Covid-related litigation – is the worst yet to come?

The LSLA survey identifies disputes about business interruption insurance, contracts and insolvency as the most likely causes of the predicted increase in litigation.

Despite recent Supreme Court guidance, uncertainty remains about the extent to which losses suffered during the pandemic are covered by business interruption policies containing forms of “notifiable disease” or “non-damage denial of access” extensions which, it was thought, may be engaged by Covid-19. Being a test case, the judgment did not address all issues that may be in dispute for a given policyholder. Issues such as causation (including the evidence necessary to prove an occurrence of Covid-19 within the geographical area covered by the policy), quantum, aggregation clauses and the impact of government assistance are all likely to be particularly contentious. Whilst the FCA has sought to encourage a prompt resolution to outstanding claims, given the amounts involved, insurers can be expected to resist claims where such issues arise and litigation is the likely result.

Perhaps surprisingly, levels of insolvencies were lower during the pandemic than before it. The likely explanation is that government support and temporary changes to the insolvency rules enabled some businesses to struggle on. Now that those “crutches” have been taken away, there may be a “pent-up” supply of insolvencies in the pipeline. The early signs are that that is indeed the case – the number of corporate insolvencies for the first quarter of this year is more than double the amount in the same period last year.

In accordance with government guidance, many parties refrained from insisting on their strict contractual rights during the pandemic. In many cases, this will have delayed disputes rather resolved them and litigation may now ensue as parties seek to enforce their rights. This hardening of attitudes is likely to be exacerbated if the economic outlook continues to deteriorate and new problems arise.

Contractual force majeure provisions are a likely source of disputes. In two recent cases, both involving television rights for sporting events, opposite conclusions were reached on whether force majeure provisions entitled a party to terminate a contract because of the pandemic. This scope for outcomes to vary, depending on the precise wording of the relevant provision, makes litigation more likely.

In some cases, parties will have agreed to vary existing contracts but the pressures of the pandemic will mean that they did not consider the detail or properly document their new arrangements. Disputes will now arise about the scope and duration of what was agreed. Commercial contracts commonly contain provisions requiring variations to be in writing. Where these formalities have not been complied with, there will be disputes about whether informal agreements are binding on the parties.

Furthermore, the effects of the pandemic continue. Figures released by the Office of National Statistics suggest that 16% of businesses experienced supply chain disruption in January 2022 as a result of the pandemic (and, possibly, Brexit). This situation is likely to be made worse by the war in Ukraine and the sanctions regime. Disputes will arise as deadlines are missed and parties seek to extricate themselves from unprofitable contracts.

Nor are the above issues the only potential sources of pandemic related litigation. In particular, the phenomenon of people working from home meant that normal processes were not in place for substantial periods of time. This will have increased the scope for both accidents and deliberate wrongdoing. Frauds, data leaks and instances of misuse of confidential information are all likely to be discovered as normality is restored. Employment disputes are likely to arise both out of the time employees spent away from the office and out of employers’ requirements that they return to the office. The vast amount of rental arrears accrued during the pandemic (not all of which is governed by the government arbitration scheme) means that landlord and tenant disputes are inevitable.

The war in Ukraine and the resultant sanctions against Russia, rising energy prices and new disruptions to supply chains all mean that hopes of a rapid and sustained economic recovery after Covid are proving to be short-lived. This will create new problems and aggravate existing ones. Attitudes are likely to harden as businesses struggle. Economic downturns normally result in an increase in litigation and the current one is unlikely to be different.

Given the potential range and scope of disputes, it will be important for boards to keep a close eye on problems as they emerge. Spotting issues at an early stage will make it easier for businesses to find sensible commercial resolutions before problems escalate and positions become entrenched. A risk-analysis of problem areas would also be worthwhile; a review of important contracts made and amended during the pandemic may be a good place to start as would assessing any risks emerging from changed working practices.