Corporate Financial Frictions and Employee Mental Health

A growing amount of literature documents that binding financial constraints during economic distress or financial distress, including impending bankruptcy, can have an adverse effect on firms’ human capital. During economic distress, firms suffering from financial frictions might dismiss short-tenured employees with high future expected productivity due to their relatively low severance pay (Caggese, Cuñat and Metzger, 2019). On the other hand, workers with the highest cognitive and non-cognitive skills might also leave financially distressed firms voluntarily (Baghai, Silva, Thell, and Vig, 2016), while talented job applicants might be reluctant to join (Brown and Matsa, 2016).

In our recent paper entitled ‘Corporate Financial Constraints and Employee Mental Health’, we document a novel cost of financial constraints on firms’ human capital: we provide evidence that financial constraints during an episode of economic distress can have an adverse effect on employee mental health. Deteriorating employee mental health is not only a personal concern of employees but also a concern for firms as mental health is an important determinant of labor productivity. To study the effects of financial constraints on employee mental health, we build a rich dataset based on administrative microdata from the Netherlands that links firm-level financial data to employee-level antidepressant use. Antidepressants are frequently prescribed as a first line of treatment for mental health complaints including major depression disorder and anxiety disorders as well. To identify the causal effects of financial constraints, we exploit variation in firms’ need to refinance their long-term debt in 2008, a period when refinancing became more difficult due to the credit crunch. The Netherlands is an ideal laboratory for this exercise as the country experienced a strong negative bank credit supply shock in 2007-2008, and bank lending is the main source of external financing for Dutch firms.

We find that employees of firms that had to repay a higher share of their long-term debt in 2008—at least 25% of their outstanding long-term debt in our baseline specification—exhibited a 0.44 percentage points higher average probability of antidepressant use in the 2008-2012 period. This is an economically significant 9% increase with respect to the 5% average probability of antidepressant use in our sample.

A possible channel from financial constraints to deteriorating employee mental health is job loss or the threat of job loss. Several studies have documented that the credit crunch associated with the Global Financial Crisis had a negative effect on employment levels. We also find that employees of firms that had to repay a higher share of their long-term debt in 2008 had a 6.2 pp higher probability of job separation in the 2008-2010 period, whereas employees of these firms did not exhibit different turnover prior to the crisis.

While job loss is a potential transmission channel for employees who actually lost their jobs due to the binding financial constraints, the increasing threat of job insecurity could have also had an adverse mental health effect on employees who eventually managed to keep their positions. Arguably it is the mental health burden on this latter group that is of greater concern for employers given employee mental health’s role in labor productivity. We separately study this sub-sample of employees and estimate an average treatment effect on the probability of antidepressant use in the 2008-2012 period of 0.28 pp. This result indicates that much of the 0.44 pp total treatment effect accumulated at employees who managed to keep their job.

Treatment heterogeneity estimates also support the argument that job insecurity is a driver for greater antidepressant use for employees who stayed in their jobs. Based on the relevant economics and psychology literature we identify five personal/household characteristics that are expected to increase the mental health burden of job insecurity: older age, being male, having no partner, having children in the household, and having a salary that constitutes the larger part of the household income. When we interact our treatment indicator with these moderator characteristics, we find statistically significantly larger treatment effects for employees without a partner, those with at least one child in their household, and for employees whose salary constitutes a large share of their total household income. Treatment effects appear to be larger for employees who are at least 45 years old, but the difference is not statistically significant at any conventional level, whereas male and female employees appear to be similarly affected.

Our study contributes to two broad lines of literature. First, a growing literature in finance studies the effects of financial constraints on firms’ human capital. We combine firm-level financial data with rich employee-level data on antidepressant use to document a novel cost of financial constraints, their detrimental effect on employee mental health. We show that the mental health toll of financial constraints is not restricted to dismissed employees but is also substantial for employees who stay with the firm. As argued above, the mental health of employees, particularly of those not dismissed, should be a prime concern of firms due to mental illnesses’ burden on employee productivity.

Second, a large body of literature examines the health effects of financial and economic crises, and among other findings reports a negative correlation between unemployment rates and mental health status. We also study how employment relations contributed to the mental health of employees during a crisis period, but contrary to the previous literature, we use employer-employee matched data to disentangle the mental health effects of the financial crisis (credit supply shock) from the effects of the ensuing economic crisis (the Great Recession). Furthermore, we show that crisis periods may have an adverse mental health effect even on employees who manage to keep their jobs but who may suffer from decreased perceptions of job security.

Dániel Kárpáti is a PhD Student at the Department of Finance, Tilburg University.

Luc Renneboog is a Professor of Corporate Finance, Tilburg University, and a research member of the European Corporate Governance Institute (ECGI).

The original version of this article was first published in Personnel Today By Dániel Kárpáti, and Luc Renneboog

EE Employee Discrimination With Mental Health Condition

EE Employee Discrimination With Mental Health Condition

An EE call centre agent with anxiety, depression and post-traumatic stress disorder (PTSD), who was told to ‘get a grip’ by her manager, was discriminated against because of reasons arising from her disability.

The Cardiff employment tribunal found that a line manager’s comments and behaviour when claimant Bethan Oakley was late returning from a lunch break caused her to become “extremely distressed”, despite his knowledge of her disability.

Oakley began working as a customer services representative at the telecom company’s offices in Merthyr Tydfil, South Wales, in October 2013.

In 2019, Gareth Roberts became Oakley’s line manager. She informed him that she had been attending counselling sessions via EE’s health and wellbeing provider. Her treatment notes confirmed she had been suffering with PTSD following the death of her father, which she had witnessed and to whom had delivered CPR. She regularly had nightmares about her father’s death, often became upset and overwhelmed at small things and cried for no reason.

At the tribunal it was accepted by Roberts that he understood and was aware of her mental health conditions, which amounted to a disability under the Equality Act 2010.

On 27 September 2019, Oakley accompanied a colleague to a sickness review meeting for moral support. The meeting was with Roberts and lasted two hours – an hour over what Oakley had expected. She missed her lunch break as a result.

As the canteen had closed by the time the meeting concluded, Roberts allowed her to take 30 minutes to get lunch off site.

When she returned, she went to her desk with her food. EE’s office had a policy that employees were not allowed to eat at their desks, but Oakley wanted to go through the callbacks and emails she had missed. Roberts told her she wasn’t allowed to eat at her desk and to go to a break out room to finish her lunch.

After no more than five minutes, Roberts entered the break out room to tell Oakley she was late. The claimant alleged he was aggressive towards her and stood over her while she cleared the table. He told her they were very busy and that she was in the break out room not doing her job.

‘Get a grip’

The claimant became upset and began to cry. She said she did not like the way Roberts was speaking to her and that she had already apologised for being late.

At that point, Roberts told her to “get a grip” and to “come on”. He told the tribunal that this latter comment was to reduce the tension in the room and accepted he could see she was upset. The claimant felt his behaviour was humiliating, which Roberts disputed at the tribunal.

Oakley returned to her desk and Roberts continued to argue with her about the fact that she had been late and that eating at desks was not allowed. When he left her desk after Oakley she did not want to speak to him, Oakley began to shake and had difficulty breathing. She told the tribunal this had been a panic attack.

She went into another break out room to calm down and a colleague, along with Roberts, entered. She told Roberts she did not want to speak to him and he said he wanted her back online in five minutes. The claimant said she would not be able to as she was too upset, at which point Roberts said she would have to take sick leave if she could not return to work. She left her shift early.

A few days later, Oakley sent a resignation letter to EE stating, “I was humiliated in front of everyone, being harassed and bullied into experiencing the worse panic attack of my life, something that I have never had happen to me previously in work”.

On 7 October 2019, after having had an email from EE that invited her to discuss the issues raised in her letter, she retracted her resignation and said she may have acted too hastily. She raised a grievance that suggested Roberts had harassed her and had “historical cases of abuse/harassment of other female staff with mental health issues/vulnerabilities in the workplace which have been covered up/neglected”. She also alleged she had been denied first aid care when she had a panic attack, but evidence given in the tribunal hearing suggested that she turned down first aid when it was offered.

Oakley refused to return to work until the issues were addressed and Roberts had received disciplinary action.

EE’s investigation concluded that Roberts’ actions were not discriminatory nor did they amount to harassment.

It partially upheld the claimant’s grievance about the “get a grip” comment and offered an apology.

The claimant resigned after finding a new job in December. In her resignation letter she suggested that the grievance outcome letter was inaccurate and that she was not given a chance to rebut the statements made by Roberts during the investigation.

Tribunal ruling

In the tribunal’s judgment last month, Employment Judge Havard said: “[The tribunal is] satisfied that the respondent treated the claimant unfavourably as a result of the way in which Mr Roberts spoke to, and behaved towards, the claimant. Such conduct not only caused the claimant to exhibit symptoms of distress/panic attack which led to her being unable to continue to work on the afternoon of 27 September 2019 but he continued to talk to her in an unacceptable way during the time that the claimant was exhibiting symptoms of distress.

“The tribunal also considered that the respondent treated the claimant unfavourably by Mr Roberts expecting the claimant to resume work in circumstances where she had demonstrated, and continued to demonstrate, symptoms of distress and panic attack and an inability to work.”

It agreed that the way she had acted arose as a consequence of her disability, which EE and Roberts had been aware of.

“It must have been evident to him that the claimant was a vulnerable individual. However, it was significant that, whilst he admitted that he knew the claimant was disabled, Mr Roberts stated that he would treat every employee under his leadership in exactly the same way,” the judgment added.

The tribunal upheld Oakley’s claim of constructive dismissal, wrongful dismissal, disability discrimination and disability-related harassment. Claims of sex harassment and victimisation were dismissed.

Compensation will be determined at a later hearing.

EE told Personnel Today it did not have a written statement in response to the tribunal’s findings.

The original version of this article was first published in Personnel Today By Ashleigh Webber

Pre-Pack Sales of Businesses From Administrations

Pre-Pack Sales of Businesses From Administrations

New regulations will add to the expense of many so-called “pre-pack” sales of businesses from administrations, but will hopefully not overly fetter the valuable use of this tool in saving insolvent businesses and jobs. The Administration (Restrictions on Disposal etc. to Connected Persons) Regulations 2021 (“the Regulations”) came into force at the end of April 2021.

Blake-Turner have on many occasions assisted directors, companies and administrators in relation to sales of insolvent businesses from administration to new companies set up by the old directors or owners of the insolvent company. Provided the best possible value has been obtained for the assets, sales from administrations are crucial because the process moves very quickly and often leads to the saving of the business and jobs, and the payment of crucial trade suppliers – and greater value is recovered to be distributed to creditors of the old company.

These so called “pre-pack” sales have been criticised, but often by politicians and observers who have no experience of being on the ground as a business fails.

The Regulations are seeking to make the process more accountable by requiring the buyer of a business from administration – if he was a director or other stakeholder in the insolvent business – to obtain a report from an independent evaluator. This report will essentially be required to confirm that the terms of the proposed sale are reasonable in the circumstances.

This is of course a rather low threshold to meet, and therefore it will hopefully not curb the use of sales from administrations in the first 8 weeks of the administration. It will, however, of course add to the expense in many instances and delay matters at a time when speed is essential to save goodwill and jobs. It is hoped that this will not make some sales from administration at the lower end of the market unviable, but allow the practice to continue simply with another layer of welcome accountability (and less welcome expense).

If you have any questions about pre-pack sales from administration, or insolvency, please contact Paul Cooper, a partner with over 20 years’ experience in assisting insolvent companies, their creditors and their stakeholders.

Cap On Damages Amounts To Informed Consent

Cap On Damages Amounts To Informed Consent

Capping the amount a solicitor can take from a client’s damages is enough to show that the client gave ‘informed consent’ to the deduction, the High Court has ruled in a judgment affecting 400 conditional fee agreements.

In Swann v Slater & Gordon, District Judge Rouine sitting in the High Court in Birmingham also held that no fiduciary duty could arise during the process of negotiating a retainer.

Regional costs judge Rouine was tasked with dealing with more than 400 ‘solicitor and own client’ costs assessments being brought against national firm Slater and Gordon. Swann was the lead case, with the judge asked to determine a number of preliminary issues to then be applied to the wider caseload. In an order dated 12 March he found in favour of Slater and Gordon on all points before him.

Each retainer contained a provision capping the client’s potential liability at 25% of their damages. DJ Rouine said the existence of this cap had a ‘magnetic attraction’ in terms of informed consent.

He added: ‘Being told that there is a cap, and what that cap might be, is more than sufficient information… for the purposes of obtaining informed consent from a client for deductions to be made from their award of damages.’

DJ Rouine said it would be an ‘impossible task’ for a solicitor to ‘provide a client with specific advice as to every scenario and every level of damages which might be awarded and the impact that such an award would have on the sums which the solicitors say could be deducted from the award of damages.’

He added: ‘The realistic and pragmatic approach… is for the client to be made aware of their potential maximum exposure to a deduction from damages.’

DJ Rouine also considered whether any breach of fiduciary duty could have occurred in relation to the retainer. He said he accepted Slater and Gordon’s arguments that a fiduciary duty cannot arise while ‘the process of negotiating the terms of the retainer relating to the solicitor’s remuneration remains ongoing’.

The judgment also distinguished Swann from last October’s ruling in Belsner v Cam Legal Services, in which Mr Justice Lavender found that informed consent had not been given. DJ Rouine noted that he was not bound by an earlier High Court decision, and said the existence of a defined cap on the client’s liability amounted to a ‘a very significant factual difference’.

The judge refused permission to appeal.

The original version of this article was first published in www.lawgazette.co.uk By Rachel Rothwell

Construction Insurance Threat To UK’s Future

Construction Insurance Threat To UK’s Future
Construction Insurance has never felt cheap to companies in the sector, although many or most of them never took the sort of risk management measures highlighted in our regular insurance articles, so to a large extent often had only themselves to blame if they were paying higher premiums than they need have.

Now however it turns out that we have been living in some sort of golden age for insurance, when premiums were in fact relatively low, and sometimes falling. The golden age is well and truly over now, and companies of all sizes across the industry are reeling under the scale of increases they are seeing. And there is probably more to come.

Premiums increases that we have already seen could be enough to put adequate cover out of the reach of many. Passing any increased cost on to clients is always difficult in such a competitive market as construction; many clients will be seeing insurance costs soar in their own businesses, but that won’t make them any more sympathetic to pleas for help. Which could be shortsighted, because if contractors and others can’t afford insurance they dare not trade. There is also the problem of a declining number of insurers prepared to take construction risks at all, which raises the threat of being unable to obtain any insurance cover.

The main culprits to blame for rises have been Grenfell and Covid, and both are having a huge and ongoing impact. But as we reported last year, premiums had been low for some years – some said unsustainably low – so this was bound to change sometime. Technical changes in the Lloyd’s insurance market have played a key role in making life harder for companies needing Professional Indemnity cover in particular. The Grenfell Tower tragedy led insurers to become more cautious about the risks they would cover under PI policies. New policies have introduced significant exclusions.

Lloyd’s syndicates had slipped into unprofitability on the PI part of their business, which prompted Lloyd’s to institute what they called Decile 10 reviews, which forced syndicates to identify the worst performing 10% of their businesses. Plans had to be produced to eliminate these loss making activities or the cover would be placed into ‘run-off’, effectively removing cover from the market. PI was revealed to be the second worst performing part of the business for syndicates and had been for some years.

Capacity in the PI market was quickly halved as a result. Premiums soared. The amount of insurance provided under particular policies has been limited and exclusions have been widened. Then Covid hit the industry. Now the insurance issue is threatening to be a barrier to recovery from the pandemic.

The Construction Leadership Council (CLC) has launched a survey on the costs and policy exclusions that the industry is experiencing when renewing their PI insurance cover (see News). CLC reports four fold increases in policy costs, with some companies unable to get cover at all.

The CLC plans to use the findings to approach the UK Government and insurers to find ways to alleviate the problems, which the industry has to support. The government and the insurance industry also have to show their support – without something being done the Prime Minister’s plans to ‘build, build, build’ the UK’s way towards a brighter post Covid and post Brexit future are on very shaky foundations.

The original version of this article was first published in www.constructionlaw.uk.com by Nick Barrett

Employment law changes from 6 April 2020

New legislation making major employment law changes to existing regulations comes into force from Monday 6 April 2020.

Employers and employees can find the updated advice here on Acas’s website. The most significant employment law changes are:

Parental bereavement leave and pay
The Parental Bereavement Leave and Pay Act 2018 gives all employed parents the right to 2 weeks’ paid leave if their child aged under 18 dies, or if they have a stillbirth at 24 weeks or later.

See our advice on parental bereavement leave and pay.

Written terms (‘written statement of employment particulars’)
Workers now have the same right as employees to written terms (a ‘written statement of employment particulars’) from their employer.

Employers must provide their workers and employees with their written statement on or before their first day of employment, no matter how long they’re employed for.

The written statement must include details about:

  • the hours and days of the week the worker or employee is required to work, and whether they may be varied and how
  • entitlements to any paid leave
  • any other benefits not covered elsewhere in the written statement
  • any probationary period
  • any training provided by the employer

See our advice on written terms (the ‘written statement’).

Agency workers’ rights
The Swedish Derogation (referred to as ‘pay between assignments’ contracts) is abolished from 6 April 2020, so all agency workers are entitled to the same rate of pay as their permanent counterparts after 12 weeks.

All agency workers are entitled to a key information document that clearly sets out the type of contract they will have and the pay they’ll receive.

See our new guide on agency workers.

ICE (Information and Consultation of Employees) Regulations
From 6 April 2020, it’s been made easier to request an information and consultation agreement. A minimum of 2%, rather than 10% of employees (or at least 15 people), in workplaces with 50 employees or more can request a formal agreement to be informed and consulted about workplace matters.

See our new guides on ICE (Information and Consultation of Employees) Regulations.

Changes to holiday pay calculations
From 6 April 2020, the period used to calculate a week’s pay for holiday pay purposes increases from the previous 12 weeks of work to the previous 52 weeks.

See our updated advice on calculating holiday pay.

The original version of this article was first published in www.acas.org.uk

Top Ten Tips To Avoid Commercial Disputes

Commercial Disputes in business are inevitable, but they don’t have to cost the earth or damage your reputation. Here are some tips to avoid commercial disputes from escalating.

Nine times out of ten, business relationships are uncomplicated, undemanding and straightforward from start to finish. Hiccups happen, but in most cases, they are but bumps in the road of an otherwise smooth transaction. However, even the most reasonable of business leaders is not immune to a conflict.

Anyone running a business will know that commercial disputes can arise at almost any time. It may be a supplier failing to deliver an element of a project and acting defensively when questioned; you may become embroiled in a conflict with an employee regarding commission and expectations around targets; a customer may argue that the product or service received was not up to par and refuse to pay on that basis.

Any of these circumstances could trigger commercial disputes that, if not properly managed, could quickly escalate into a bitterly fought conflict that drags both parties in and drains the business of valuable time and costs from legal expenses. Litigation should always be the last resort, so if you’re currently teetering on the edge of an argument, read on – we’ve set out 10 of our top tips for avoiding commercial disputes.

1. Carry out research and due diligence
When a new business opportunity arises, it’s easy to assume the best and jump into an agreement knowing very little about the people running the business and their reputation. Similarly, after a painfully long recruitment process, seeking out references doesn’t seem so important once you’ve found what looks to be a dream candidate who ticks all your boxes. Once again, suppliers who can quickly meet the demands of an upcoming project can be rushed in without prior research.

In all these cases, a lack of background research opens a business up to the risk of disputes. A variety of checks can be performed nowadays to vet a business or individual before agreeing to anything, such as Companies House Beta, Land Registry and even Google reviews. Professional non-payers don’t come with a warning, but there are ways to uncover information and identify red flags before a contract is signed.

2. Create clear and understandable agreements
It’s not uncommon for incomprehensible contracts to be drawn up due to boilerplate text being thrown in by a senior person who doesn’t possess a legal background. This typically happens when a business wants to either save on legal costs or the presumed time involved in seeking advice.

It may seem like an obvious point, but the need for watertight agreements that are clear on the rights, responsibilities and liabilities of all parties is paramount to preventing disputes. The more room for subjective interpretation in your contracts, the higher the risk that the counterparty will take advantage of ambiguity for their own gain. If you aren’t certain on how a clause implicates you or the counterparty when signing, you can only blame yourself when things go wrong.

3. Carefully consider any limitations on liability when drawing up a contract
Every commercial transaction has a risk of liability attached to it. From breach of contract to infringement of intellectual property rights, regulatory offences and negligence, the possible risks involved in a transaction can be mitigated by limiting your liability through explicit terms in the contract. Limitations of liability can either refer to specific events and state that there will be no liability for them, exclude all warranties unless they are specified in the contract or exclude legal claims based on misrepresentation. This isn’t something you’ll want to copy and paste into a contract, but rather an area that you should seek specialist advice for to ensure that your interests are protected when entering into a new agreement. Similarly, if the contracting party has snuck in a limitation or exclusion of liability clause at the last minute, think carefully about the potential consequences for your business before agreeing to anything.

4. Agree a process for dispute resolution
A simple measure but a critical one in the prevention of commercial and shareholder disputes is a clause in your commercial contracts and shareholders agreements that outlines the process for resolution should matters turn sour. This is another area that is easily glossed over when embarking on new business ventures, but one that arguably gives all parties involved in a contract the best chance of keeping the time and costs as low as possible in the event of a disagreement. The contents of a dispute resolution clause will vary between types of agreements, but the key considerations to address include:

  • Which country’s laws will govern the contract (in cases of cross-border transactions)
  • Who should apply the governing law and make a decision on any dispute,
  • What steps the parties must take to resolve the dispute.

5. Keep all relevant documentation
If you suspect a dispute has the potential to escalate, it’s important to adopt a no-destruction policy on all relevant documentation, and to ensure everyone involved in the contract does the same. While litigation should always be avoided, it’s best to prepare for the worst should further action be taken against you. As such, if it is found that you have destroyed documentation that was relevant to the dispute, it won’t be a good look in court and can have serious consequences. As well as that, the better able you are to document your case – the better your chances of a successful outcome.

6. Be prepared to negotiate and explore alternative dispute resolution
Litigation is expensive, time consuming and, depending on the outcome, can be highly damaging to your reputation. Before a case reaches court, the Judge expects that both parties have at least attempted to resolve the dispute outside of court. That means you should be prepared to compromise and find a settlement that suits you and the opposing party. This could be through a face-to-face meeting, formal mediation or arbitration. Alternative dispute resolution is quicker and cheaper and, in the best-case scenario, may even preserve the commercial relationship.

7. Be prepared to negotiate and explore alternative dispute resolution
If the opposing party has breached the contract, you may have the right to terminate the contract altogether. However, this right is lost if you fail to alert the opposing party of your intention to terminate or take further action. It is perfectly normal for you to take some time to decide the best course of action, but be careful not to take too long – there comes a point where inaction can be construed as a decision to ‘affirm’ the contract. While explicit termination leaves little doubt as to your intentions, inaction does tend to blur the lines in the eyes of judges. If you become aware of the breach, speak to a commercial dispute resolution lawyer about the best way to proceed as soon as you can.

8. Consider training your staff on handling complaints
They may be an expert in their field, but without proper training, staff who aren’t typically customer-facing can find themselves struggling to deal with a frustrated customer due to their lack of training in complaints handling. Negative feedback is rarely well-received, but by developing a complaint handling process and providing the necessary training, you create a standardised procedure for which all your employees can operate from to improve customer satisfaction and minimise the risk of conflict. At the same time, it’s imperative to recognise when a customer is taking advantage of goodwill and to know when to step in to protect your employee and preserve peace between your business and the client.

9. Be proactive in the face of a potential dispute
Reducing the risk of conflict requires a proactive approach from business leaders. For example, if an angry customer isn’t backing down, don’t ignore the signs. Instead, acknowledge the problem and try to find ways to rectify the issue before the matter escalates any further. In most cases, what someone puts in an email will be very different to how they act when speaking face to face or on a call. Misunderstandings happen, and they can usually be resolved if you get on top of them before they evolve into something bigger. Simply picking up the phone to the aggrieved party to empathise with their frustrations and find a way forward can make all the difference in avoiding a costly legal dispute.

10. Be proactive in the face of a potential dispute
Don’t leave it until the dispute has escalated to get a lawyer involved. The moment matters start to become complicated or a disagreement is showing no signs of resolution, seek advice from a commercial solicitor. They should be well-equipped to provide you with a bespoke roadmap for resolution, along with expert advice to minimise the risk of future disputes.

The original version of this article was first published in Start Ups Magazine by Robert Taylor

Virtual Arbitration: An Overdue Addition or a Ticking Time Bomb?

Virtual Arbitration – An Overdue Addition or a Ticking Time Bomb?
The effects of Covid-19 have been evident throughout the legal sector, primarily causing the English legal system to be dragged hastily into the 21st century. The once traditional formal hearings, now, have a consistent utterance of ‘can you put your microphone on?’, and ‘your connection dropped, could you repeat that?’.

The intent has always been to slowly introduce technology into the court system by giving it the necessary time to adjust and iron out any teething problems. Instead, the industry underwent an abrupt shift to incorporate virtual meetings, which allow hearings to go ahead despite global physical distancing measures. The use of virtual hearings has now flourished due to the certainty in scheduling and the safety from the pandemic. It was time for some form of modernisation for UK hearings, but the drastic changes rising from the pandemic may not be at all sufficient and permit abuse from those who understand the loopholes of telecommunications.

The international arbitration community was no stranger to virtual proceedings, even before the Covid-19 crisis. Efforts to transfer to the online interface started a few decades ago, but growth remained almost stagnant compared to the exponentially growing popularity of alternative dispute resolution in general. Most dispute resolution centres – including the ICC, LCIA, and ICDR, can facilitate virtual hearings if needed. Despite the versatility of most institutions, completely virtual proceedings have been the crushing minority of cases.

Ironically, the situation is rapidly changing due to Covid-19 and the parallel need for social distancing and dispute resolution accommodation. Even though a year has passed since the beginning of the pandemic, governments are still placing physical restrictions on an ad hoc basis, which causes uncertainty in scheduling hearings. This has led to counsels advising parties to proceed with virtual hearings or online arbitration whenever possible. As virtual hearings are coming to the limelight, it is worth exploring some relevant challenges and asking: is the current system sufficient?

Due process complications: a potential challenge to the award?
It is straightforward that when both parties consent to virtual proceedings, there will be no issue of due process and any related challenge to the award is likely to fail. When the motion to transfer to virtual hearings is made by one of the parties or by the tribunal itself, that might compromise the enforceability of the arbitral award on due process grounds.

According to Article 18 of the UNCITRAL Model Law on International Commercial Arbitration, the parties must be ‘treated with equality’ and must be ‘given a full opportunity to present their case.’ Under Article V(1)(b) and (d) of the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention) a national court might refuse the recognition and enforcement of the arbitral award if due process was not observed during the proceedings. While there is no apparent reason why a party’s procedural rights might be compromised during virtual hearings, the practical implications of transferring to the new interface can have a considerable impact on a party’s ability to participate.

Concerningly, the processes involved in arbitration are at risk of exploitation through virtual hearings. One risk is that parties and witnesses can have other people in the room, potentially coaching answers to questions, which can be detrimental to the opposing party. [i] This could breach Article 18 of the Model Law, as the parties are not on equal footing when this occurs. However, guidance has suggested 360-degree video conferencing to mitigate this risk. [ii]

Similarly, there are issues with timing in global arbitration. When there are multiple time-zones involved, there can be a need for more breaks due to the risks associated with the overuse of screens. [iii] When the so-called ‘Zoom-Fatigue’ sets in, parties are less aware and less receptive to the presented information.[iv] When one party has to participate late at night, further breaks may need to be provided due to the lack of sleep. In such cases, not providing breaks could grant the opposition an unfair advantage.

If the parties are unaware of how to resolve connection issues, the flow of proceedings may be interrupted and may even need to be postponed, which can be detrimental and time-consuming for all stakeholders.[v] This is also an aspect of virtual hearings, which is vulnerable to manipulation by uncooperative parties. Some may exploit the freedom to cut off their Internet to postpone a hearing which is not working in their favour. This phenomenon, essentially ‘rage quitting,’ is not preventable during a hearing, and it may negatively impact the other party. Of course, there is always the risk of due process claims at the recognition and enforcement stage.

Not granted: the cost of access to technology
Virtual hearings tend to be more cost-effective than court litigation; however, it should not be taken for granted that virtuality necessarily results in less cost for some parties. Although technology has advanced vastly over the past decades and is still advancing exponentially, it has evolved unevenly around the world. Many states have the infrastructure and the tools to support virtual arbitration hearings, while other states do not, resulting in a significant disparity of cost of access from state to state.

The unevenness is evident when comparing developed to developing nations. According to the World Bank, only 35% of developing countries have access to the Internet, in stark contrast to the 80% in developed nations.[vi] Even amongst developed nations, the cost of access to technology can be a ‘make or break’ factor for a party participating in virtual hearings. For those who have access to data, that comes at vastly different price tags, making the cost of participation significantly different from country to country. According to Cable’s report on Worldwide Mobile Data Pricing, the disparity in data cost can be large even in the developed world, where reportedly 80% of the population have access to the Internet.[vii] As of February 2020, the UK’s average price of 1GB of data was $1.39, with Russia’s average price being $0.52 and Canada averaging at $12.55.[viii]

Given these numbers, the cost of an hour’s streaming of virtual hearings is bound to be significantly more expensive at a state with higher rates, whereas its counterparty might be facing a fraction of the cost. Instantly, the burden of the virtual hearings becomes tangible for one party but remains a hustle-free option for the other. The stark inequality of expenses associated with participating in virtual hearings across the globe will not improve until the use of data is made more readily available globally.

Privacy and confidentiality
Another issue presented by virtual hearings is confidentiality, as additional steps are required to ensure it is maintained. Hacking or the parties covertly recording the proceedings are more likely to occur in the virtual interface, breaching the rules of the arbitration and leading to unfairness. In an attempt to prevent issues of this kind, Annex I Paragraph C of the ICC practice note requires parties to have a meeting with the tribunal to discuss what needs to be established to protect the parties.[ix] This involves discussing privacy issues, such as whether to record the session or if they wish for 360-degree views of each participant’s room. Parties can also consult about confidentiality in the context of establishing minimum requirements of encryption against hacking. The American Arbitration Association issued a virtual hearing guide, which lists more detailed guidance on maintaining confidentiality, including preventing the use of public internet connections. [x]

The above aim at protecting the parties as much as possible in a virtual hearing. However, issues such as the breach of confidentiality are always a risk, as they can only be mitigated to an extent and are very difficult to be entirely prevented. While privacy & confidentiality will likely remain an issue in virtual arbitration, all the add-on elements available by arbitration institutions are bound to increase the cost of arbitration significantly, even though they are essential to safeguard against the frustration of the arbitral process and tactical proceedings at the recognition and enforcement stage. The lack of standardised rules, in this regard, is evidence of how hastily the world moved to virtual hearings and provides food for thought; it is perhaps time for online arbitration rules to name elements such as encryption as the base standard, given their cruciality.

Final thoughts
Awards made during virtual hearings are widely considered to be valid alternatives to traditional awards in arbitration.[xi] Covid-19 has ensured a quick turnaround in introducing these hearings, meaning that teething problems are underway and may continue to be for some time. There are issues with fairness within the system, but it is possible to take steps to mitigate the risk of injustices occurring. The development of virtual hearings is ongoing, and while they remain adequate, further steps will likely be taken to improve their quality.

[i] Norton Rose Fulbright, ‘Institutional responses to the COVID-19 pandemic’ (2020) accessed 3rd March 2021.
[ii] International Court of Arbitration, ‘ICC Guidance Note on Possible Measures Aimed at Mitigating the Effects of the COVID-19 Pandemic’ (ICCWBO, 2020) accessed 1st March 2021.
[iii] Ibid.
[iv] Correia, Fleury, Gama e Silva Advogados, ‘Virtual hearings on the merits of the arbitration: a step too far or the only path to follow?’ (The legal 500, 2020) accessed 3rd March 2021.
[v] International Court of Arbitration, ‘ICC Guidance Note on Possible Measures Aimed at Mitigating the Effects of the COVID-19 Pandemic’ (ICCWBO, 2020) accessed 1st March 2021.
[vi] The World Bank, ‘Connection for Inclusion: Broadband Access for All’ accessed 3rd March 2021.
[vii] Ibid.
[viii]Dan Howdle, ‘Worldwide Mobile Data Pricing’ (Cable.co.uk, 2020) accessed 2nd March 2021.
[ix] International Court of Arbitration, ‘ICC Guidance Note on Possible Measures Aimed at Mitigating the Effects of the COVID-19 Pandemic’ (ICCWBO, 2020) accessed 1st March 2021.
[x] American Arbitration Association, ‘AAA-ICDR® Virtual Hearing Guide for Arbitrators and Parties’ (AAA, 2020) accessed 3rd March 2021.
[xi] Norton Rose Fulbright, ‘Institutional responses to the COVID-19 pandemic’ (2020) accessed 3rd March 2021.

The original version of this article was first published in The Legal Compass by Konstantina Kalaitsoglou, Stephanie Stephenson

Don’t Confuse Flexible Working With Remote Working

At the end of January a People in Law conference heard from Iain Harrison, a senior manager at EY about the difficulties and potential rewards of establishing a new hybrid working model once the pandemic has receded. Adam McCulloch listened in.

Businesses must not confuse flexible working with remote working – they are two different things. UK workplaces have been faced with a revolution, not evolution, over the past year as a result of the pandemic, Iain Harrison, people consulting, EY, told the People in Law conference at the end of last month.

Harrison also said that few people “realised how important HR was until the pandemic”.

He said that people were mistaken when they talked about there being a great experiment in flexible working during the pandemic. It’s actually an experiment in remote working, he told People in Law delegates, with some employers increasing digitisation exponentially and claiming that they would never return to the old workplace-centred way of doing things. But was this something of a sticking plaster approach that didn’t recognise the importance of continuous human interaction, Harrison asked

“Are clients going to want remote meetings? Will we return to a real desire for in-person contact and what does this mean for our structures?” Harrison said.

Harrison suggested that remote working was no more flexible than having to go into the office. “We all have stories of colleagues who have not fully embraced remote working. Confirmation bias … oh we can do everything remotely … but it doesn’t mean that things should be done remotely. The thought process hasn’t evolved fully enough to make the right choices,” said Harrison.

He said that companies had made missteps during the pandemic, implying that permanently changing the working model did not address the question of whether the model fitted how firms worked with their clients.

There was also the question of how remote working had disadvantaged some groups of workers. “We’ve seen a disproportionate impact on women in the pandemic. It’s taking women backwards. So the new [hybrid] models [of working] are an opportunity to make up for that,” said Harrison.

Empty buildings

He went on to question how the office would lose value as part of a business’s branding if managers were to invite clients to largely empty buildings. Harrison saw offices as being linked to social activities – a shift from our traditional view of them as places just for work. He said the view would become more one of “Work is something I do in different places… the office does not exist as the main place of work.”

One of the most important functions for offices, he said, was how they provided a venue for random meetings with colleagues; one of the benefits was that employees were in proximity to more experienced colleagues and could “earwig” conversations. “So flexibility reduces the chances of these important interactions,” said Harrison.

“Putting together a hybrid model can’t be done by accident,” said Harrison, citing research by Cushman and Wakefield, whose study showed how the random meetings and encounters that “give wonderful insights on taking your work forward” would be impacted by more flexible working. The research showed that the chances of a team coming together reduced exponentially depending on how many days a week people were at home. If team members worked at home three days a week, the chances of meeting a colleague dropped to 12%.

This told us, said Harrison, that “you can’t choose to work at home whenever you want… there must be some form of design”. The fact that, for example, junior lawyers learned a lot by “osmosis” was highly pertinent here, yet there were employees who had joined professional services firms nearly a year ago who had never met any colleagues.

Decisions needed to be made on who needed to work together and leadership must develop real time for engaging with people and ensure it had the capacity to do this. HR could help with this but it had to be led “within the line”… and had to be supported by rostering, facilities and real estate to ensure there’s space for teams.

Presenteeism

Harrison said many employers and employees feared that “return-to-office presenteeism” could develop very quickly where people wanted to be in the office, where the “seat of power” was. This had been seen at some government departments where people had needed to head in to the office and presenteeism crept back in. “Thankfully some of the leaders said I’m not going back in and I’ll continue to work remotely but inclusively. That role modelling is so important from leaders.

“The culture and behaviours are different levers that need to be in place to support this new way of working. We’ve seen a lot more organisations needing to focus on culture as a forethought not an afterthought.”

One of the biggest risks, said Harrison, was around collaboration and relationships. As people come into the organisation how do people feel they’ve joined an organisation – what differentiates one business from another? “Onboarding is a real challenge and one of the hardest challenges of a new hybrid model.”

“We’ve had to work doubly hard to make sure people gain that shared knowledge and shared experience,” he said.

There was a risk that the benefits of the hybrid model would not be felt because leaders would just decide it was too difficult to achieve, agreed Harrison in response to a question. But this was why really understanding the drivers behind hybrid working was vital – “we need to get the hard metrics and put them in the dashboard”.

Shared experience

He saw the past 12 months as a shared experience, one that had affected clients, supply chains, leaders equally. “We now all have an experience of remote working. We are seeing greater acceptance of individual red lines… many people might now feel they can meet remotely because of a family issue, client expectations have changed because the clients themselves have had to lead a different kind of working life. We have to be a lot more bold in expressing our needs.”

HR must facilitate the conversation about where certain tasks must take place, with the ability of people to move around roles becoming important.

The new hybrid style of work “will require trust” concluded Harrison, at the People in Law conference. “Team leaders must be trusting about workers. Output must be focused on. Guardrails and guidance … a more adult to adult relationship in the employment contract as opposed the adult-child-type relationship we used to have.”

The original version of this article was first published in Personnel Today by Adam McCulloch

Covid Procurement Highlights Need For Reform

The original version of this article was first published in Construction Law by Nick Barrett

Much, if not all, of 2021 will be spent dealing with the fall out of the Covid-19 pandemic, and hopefully learning from the way the UK mobilised its central government procurement systems to combat it. There is much to learn.

There are hopes that leaving the European Union might mean a more welcoming attitude to the sort of fundamental reform that has long been recognised as essential for more efficient, money saving procurement of all services and products by the public sector. There have been successes. Developing and manufacturing a vaccine in such a short space of time might go down in history as one of the great medical success stories. The construction industry earned well deserved plaudits for making the Nightingale Hospitals available in a timely fashion. But was the way the UK responded to the pandemic a procurement success story?

Most crucial medical supplies like personal protective equipment (PPE) for national health service staff were obtained. But there were some headline grabbing embarrassments for the government along the way. A raft of previously unknown ‘brokers’ popped up promising to deliver supplies that nobody suspected even existed. Sometimes they didn’t, at least not while meeting the required specification. Some of these people or organisations were able to simply ‘flip’ the contracts, creaming off large profits.

Some contracts were awarded retrospectively as normal standards of transparency and procurement process were steamrollered in the understandable rush to combat Covid, which quickly caught the eye of the National Audit Office.

An almost unique part of the UK’s Covid related procurement during 2020 was abandoning the usual practice of subjecting the award of contracts to suppliers with known connections to gatekeepers like Ministers and MPs to greater scrutiny than usual. This abandonment of open competition was achieved through the creation of a high priority channel for some major awards that companies could breeze through if recommended by these gatekeepers, which included health service officials. Entry to this channel reportedly improved chances of being awarded a contract by a factor of ten.

We will probably never know for sure what part of the £15 Billion or so that has been spent on PPE so far could have been saved. On transparency the UK has fallen well behind international standards in its Covid related procurement. Some countries publish all emergency contracts within 24 hours. UK procurement rules demand publication after 30 days; but many were unpublished after three months, or longer.

Other countries have already investigated their procurement during the first year of the pandemic, pointing out where things could be improved. The UK government has yet to undertake such detailed scrutiny of its performance, so the opportunity for learning and improving is so far being passed up, at unknown cost to the public purse.

The pandemic has highlighted weakness in the UK public sector procurement system, in particular its uncoordinated and fragmented nature, which have been appreciated for years. The need may be for appointing someone with an overarching power to reform public sector procurement, to ensure readiness for another pandemic, which we are assured will arrive one day, as well as to generate efficiencies that might leave us in a better position to both respond to and pay for it.