Author: D C

COVID-19 has changed the scope of business contracts in a variety of ways including the performance of contractual obligations. It is important for businesses to recognise their legal standing and the contractual issues they may be facing in light of coronavirus, so that they are not exposed to a claim for damages.

Whether a party can suspend or terminate a contract due to the current climate will depend on a number of factors and the specific circumstances of the contractual terms in question.

Force Majeure

Unforeseen circumstance clauses contained within contracts are often expressly referred to in force majeure clauses in contracts. A force majeure clause will typically allow parties to renegotiate, extend, suspend and/or terminate the performance of the contract when an unforeseen or unexpected event has occurred. Force majeure is not a doctrine of English common law, meaning it is not implied in a contract. Therefore, parties wishing to rely on this clause must expressly insert a force majeure clause into a contract to rely upon it. Parties will often insert a force majeure clause to allocate risk between them when negotiating the drafting of a contract. Unexpected global events, such as the Coronavirus pandemic has the obvious ability to significantly disrupt the performance of a contract and is an example of where some force majeure clauses would be scrutinised quite carefully for who ultimately bears the loss.

Is COVID-19 a force majeure event?

Force majeure clauses must be specific, as the consequences of an unexpected event will be determined by the interpretation of the clause by the courts. The clauses will be examined in great detail to determine whether they can be taken to cover the intervening event and to ascertain whether the event is materially relevant to the performance of the contractual obligations in question. Whether a force majeure clause has been triggered in a contract will depend entirely on the exact wording that the parties have used, this often includes a non-exhaustive list of events. For example the presence of words such as: “pandemic”, “epidemic”, “outbreak”, “government action”, or “crisis” will be crucial in parties being able to argue that their force majeure clauses apply to the current circumstances.

It is the duty of the party seeking to rely on the clause to prove that the force majeure event has significantly prevented or delayed them from performing their contractual duties. Classic Maritime Inc v Limbungan Makmur [2019] EWCA Civ 1102 suggests that the party looking to rely on a force majeure clause must have been willing and ready to perform the contract, even if the exceptional event had not occurred. The unexpected event must be the cause of the failure to perform the contract, rather than an excuse if the underlying problem is something else. Therefore, to give a current example, it isn’t enough that COVID-19 was around at the same time as the breach of contract, it has to be the cause of the breach.

The English courts have previously not looked particularly favourably on reliance of force majeure clauses. However, the current climate makes it more likely than ever that parties will try to rely on force majeure clauses; due to the vast economic impact the pandemic is having on society and in turn, the impact it will have on the ability to perform contractual obligations. The Courts will not offer general guidance for this particular area of law, rather they will consider the cases on their individual merits.

What if the contract does not include a force majeure clause?

If force majeure is not a clause defined within a contract, parties may try to rely on specified time periods, which could warrant automatic termination. Parties will often scour their contracts for any clauses which provide flexibility, such as an option for the parties to terminate or renegotiate the contract, or any redress clauses. These clauses would need to be specifically drafted within the contract for them to take effect.

Further, if a force majeure clause cannot be invoked, parties may seek to rely on the frustration of a contract to bring the contract to an end. A contract can be frustrated when something occurs after the formation of a contract, rendering it impossible to fulfil. Similar to force majeure, the burden of proof for frustration is on the person seeking to assert it. COVID-19 may possibly be a factor that parties can rely on when considering if their commercial contract has been frustrated, however this will heavily depend on the circumstances and wording of the individual contract and will often require parties taking detailed specialist advice.

The realities of a global pandemic may require parties to be forced to re-negotiate aspects of a contract if the situation changes, since each contract is analysed on its own merits; however this would need to involve constructive communication between all parties involved and potentially the involvement of specialist providers of mediation services. It is important to understand the different legal and practical implications of that COVID-19 might have on current or future commercial contracts.

Our commercial contract lawyers are experts in this field and can provide practical and specialist advice during this difficult time.

Should you have any queries with regard to this article, please do not hesitate to contact us via email: mail@eldwicklaw.com, or telephone: +44(0)203 972 8469.

On 13 March 2020 the High Court decided that Gate Ventures PLC, a company specialising in media and entertainment investment previously chaired by Lord Grade, will enter into administration. The company’s management faced accusations of mismanagement and misapplication of monies which resulted in the company falling into serious financial difficulties. Eldwick Law represented a number of Chinese individuals with small shareholdings in their fight to uncover the truth.

Gate Ventures was founded in 2015 by the legendary British songwriter and composer Geoff Morrow whose compositions were performed by stars including Barry Mannilow and Elvis Presley. The company invested in start-ups, films and had backed stage-shows such as 42^nd Street and Sunset Boulevard. Gate Ventures initially saw a surge in its share price of 55% when it debuted on the AIM market and was once backed by several prominent investment organisations.

However, the company’s fortunes were much changed by March 2020. It was alleged that Gate Ventures’ management had fallen into farce under the chairmanship of Jonny Hon, a prominent businessman based in Hong Kong. The court heard of how Mr Hon spent thousands of pounds of company money on lavish meals with foreign dignitaries, including President Obama’s press-secretary and Prince Albert of Monaco, as well as private tours of exclusive fashion houses. The court heard how Sarah Ferguson the Duchess of York, a one-time member of Gate Ventures’ board of directors, had rendered invoices of £200,000 for branding and marketing for her company ‘Ginger and Moss’ and had received £90,000 in loans from Gate Ventures which had yet to be repaid.

Lord Grade, another director and presiding chairman of Gate Ventures at the time proceedings came to court, presented the defence on behalf of the company’s management following the withdrawal of their lawyers for non-payment of legal fees. Lord Grade admitted that spending limits were not in place during the chairmanship of Mr Hon but asserted that he had presided over the emplacement of strict financial controls and that the company was close to being revived through a series of high-profile investments. However, the company’s defence ran into real difficulties when Lord Grade was unable to offer any answer to claims made by the Applicant’s lawyers that Gate Ventures inexplicably spent £1 million to buy shares in a dormant company with no assets, whose directors included members of the board of Gate Ventures, and had made a series of loans to other board members without the requisite shareholder approvals.

The court heard how Gate Ventures had posted losses of £19.5 million despite investments of approximately £24.5 million, some of which had come from an array of smaller investments made by individual Chinese consumers who had secured ‘Intervenor’ status and were represented by Eldwick Law. The company’s dire financial situation was compounded by the fact it owed £2.5 million to Chinese businessman and shareholder Zheng Youngxiong, who had launched the principal action after the company had proven itself unlikely to be able to repay him by the looming contractually-agreed deadline. Lawyers for the Applicant and the Intervenor expressed their disbelief that a company of once such significant assets could be reduced to being unable to pay its own accountants and lawyers, to which Lord Grade and his team of informal advisors had no substantive explanation.

No doubt Lord Grade had hoped to be able to replicate the defence mounted by the company earlier in the year, where the court had denied Mr Youngxiong’s application to place Gate Ventures into administration on the strength of the all-star cast of board members that included Lord Grade (former Director of Programmes at the BBC) and the Duchess of York among others. The judge highlighted on that occasion that he was willing to give the board a chance to enact a rescue plan they had presented to the court, but placed the company under an obligation to produce fortnightly financial reports to monitor its progress. But with neither the mandated reports or any of the envisioned investment having materialised by the hearing in March and with a number of high-profile resignations from the board, including the Duchess of York, and the withdrawal of the company’s lawyers – the situation looked bleak for Lord Grade and his team.

Attempts by Lord Grade to adjourn proceedings to seek alternative advice or to raise additional funds from creditors, who were said to be ‘waiting in the wings’, were robustly opposed by the applicants and ultimately refused by the court. Further attempts to place Gate Ventures into Members’ Voluntary Liquidation, a technical process whereby a company is liquidated and any remaining equity distributed to its creditors and shareholders, was similarly opposed and rejected. It was concluded that the company was in such dire financial straits that it was unlikely to survive the 21-day process without being wound up by its creditors and there was no guarantee of the process being approved by Gate Ventures’ shareholders in any event.

Ultimately the court held that Gate Ventures should be placed into administration to protect the interest of major creditors such as Mr Youngxiong and those of the smaller individual Chinese investors – many of whom had been induced into investing by dazzling roadshows and the extravagant social-media profile of Mr Jonny Hon. It is hoped that, by being placed in administration, Gate Ventures has a chance of returning to the profitable past it once knew and of producing the kinds of returns expected by its shareholders and creditors.

 

The unprecedented outbreak of COVID-19 has changed the way litigation proceedings operate in a number of ways. The recent changes include the closure of the Supreme Court, hearings being conducted remotely via video link, increased electronic pre-trial preparation, and many more procedural matters being dealt with on paper. Courts will be transferring to remote hearings where possible, which will give rise to significant change in working practices for everyone involved.

Changes to the Civil Court system

On 23 March 2020, the UK government issued instructions for everyone to stay at home, save for very limited purposes, as supported by the Coronavirus Act 2020 and related regulations. The Coronavirus Act makes a specific provision implying that the civil court should continue with remote hearings, with the aid of technology which has been supported by guidance subsequently produced by the senior judiciary.

The new legislation will inevitably require a number of adjustments to be made to the civil courts as we know them, which will require co-operation and planning from the courts and the parties involved. Such planning will need to accommodate litigants and witnesses and ensure adequate video and audio quality so that all parties can be heard clearly and documents can be displayed visibly and quickly. While use of technology had already started to be applied and trialled across various courts in England & Wales, the current regime represents the most widespread use of technology in trials so far. Judges will have broad discretion as to how to proceed with cases and will make decisions on whether remote trials will be suitable on a case-by-case basis.

Blackfriars Ltd [2020] EWHC 845 (Ch)

The fact that a case may comprise significant sums, a lengthy trial time and multiple witnesses will not necessarily prevent the court deciding to hold the trial remotely. In One Blackfriars Ltd [2020] EWHC 845 (Ch), during a pre-trial review, the High Court rejected an application to adjourn the five-week hearing until June 2021. This trial is set to involve four live witnesses of fact and 13 expert witnesses. Placing importance on the overriding objective, John Kimbell QC rejected the submission that there was a real risk of unfairness in conducting a remote trial for this claim. It was held that the challenges and upsides of proceeding with a remote trial would apply to both sides equally. In this case, the court placed importance on the fact that there were no allegations of dishonesty or fraud and that the proceedings contained a large number of contemporaneous documents, where most of the relevant matters were likely to be set out.

The trial judge acknowledged the health and safety risks posed by conducting the trial in-person and pointed out that it was not “a case in which it can be said that it is essential to have the witness, the cross-examiner and the judge and the other participants in the same physical space”. It is clear that the court are trying to strike a balance between protecting the health and safety of those involved in litigation and ensuring the course of justice will ensue, with a demonstrable focus on avoiding undue delay.

Is it a just approach?

It has been acknowledged by the courts that they do not have the technological capabilities to offer a full remote service, and have indicated that HMCTS are working urgently to expand the technology available. In the meantime, courts will conduct hearings via Skype, telephone and other available video facilities. One of the issues with this is that many participants may not have the technological knowledge for hearings to progress smoothly, which could cause delays, especially in the early months. Parties are encouraged to be cooperative, especially in cases involving litigants in person, to try and ensure some fairness during the process and the courts have indicated that they would take a more relaxed approach than usual to compliance with certain aspects of the Civil Procedure Rules. For example, if court proceedings were not received due to self-isolation restrictions or office closures a request for relief from sanctions for late service would be expected to be looked upon sympathetically. It is important for the courts and both parties to be flexible in this regard and prioritise cooperation between the parties to ensure justice is not obstructed for the sake of a tactical advantage over one party.

Some would undoubtedly think, such as the parties involved in the Blackfriars Ltd [2020] matter, that it would be more practical to postpone hearings until normality is resumed. Whilst this may seem sensible for some cases, the majority of cases are financially sensitive and adjournments may cause hardship for those involved. This may be particularly distressing whilst we are in a time of financial turmoil due to the current circumstances and not something that one party should be allowed to take advantage of.

Could this change the future of the courts?

The rules in the civil courts are flexible enough to allow the processes to be adapted quickly to ensure that proceedings fall in line with new coronavirus legislation. Some have seen the step towards a new ‘virtual’ court as a blueprint for the future of modern justice, for certain proceedings that can be easily managed without the need of physical attendance by the parties. Virtual hearings are far less costly for both parties and may be more time efficient, for example if both parties have to undergo preparation beforehand to ensure that all of those involved have in their possession the correct documents. While it remains unlikely that procedures will remain so drastically changed once the pandemic subsides, this will at least offer the most widespread trial of digital services the English court system has ever seen and will undoubtedly offer a great many lessons to learn in the making of future reforms.  

Cases are financially sensitive and adjournments may cause financial difficulty for those involved. This may be particularly distressing whilst we are in a time of financial hardship due to the current circumstances and not something that one party should be allowed to take advantage of.

Could this change the future of the courts?

The rules in the civil courts are flexible enough to allow the processes to be adapted quickly to ensure that proceedings fall in line with new coronavirus legislation. With many arguing that traditional courts are far behind in terms of their upkeep of the modern world, the step towards a new ‘virtual’ court may be the future for certain proceedings that can be easily managed without the need of physical presence. Once these hearings are being progressed without a hitch, it may become more sustainable to work this way going forward. Virtual hearings are far less costly for both parties and may be more time efficient, for example if both parties have to undergo preparation beforehand to ensure that all of those involved have in their possession the correct documents. Of course, it is unlikely that procedures will change so drastically once normality returns, however it may be the change the legislature needs as a step in the right direction towards a more modern court system.  

Eldwick Law have a team of expert solicitors who are able to assist you with any litigation during these unprecedented times.

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