Many types of Covid-19 disputes will be arbitrated
Covid-19 related contractual disputes
As the Covid-19 pandemic took hold, closed borders and lockdowns meant that many companies found they were unable to perform their contracts. Aviation, hospitality and tourism were the most immediately affected but the longer the crisis continued, the more severely supply chains – particularly in global manufacturing sectors such as automobiles, electronics and clothing – were disrupted. Government restrictions also had an impact on the ability of parties to perform contracts in the mining, construction and shipping sectors, while plummeting oil and gas prices led to disagreements over contract prices in that sector.
Many of the resulting contractual disputes will be resolved confidentially through arbitration in the coming years. They will centre on contractual provisions, including clauses such as:
- force majeure
- material adverse change (MAC)
- suspension and termination
- price revision
Parties will also invoke legal concepts such as frustration and hardship or impracticability in seeking to excuse their non-performance.
Courts in several common law jurisdictions, whose laws frequently apply in international commercial arbitration, have already begun to hand down important Covid-19 related decisions. For example, in late 2020, a judge of the Southern District of New York found that Covid-19 qualifies as a “natural disaster,” thereby excusing a contractual counterparty’s non-performance under a force majeure provision in an art auction-house contract.
In civil law jurisdictions, legal principles excusing performance are generally set out in civil codes and can be invoked as implied contractual terms. In some civil law jurisdictions, governments have declared that Covid‑19 constitutes a force majeure situation that may affect contractual relationships. In Peru, for example, the government did this in the context of public procurement.
While outcomes will vary depending on the terms and governing law, there is no doubt that Covid-19 related contract disputes will be a prominent feature of the international arbitration landscape in 2021. Some Covid‑19 related contract-based arbitrations will take place against a backdrop of insolvency proceedings.
Covid-19 related M&A disputes
The economic hardship and uncertainty caused by Covid-19 has also disrupted many mergers and acquisitions, with buyers looking to exit deals, delay completion or renegotiate purchase prices. We expect to see an increase in 2021disputes arising from M&A deals, with many being resolved by international arbitration, and a number featuring requests for temporary relief from emergency arbitrators in time-sensitive situations, such as where buyers refuse to complete transactions.
Disputes are also likely to arise in connection with representations and warranties in share purchase agreements regarding business operations and continuity. Some buyers may accuse sellers of pre-contractual failures to disclose information or fraud, given that success will provide the buyer with a way to exit the transaction in some jurisdictions.
Numerous price adjustment claims are likely to be arbitrated in 2021 and beyond. A significant proportion of these disputes will involve earn out clauses, which define the purchase price of a target company partially by reference to the company’s future performance. Parties can be expected to differ in their interpretation and application of metrics for measuring the success of a company post-closing in light of the unpredictable effects of Covid-19. This will widen the gap between buyers and sellers regarding the valuation of the target business, making a dispute more likely.
Courts in several jurisdictions have already begun to hear Covid-19 related M&A disputes. For example, the Delaware courts have been hearing a high profile dispute over LVMH’s obligation to complete its acquisition of Tiffany’s, which it refused to do citing the pandemic, and a number of other M&A disputes are presently ongoing in other jurisdictions.
Government Covid-19 measures mean more investment treaty disputes
Many governments imposed unprecedented restrictions on business activity in an effort to control the spread of the pandemic, with some then taking dramatic steps to ease the economic repercussions of the crisis. Foreign investors may attempt to challenge at least some of these measures as violating the protections provided by investment treaties, while States will defend them as justified under doctrines such as state of necessity or exceptions to treaties for public health measures. Investors may allege that they should have been compensated for the impact of such measures or that they were not treated fairly and equitably, with full protection and security, or as well as others national or foreign investors. The costs of government responses to Covid-19 have also put significant pressure on the debt obligations of countries around the world, which may lead to defaults and dissatisfied creditors bringing claims for compensation.
Although it is too early to predict how many investment claims such measures will trigger, several government initiatives apparently taken in response to the pandemic have already prompted investors to threaten claims. These include measures taken by:
- Chile that affected a concession at the Santiago International airport
- Mexico for the modification of its renewable energy framework
- Peru that suspended the collection of toll fees during the state of national emergency decreed as a result of the Covid-19 outbreak
Other governments, particularly in Latin America, have proposed or taken measures in the pensions sector in order to allow early withdrawal, which may have an adverse impact on the overall economics of protected pension fund administrators, many of which are foreign owned.
This article is part of the International Arbitration Review.