Pandemic forces UK dispute resolution rethink

Bryan Shacklady, senior solicitor in the dispute resolution team at Forsters LLP, answers some common queries on commercial disputes arising out of the current climate caused by the pandemic

22 October 2020

The disruption and financial pressures caused by the pandemic are likely to give rise to some common challenges for businesses across sectors, whether the problem concerns a supplier or a customer. While each case will require specific advice, parties should be generally aware of some recent changes to legal remedies available when approaching a dispute.

My supplier is telling me that it can't perform its obligations because of the pandemic. What rights do I have?
The first step here is to check your contract for a force majeure clause. It may be headed force majeure, but if not, you are looking for a clause that describes what will happen if the contract cannot be performed because of an event that neither party anticipated. The pandemic almost certainly falls into the category of such an event, at least for contracts entered into before the spread of the disease was declared a pandemic by the World Health Organisation.

If your contract does not contain such a clause, then, broadly speaking, the general law was that the loss under the contract will lie where it falls – so if you have already paid for goods that have not been supplied, you would not be able to recover that payment. The exceptions to this rule are contained in the Law Reform (Frustrated Contracts) Act 1943. This now provides that sums paid out under a frustrated contract in respect of which the corresponding obligation has yet to be performed (such as delivery of goods that had not yet been delivered at the time the contract was frustrated) can now be recovered. Mirroring this, where an obligation has been performed in respect of which there is a corresponding right to be paid (for example, goods that have been delivered), the payment can still be recovered by the person to whom it is due.

My customer is about to go bust. Can I stop supplying them?
You commonly see clauses in contracts that allow a party to terminate a contract where the other party is wound up, placed into administration, or suffers some other kind of "insolvency event". These clauses can provide useful protection, for example where a supplier has an ongoing obligation to supply, but is worried that it may not be paid going forward because its customer is experiencing financial difficulty.

However, in response to the crisis, the Westminster government has enacted the Corporate Insolvency and Governance Act 2020. This provides that clauses providing a right to terminate because of an insolvency event are void. Essentially, it means that, for example, suppliers with long term contracts must continue to supply customers under those contracts even if they are insolvent. Other provisions connected to insolvency events, such as shortening of payment terms, or increases in interest, are also void.

Can I serve a statutory demand on a company that owes me money?
A powerful remedy against a company that owes a supplier money is for the supplier to serve a statutory demand upon the delinquent company. This is a powerful tool, as failure to satisfy the statutory demand within 21 days in the absence of a genuine dispute as to whether the money was payable would mean that the supplier could then petition for the company's insolvency.

However, with the effect from 26 June 2020, the Corporate Insolvency and Governance Act 2020 has provided that no creditor may petition for a company's insolvency based on a statutory demand (or on various other grounds). This will remain the position until at least 30 September 2020, although there are rumours that the suspension of the right to petition for insolvency may be extended.

Can I sue a company that owes me money, and what happens if I win and get judgment, but it isn't paid?
It remains possible to start proceedings in the English courts against companies that have not paid. However, you may wish to consider alternative dispute resolution (ADR). Two of the most common methods of ADR are arbitration and mediation.

Arbitration can be chosen by parties as a means of dispute resolution at the time they contract, or after a dispute has arisen. The main advantage of arbitration (a similar procedure to court proceedings, but before an arbitrator paid by the parties instead of before a judge) is usually a streamlined procedure leading to quicker resolution of the dispute. Appeals are also extremely limited.

Mediation involves settlement discussions moderated by an independent mediator. It can often be a good way of resolving disputes where the parties have adopted entrenched positions, as the mediator is well placed as a trusted third party to point out strengths and weaknesses in each party's position. The process is confidential, and there is no obligation to settle.

If you choose court proceedings, and you obtain judgment, although certain methods of enforcement such as insolvency proceedings are on hold for the moment, other remedies are available. For example, it can be possible to obtain a charging order over property of the debtor where that property consists of real estate (land) or securities (such as shares in a company). It is also still possible to obtain a third party debt order, so that if someone owes the debtor money, the court can order that money to be diverted to you instead when it is paid.

In short, businesses should not assume that all the remedies they are used to having at their disposal will be available to them when they encounter a dispute in the current climate.

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