase, the courts shut down all but essential operations and proceedings, adopting COVID procedures. In many court systems, this meant no court work on commercial cases, no new case filings, no ECF filings in non-essential cases, and similar restrictions. They began, and continue, to move their operations to remote status.

Non-judicial dispute resolution service providers, arbitrators, mediators, and the institutions which administer those services were disrupted like every business, but have continued to operate as they moved much of their staff to work from home and all of the proceedings they administer to remote status.

As with the rest of life and business, we are now entering the next phase, of what can be called the “new normal,” as we work to restore as much as possible of what we did pre-COVID in a COVID world. In the New York State courts, for example, Monday, April 13^th marked the beginning of their again handling non-essential cases (in part) in a new, virtual, format.

The same is happening elsewhere as state and federal courts in the U.S. move back from their first phase restrictions toward the conduct of court business as close in scope as possible to pre-COVID times.

There are courts, such as some federal district courts, which, apart from courthouse closings and trial adjournments, had fewer first phase restrictions, depending often on the assigned judge. Even in such courts, there has been in the early weeks more sympathy for requests for schedule extensions, adjournments and stays by parties impacted by COVID restrictions.

It will take time, yet, for all courts to return to more complete operations. New York State courts, for example, still are not accepting new non-essential case filings. But the tide is clearly and swiftly flowing toward business as close to usual as possible. Courts known for closely managing and moving cases can be expected to work hard to live up to their reputations and case management philosophies.

Arbitration services providers, such as AAA/ICDR and JAMS, along with arbitrators and mediators managing current cases, have moved quickly to adopt rules for virtual hearings, adapting their procedures to work on platforms such as Zoom™ and Endispute™. And services providing platforms supporting virtual mediation and arbitration proceedings have blossomed like spring flowers.

At the same time, after absorbing the initial shock of loss of business and the resulting mass terminations and layoffs, in which labor and employment and loan application assistance were most direly needed, the multiple liability issues generated by the crisis, overlaid on existing business claims temporarily back-burnered, are now coming into focus. Businesses are moving beyond initial advice about force majeure and other business termination issues and business interruption insurance and into planning and acting to limit their liability and pursue claims.

Contract disputes, insurance claims and coverage disputes, supply chain disruptions, and canceled projects caused by governmental orders continue to multiply. Affected businesses seeking relief must navigate a new set of options depending on their jurisdiction, industry and financial condition.

Companies seriously hit by the crisis, which is to say most companies, are welcoming the ability to move ahead with and resolve their claims if they are plaintiffs. On the other hand, defendants, particularly foreign defendants in U.S. court proceedings, are more inclined to protest they are not capable of supporting active litigation while mustering all of their reduced management and financial resources to work to keep their companies in business.

Even companies that have benefited from the crisis have developed liability issues related to it. Zoom Video Communications Inc.’s privacy problems are the most reported example.

So, what should business leaders and legal advisers do?

Things to Do Now

Even if the relevant courts in your jurisdiction are not now accepting filings of new non-essential cases, they probably will be doing so soon. And there is a lot to do to evaluate and preserve claims and defenses pending the restoration of court access. And there are alternatives to court-based litigation which may be available now.

First, whatever else you do, preserve the evidence. This is particularly important advice for businesses outside the U.S. The U.S. legal system prioritizes preservation of evidence. While statutes of limitation and filing deadlines may be being extended, the obligation of parties to a dispute to preserve evidence is not suspended.

Be aware the preservation obligation may attach before any formal claim or demand is made. U.S. lawyers are well familiar with the concept of a “litigation hold,” which, among other effects, often freezes ordinary data destruction cycles. Following such internal procedures, even if prescribed by local privacy law, such as the GDPR, is not likely to excuse the intentional destruction of potential evidence after the responsibility to preserve it has attached.

Next, if you are unable to perform a contract or your counterparty is not performing, understand your legal position. What are the contract provisions for nonperformance and default? For example, is there a notice requirement? What does the applicable law provide? The common law defenses, such as, in New York, force majeure (applicable if you have such a clause), frustration of purpose and impossibility, must be considered.

A commercial contract may be governed by the Uniform Commercial Code (“UCC”). UCC Section 2-615(a) governs commercial impracticability for covered transactions. An international commercial contract may be governed by the United Nations Convention on Contracts for the International Sale of Goods (“CISG”). CISG Article 79 addresses failures of performance due to an impediment beyond a party’s control.

Different types of transactions have their own termination issues. Has a financing been pulled, for example? Financing agreements often have a condition of no material adverse change. The interpretation of such clauses in the governing jurisdiction will bear on their utility in specific industries regarding the effects of COVID. There are existing court decisions providing guidance in respective jurisdictions on this issue and more such cases are expected. Other provisions also may be interpreted differently in this environment, such as time of the essence clauses.

Also, assess the effect of the COVID-related orders and laws. Current governmental orders may affect your evaluation of your rights. For example, suspensions of statutes of limitations and orders applicable to specific industries, such as construction site and hospitality industry shutdowns.

If you decide to act, what does the dispute resolution clause in your contract provide? If it provides for arbitration as an optional alternative to bringing an action in court, what are the specific pros and cons of each? Are the parties’ interests such that both sides have a reason to try to resolve the dispute? That may point toward an agreement to arbitrate if court access is currently blocked. Or is it in the interest of one party to defer any formal dispute proceeding such that access to compulsory process of a court must figure in your analysis?

Before you act, also look at your insurance coverage. If you believe you have a claim for insurance coverage, such as for business interruption insurance, determine what you can do before your carrier addresses your claim. Are you free to engage counsel and commence a proceeding? Regardless, business interruption claims, like most insurance claims, require extensive documentation. So, start to collect and organize the information required.

In the insurance connection, again, assess the COVID effect. Some states, including Ohio, Massachusetts, New Jersey and New York, have legislation pending as of this writing which would force insurers to retroactively cover business interruption claims due to COVID-19. And insurers are promising to sue to invalidate any such law. It would seem that the safe bet for a business from a coverage standpoint is to make the claim if there is support for coverage even if relies on a new coverage law.

Don’t forget about other possibly applicable coverage. For example, environmental policies may cover site disinfection.

Regardless of whether the applicable law tolls or extends the applicable statue of limitations, claims arising now from COVID-related events will, in most cases, have years to run. (Note determining the applicable law to make such determinations should be made early in your evaluation.) So, if you do not need immediate relief, you may decide to wait.

If, upon a thorough evaluation, you decide not to act now, you must still preserve evidence. Also, you may have an obligation to mitigate your damages.

Timing decisions should be based not only on the current capacity of the courts or available alternative means of resolution and cost considerations. Also consider eventual enforcement. How viable is the prospective defendant in the long term? Are claims by others expected such that delay will mean lower priority as a creditor once you have a judgment?

If your claim is substantial and cost is an issue, be aware that COVID has occasioned a significant uptick in third-party litigation funding. It is becoming a more usual consideration in litigation planning and funders have adjusted to the new environment.

These are general considerations for first steps in addressing commercial contract dispute issues. There is much detail within each of such broad areas as contract interpretation, insurance coverage, current court access, and alternatives to court actions. So, be sure your evaluation and legal advice consider all potentially relevant facts and legal issues.

There are business and commercial dispute situations other than contract claims, of course. In future posts we will discuss, among other common issues companies now face in this space, business torts, which usually do not have controlling dispute resolution agreements, considerations and strategies for parties in pending court actions affected by court access limitations, and drafting contracts in the age of COVID.

If you have any comments or questions regarding business disputes during COVID-19 or commercial and international litigation and dispute resolution, generally, do not hesitate to write to me at tsemaya@offitkurman.com.

ABOUT TED SEMAYA

tsemaya@offitkurman.com | 347.589.8506

Ted Semaya co-chairs Offit Kurman’s Commercial Litigation Practice Group. He devises strategies for complex and international business disputes designed to achieve a client’s business objectives. Mr. Semaya counsels and represents U.S. and non-U.S.-based businesses from startups to the world’s largest and individuals in a range of business, corporate and commercial matters. He also advises on international contracts, dispute resolution strategies, and legal risk management.