Top judges urge “breathing space” over contract breaches

Neuberger: Debate needed as matter of priority

Two former presidents of the Supreme Court have suggested introducing a “breathing space” so that contractual breaches arising from the coronavirus crisis are conciliated to avoid the courts being overwhelmed with disputes.

Lord Phillips and Lord Neuberger were part of a meeting hosted by the British Institute of International and Comparative Law (BIICL) which developed a ‘concept note’ on the private law response to contractual defaults caused by the pandemic in the face of a possible wave of commercial disputes with businesses invoking their inability to meet their obligations.

The other attendees were: Sir David Edward, a former judge of the European Court of Justice; Sir William Blair, a former Commercial Court judge; BIICL director Professor Spyros Maniatis, former head of the Centre for Commercial Law Studies at Queen Mary University, London and now a honorary professor of intellectual property law there; Professor Malik Dahlan, who holds the chair of international law and public policy at Queen Mary University; and Keith Ruddock, a one-time general counsel who is now chair of the BIICL’s board of trustees.

The note said it was “easy to see how damage can happen as parties trigger default clauses, and counterparties maintain that they are excused from performance”.

It continued: “It can be mitigated by agreement, or by mediation – both of which must be encouraged and will have a crucial role – but there is a risk of a deluge of litigation and arbitration placing a strain on the system of international dispute resolution, and reducing the prospect of more constructive solutions and increasing the prospect of uncertainty of outcome.”

The note said the principle of legal certainty in the common law has not had to encounter a crisis of this nature before.

“In at least one jurisdiction, measures have been introduced to give a ‘breathing space’, offering temporary relief to specified businesses and individuals unable to fulfil their contractual obligations because of Covid-19.”

While there may sometimes be “little alternative to resolution through the courts even if lengthy and expensive” – citing business interruption insurance as a possible example – the group said that “in other cases, arguably an outcome which leaves one party a winner, and the other a loser, will not take full account of the market/social contextualisation of the crisis”.

It went on: “Is there is a case for adopting a more creative, graded, but nevertheless rigorous approach without prejudicing the underlying need for legal certainty?

“In many jurisdictions, procedural rules already encourage conciliation – can these be developed further to give a breathing space? The onus at least in the first instance would be for the continuance of a viable contract rather than bringing it to an immediate end.”

The note concluded: “In the current emergency, which is a universal challenge, a debate should happen as a matter of priority on the necessary contribution of the law to safeguard commercial activity, minimise disruption to supply chains, and ameliorate the adverse effects of a ‘plethora of defaults’, by encouraging a legal environment which is conducive to optimism and a global recovery.”

Speaking about the note, Sir William Blari said: “New thinking is going to be required if the law is to play its full part in getting international commerce back on its feet – within the principle of legal certainty, space need to be found for renegotiation, and if the contract is no longer viable, equitable solutions.”

Sir David added: “The law cannot insist that parties’ contracts must continue as if nothing has happened, or simply declare that frustration has brought them to an end. If commercial life is to go on, a rational and equitable solution must be found.”

Professor Maniatis added: “This is not the time for zero sum games – protecting markets and supply chains will be critical.”

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