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.

Eviction Ban Extended Until End of March

The original version of this article was first published in The Law Society Gazette by Monidipa Fouzder

The government has extended the current eviction ban until the end of March – a decision that has been cautiously welcomed by housing lawyers who remain concerned that tenants can still be made homeless due to Covid-related rent arrears.

The Ministry of Housing, Communities and Local Government announced over the weekend that the ban on bailiff evictions has been extended until 31 March. Exemptions to the eviction ban include illegal occupation, anti-social behaviour and rent arrears of six months or more. Landlords must give six months’ notice before starting possession proceedings.

Housing secretary Robert Jenrick said: ‘By extending the ban on the enforcement of evictions by bailiffs, in all but the most serious cases, we are ensuring renters remain protected during this difficult time. Our measures strike the right balance between protecting tenants and enabling landlords to exercise their right to justice.’

The Law Society welcomed the extension but is worried tenants can be evicted as a result of the redefined exemption for arrears.

David Greene, Society president, said: ‘Eventually, fewer tenants will be protected by the ban and may become homeless, making it difficult to contain the virus. Funded early expert legal advice is vital to preventing unnecessary evictions and must continue to be available to all tenants alongside the mediation pilot, now deployed across all courts.’

The Housing Law Practitioners Association welcomed the extension but said: ‘It remains HLPA’s position that nobody should be evicted into a pandemic health crisis, not least because eviction, home-seeking and homelessness are not conducive to public health and dilute the message to stay at home and save lives.

‘The January regulations watered down the November regulation and that should be reversed. The ban on evictions should not have any exceptions other than those necessary for public health reasons. Otherwise the measures do not, to quote [Jenrick], “strike the right balance between protecting tenants and enabling landlords to exercise their right to justice”. Instead they leave renters and the general public at risk for the sake of assuaging private landlords.’

Solicitor Amy Stirton, an associate in the housing and regeneration department at Forbes Solicitors, said: ‘Whilst it doesn’t come as a surprise that the eviction ban has been further extended, I am sure that it will be unwelcome news to the thousands of victims of antisocial behaviour who have endured the wider consequences of the ban for the best part of the last 12 months.

‘I hope the courts will enable landlords to apply the exemptions more easily going forward to ensure that those suffering the most are able to gain some respite. Going forward, I think that it is important that each case is dealt with on an individual basis to enable the correct balance to be achieved.’

The National Residential Landlords Association said the government’s latest announcement does not help over 800,000 private renters who have built rent arrears during the pandemic.

Ben Beadle, the association’s chief executive, said: ‘It means debts will continue to mount to the point where they have no hope of paying them off. It will lead eventually to them having to leave their home and face serious damage to their credit scores. A package of hardship loans and grants is needed as a matter of urgency. To expect landlords and tenants simply to muddle through without further support is a strategy that has passed its sell by date.’

COVID-19 and the Frustration of Leases: Lessons from Hong Kong

The original version of this article was first published in University of Oxford Undergraduate Law Journal by Alexander Yean

[1]With many parts of England subject to severe COVID-19 restrictions that have mandated the closure of non-essential shops, it is likely that many tenants are being forced into financially untenable positions. Subletting and assignment are commercially impossible in the current climate, and the difficulty of finding new tenants means that it would be illogical for landlords to agree to early termination. It is therefore pertinent to consider the potential application of the doctrine of frustration to leases, which would have the effect of automatically discharging the parties’ obligations thenceforth.[2]

At the time of publication, I am not aware of any reported cases in England and Wales of frustration being pleaded in respect of a tenancy dispute relating to COVID-19 or the attendant restrictions. Among common law jurisdictions, the Hong Kong Court of First Instance has led the charge, and its November 2020 decision in The Center (76) Ltd v Victory Serviced Office (HK) Ltd[3] may well set the tone for any upcoming tenancy disputes relating to COVID-19.

This note will begin by summarising the current position in English law as regards the applicability of frustration to leases, before analysing how the law has been applied to the COVID-19 situation in the Center 76 case. I will then argue that while the outcome reached in the Center 76 case was just, English courts should not adopt its ratio when approaching similar cases that may arise in the near future, and should instead seize the opportunity to re-examine the law on frustration as applied to leases.

Frustration and Leases: Where the Law Stands

The starting point of any analysis must be the National Carriers case[4], in which a majority of the House of Lords[5] first accepted, in principle, the proposition that a lease was capable of being frustrated. However, because frustration was not actually made out on the facts, and because there has been no subsequent case where frustration has been successfully pleaded,[6] that proposition remains obiter even today.

At time of publication, the position currently stands as follows: while the proposition that leases are capable of being frustrated seems to now be universally recognised,[7] this is strictly speaking not binding as a matter of law, so it is still technically possible (albeit practically inconceivable) that a claim might fail on this preliminary basis. More significantly, when frustration is pleaded in respect of leases, the standard required for a successful claim is exceedingly high. An illustrative recent case is Canary Wharf (BP4) T1 Ltd v European Medicines Agency,[8] in which the European Medicines Agency failed in its claim that a 25-year lease for its EU headquarters which commenced in 2014 had been frustrated due to Brexit, because the lease was assignable and the property could be sublet.

The Center 76 Case

It is against this backdrop that we turn to the Center 76 case. The tenant, a flexible workspace provider, had a five-year lease of a 76th-floor office in The Center, a skyscraper in the heart of Hong Kong’s Central district, which commenced in September 2019. Since February 2020, the tenant had failed to pay the rent and other charges, and in June 2020 the landlord commenced proceedings for possession and to recover the arrears. The action succeeded, and summary judgment was given in November 2020. Of present interest is the fact that the tenant’s submission that the lease had been frustrated by disruptions caused by social unrest and COVID-19 restrictions was rejected as ‘unmeritorious… moonshine’.[9]

DHCJ Ho’s reasoning for rejecting this submission[10] is twofold:

‘The Defendant has not adduced any evidence to show how long the disruptive events and/or COVID-19 pandemic were expected to last during the unexpired term of the tenancy or at least for a long period of that unexpired term.’

‘Furthermore, the Defendant’s conduct in holding onto the Premises instead of surrendering them is inconsistent with its claim of frustration. Its refusal to deliver up possession of the Premises is evidence of its lack of good faith in this defence.’

While the decision is unsurprising on the facts, both grounds of DHCJ Ho’s judgment raise interesting points of general applicability.

The First Ground: the Duration of Interruption

It is good law that the duration of the interruption of use (specifically, whether the duration is a significant proportion of the original lease) is a critical factor in determining whether a lease has been frustrated. On the facts of the National Carriers case,[11] access to a warehouse being blocked for 20 months in a 10-year lease that had 5 years left to run was held to be insufficient to make out frustration. This is sound, because it would have been disproportionate and unjustified to automatically terminate the entire contract on account of one-third of the remaining lease being disrupted.

Indeed, this proposition dates back at least as far as the Cricklewood case (heard in 1944),[12] wherein Viscount Simon LC held that retail disruption caused by WWII restrictions was not capable of making out frustration, because

‘the lease at the time had more than ninety years to run, and though we do not know how long the present war… [is] going to last, the length of the interruption so caused is presumably a small fraction of the whole term.’[13]

That the duration of the claimed interruption should be for a substantial period of the remaining lease in order to make out frustration seems to be wholly consistent with the doctrine of frustration itself. The general test for frustration as set out by Lord Radcliffe in Davis Contractors v Fareham Urban District Council[14] is whether a thing undertaken under the frustrating circumstances would be ‘a thing radically different from that which was undertaken by the contract.’ For a lease to be rendered ‘radically different’ by disruptions, it is common sense that the disruption suffered should last for a substantial period of the remaining lease.

As such, DHCJ Ho was surely correct for finding against the tenant due to its inability to demonstrate that the disruptions caused by social unrest and COVID-19 disruptions would remain extant for a ‘long period’ of the remaining tenancy.[15] It is of course trite law that the burden of proof is on the claimant, who was in this instance the tenant asserting that frustration had occurred.

Yet one cannot help but feel sympathy for the tenant (at least as far as this point is concerned), due to the practical impossibility of demonstrating the length of the disruptions caused by COVID-19 and social unrest. At the time of trial (before the results of several COVID-19 vaccine trials were announced), nobody, least of all an indebted tenant and its legal counsel, was in a position to even speculate how long the pandemic might last, or whether Hong Kong might again see mass political protests. The tenant can hardly be faulted for failing to adduce evidence that simply does not exist—the government monitors the pandemic and updates its policy on a day-to-day basis, so it is simply not possible to adduce evidence as to the duration (or even likely duration) of pandemic-related restrictions.

These observations raise an interesting general problem, which is perhaps the most germane aspect of the Center 76 judgment: any tenant trying to plead frustration under COVID-19 restrictions (or indeed, any restrictions of indeterminate duration) would face insuperable difficulty in fulfilling the burden of proof vis-à-vis the extent/duration of those restrictions. If the Center 76 case remains good law, it would be virtually impossible for any such claim to succeed.

The Second Ground: the Tenant’s Conduct

On the facts of the Center 76 case, the tenant failed to pay rent for several months, yet nonetheless refused to deliver possession of the premises when so demanded. In the subsequent action by the landlord, it then pleaded frustration, while still continuing to use and occupy the premises even as the case was being heard.[16] DHCJ Ho was understandably unimpressed by this conduct, and held that the tenant, to summarise with a colloquialism, could not have its cake and eat it too. There is nothing controversial about DHCJ Ho’s finding: surely, if the tenant believed that the lease had been frustrated, it would deliver possession and terminate the lease at the earliest opportunity; its failure to do this was evidence that the lease had not been frustrated, as the tenant still saw (and presumably in fact derived) value in retaining possession in an attempt to ‘generate income without paying rent to the prejudice of the [landlord]’.[17]

While the tenant’s conduct on the facts was certainly egregious, it is submitted that this finding should be confined to the facts of the present case. It may not be the case that every instance of a tenant refusing to deliver possession is evidence that the lease has not been frustrated, because there may be compelling reasons for not doing so. Take, for example, the lease of a showroom for the display of large chattels (e.g. furniture, or grand pianos, or luxury cars) that cannot practicably be moved in order to deliver up vacant possession, especially during a pandemic. The tenant in such a case may well still derive some value from the storage of the showpieces, but surely this value would be de minimis if the main purpose of the lease (to use the property as a showroom) is frustrated by the mandatory closure of non-essential shops. Therefore, the conduct of the tenant in failing to transfer possession when demanded should not be determinative in every case, although it is certainly conceded that a tenant that takes active steps to leave the premises would likely have the stronger factual claim for frustration compared to a tenant that does not do so.

The Way Forward

Despite the fact that the Center 76 case was heard in Hong Kong, both grounds of the judgment on frustration can easily apply to cases heard in English courts. If the judgment is indeed adopted, the implications for tenants seeking to frustrate their leases would be dire.

As regards the first ground, English tenants seeking to plead frustration would, logically, also find it impossible to fulfil the burden of proof as regards the expected duration of disruption while the pandemic is still ongoing. This would have the unjust effect of causing claims to fail that would have otherwise succeeded if the actual duration of disruption is known beforehand: suppose that the current COVID restrictions last until the end of 2021, but no longer. If the government announced this in January 2021, a retail tenant that entered into a one-year lease at the end of 2020 would certainly have a strong case for frustration; but if the government refuses to commit to a long-term strategy and instead intermittently reviews the restrictions (as it is now doing), the tenant would not be able to succeed in its claim until most of the lease is already elapsed—a financially ruinous outcome.

The second ground of DHCJ Ho’s judgment, while more confined to the facts of the Center 76 case, nonetheless suggest that tenants must be mindful of their conduct, as it could well form the evidential basis of the court’s finding on frustration. In particular, a retail tenant facing a demand to deliver up vacant possession may be in a difficult dilemma, since doing so might be financially ruinous (due to the added expense of transporting and storing stock), but not doing so may impede a subsequent claim of frustration.

If English courts decide to adopt the ratio of the Center 76 case, tenants intending to plead frustration in respect of COVID-19 restrictions would certainly face an uphill battle, with the broader implication that the doctrine of frustration as applied to leases would be robbed of a great part of its practical significance. Beyond implausible scenarios such as where ‘some vast convulsion of nature swallow[s] up the property altogether’,[18] the status quo under stringent COVID restrictions seems to be the quintessential situation where frustration should rescue a tenant from a lease that has been rendered commercially ruinous; however, most claimants would have little prospect of success if faced with an impossible burden of proof as regards the duration of disruption.

It is therefore submitted that English courts should decline to follow DHCJ Ho’s judgment in the Hong Kong Court of First Instance, and should instead take this opportunity to re-examine the law on frustration as applied to leases. It is accepted that frustration is an exceptional and residual doctrine designed to cure injustice where no other remedy can operate, and as such should not be applied liberally.[19] Notwithstanding, its extension to leases would be largely devoid of purpose if the bar remains insuperably high. Adopting a lower standard of proof as regards the duration of disruption than that applied in the Center 76 case would not only result in greater legal coherence insofar as it allows the doctrine to be successfully applied in practice, but may also provide a lifeline to countless tenants in dire financial straits. A careful balance must be struck, and time is of the essence.


[1] I am a final year law student at the University of Oxford (Exeter College). All errors remain my own. I welcome any comments or criticisms, and can be reached at alexander.yean@exeter.ox.ac.uk.

[2] Law Reform (Frustrated Contracts) Act 1943, s 1.

[3] [2020] HKCFI 2881

[4] National Carriers Ltd v Panalpina (Northern) Ltd [1981] AC 675

[5] Accepted 4-1, with Lord Russell dissenting in part.

[6] Perhaps the closest that the proposition has come to being directly applied as law was in Hussein v Mehlman [1992] 2 EGLR 87, 89, wherein Sedley QC (then sitting as an Assistant Recorder in the County Court) accepted the proposition as a matter of law, but only applied it as part of his reasoning that leases were susceptible to repudiation (a concept that he reasoned to be similar to frustration, insofar as both are contractual doctrines that operated to determine a lease and its demise in land).

[7] See e.g. the Blundell Lecture of 2020 (wherein Anthony Tanney from Falcon Chambers assumed the proposition when giving a lecture entitled “From Panalpina to the Pandemic: Leases and the Doctrine of Frustration”); the Blundell Lecture of 2000 (wherein both Lord Millett and Neuberger J (as he then was) accepted the proposition in the context of an extrajudicial debate on the applicability of the doctrine of contractual repudiation to leases); Canary Wharf (BP4) T1 Ltd v European Medicines Agency [2019] EWHC 335 (Ch), [23] (where the proposition is accepted in the context of a failed claim for the frustration of a 25-year lease); and Center 76, [38] (wherein DHCJ Ho and both sides’ counsel accept the proposition).

[8] [2019] EWHC 335 (Ch)

[9] Center 76 [50].

[10] Center 76 [39].

[11] Considered at Center 76 [39].

[12] Cricklewood Property and Investment Trust Ltd v Leighton’s Investment Trust Ltd [1945] AC 221

[13] Cricklewood 231-32.

[14] [1956] AC 696, 729

[15] Center 76 [39].

[16] Center 76 [49].

[17] Center 76 [39].

[18] Cricklewood 229.

[19] National Carriers 701.

Principle of Finality in Litigation

The original version of this article was first published in The Law Society Gazette by Masood Ahmed

Principle of Finality in Litigation – A judgment made in open court takes effect when it is made and not when it is subsequently sealed. The lapse of time between the making of an order in open court and sealing it may be taken by the unsuccessful party as an opportunity to rehearse legal arguments or to produce new evidence to persuade the court to revisit and amend its order before it is sealed.
Principle of Finality in Litigation Blake-Turner
In AIC Ltd v The Federal Airports Authority of Nigeria [2020] EWCA Civ 1585 the Court of Appeal provided guidance on the correct approach the courts should take when determining an application to reconsider an order before it is sealed.

Facts and first instance decision

On 6 December 2018, AIC Ltd (AIC), a Nigerian construction and property development company, made an application to the High Court to enforce a Nigerian arbitration award of over $48m against the Federal Airports Authority of Nigeria (FAAN), an airport-operating agency. However, before the order was sealed, the judge rescinded AIC’s right to enforce the award on the grounds that there had been a significant change in circumstances in that FAAN had obtained a guarantee for security for costs. The judge also granted FAAN relief from sanctions for failing to comply with various deadlines. AIC appealed the reconsidered order, asserting that the judge had no discretion to reconsider her order because, although it had not been sealed at that stage, it had been pronounced in open court and therefore took effect immediately.

Facts and first instance decision

Allowing the appeal, Coulson LJ held that there were two distinct questions which the court must ask itself. The first was whether the application to reconsider should be entertained in principle; if the court answered the question in the negative, that was the end of the matter. If the court concluded that reconsideration was appropriate in principle, then it became an open-ended matter of discretion, to be exercised in accordance with the overriding objective, as to whether the order should be changed. Coulson LJ provided further guidance on first question when he said: ‘In my view, the court should be looking for a sufficiently compelling reason that may justify reconsideration; something which might outweigh the importance of finality and justify the opening up of a question or questions which, following the pronouncement of the order in open court, appeared to have been finally answered. Of course, it is quite right to say, as the authorities stress, that those categories of case are not closed. But, assuming that the request to reconsider comes from the parties and not the court, the court should instinctively be looking for something which has been missed or otherwise gone awry: a mistake or a fundamental misapprehension; a fundamental piece of evidence or a point of law that was overlooked. The court’s undoubted jurisdiction to reconsider its earlier order cannot be permitted to become a gateway for a second round of wide-ranging debate.’

Coulson LJ held that the judge had failed to consider whether the application identified a sufficiently compelling reason for the court to entertain an application to reconsider the 6 December order which had been an error of law. To the extent that it might be said that the judge had identified the significant change in circumstances as the compelling reason for entertaining the application, she had been wrong as a matter of fact. The arrival of the guarantee was not a significant change in circumstances but simply the culmination of what FAAN had been saying in its evidence for some time, which had been taken into account when the 6 December order was made.

Leaving aside the error of principle, Coulson LJ also found that the judge had failed to take into account matters which she ought to have taken into account, and gave weight to other matters which were irrelevant. Therefore, this was a case in which interference with the exercise of the judge’s discretion was justified.

Although AIC Ltd concerned an application for enforcement of an arbitral award, its application is of broader significance because it is applicable to any applications for reconsideration of court orders made in civil proceedings. When considering an application to reconsider, the courts need to ensure that their jurisdiction must, as Coulson LJ put it, be ‘carefully patrolled’ so that the principle of finality in litigation is not undermined.

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The Corporate Insolvency and Governance Act 2020

The Corporate Insolvency and Governance Act 2020

The Government implemented both temporary and permanent reforms to the UK insolvency regime in light of the COVID-19 (COVID) pandemic and resulting economic crisis. Significant changes were made by the Corporate Insolvency and Governance Act 2020 (CIGA) which aimed to ease the pressure on businesses under financial pressure and avoid mass insolvencies.
CIGA came into force on 25 June, following an accelerated parliamentary process.
The moratorium procedure
CIGA introduced a new standalone moratorium procedure with the intention of giving companies space from creditors to turn around their business and avoid insolvency. The moratorium covers an initial period of 20 days. This initial period can be extended without permission for another 20 days and can be further extended with the permission of pre-moratorium creditors or the court. The moratorium involves an insolvency practitioner monitoring the company’s directors, who remain in control.
Companies eligible to use the moratorium should have been:

  • Incorporated under the Companies Act 2006 or, if unregistered, would be wound up under the Insolvency Act 1986.
  • Unable to or likely to be unable to pay its debts in the opinion of the directors.
  • Rescuable as a going concern in the opinion of the insolvency practitioner.

Wrongful trading (temporary)
CIGA also temporarily lifted wrongful trading restrictions which would prevent a company from operating during an impending insolvency. Normally directors could be subjected to personal liability for continuing to trade in the face of an impending insolvency under Section 214 and Section 246ZB of the Insolvency Act 1986.
Restructuring Plan
CIGA inserted Part 26A into the Companies Act 2006 (Arrangements and Reconstructions for Companies in Financial Difficulties) which applies to companies liable to be wound up under the Insolvency Act 1986. This permits creditors with genuine economic interests from participating in the formulation of a restructuring plan and for the court to be able to sanction plans it considers to be just and equitable.
The “Ipso Facto” regime
CIGA made changes to the effect of Ipso Facto termination clauses; these automatically entitle a party to terminate a contract or automatically terminate a contract without any election being made in the event that a certain event occurs, for example, insolvency. Suppliers cannot end contracts for non-payment of pre-insolvency debts.
The effect of this regime is widespread and some provisions have been included to prevent unfairness to suppliers. For example, they are able to apply to the court to be exempt from the regime if it would cause undue hardship to continue to supply a business. If a company enters into a standalone moratorium, debt owed to the supplier during this period will be prioritised over other creditors. There are exceptions for ‘essential suppliers’ and ‘small suppliers’, which are dealt with under separate legislation.
Further developments
There were concerns that the Act was rushed without consideration to certain stakeholders. The Pensions Regulator, the Pension Protection Fund, and other retirement scheme representatives felt the changes may negatively impact pensioners, as the moratorium would prioritise debts falling during this period over beneficiaries of underfunded undefined pension schemes. However, some of these concerns were addressed while the Corporate Insolvency and Governance Bill was being debated and also by the Pension Protection Fund (Moratorium and Arrangements and Reconstructions for Companies in Financial Difficulty) Regulations 2020 (SI 2020/ 693) which came into force on 7 July 2020. There have also been concerns that that some creditors may be disadvantaged by the suspension of wrongful trading offences.
The temporary provisions will be phased out by the end of September and though the other changes are not subjected to time limits, however this may change in light of future developments.
For further information please contact Paul Cooper: paul.cooper@blaketurner.com or 020 7480 6655

Employment law updates – Coronavirus

Employment law updates: Coronavirus

Coronavirus Job Retention Scheme (CJRS) updates

Employment law updates – Coronavirus Redundancy payments:

  • The government announced on 30 July that workers who were furloughed will be entitled to a statutory redundancy payment based on their pre-furlough salary and not the reduced furlough salary. This was implemented by the Employment Rights Act 1996 (Coronavirus, Calculation of a Week’s Pay) Regulations 2020 which came into force on the 31st July.
  • Employees with more than 2 years of continuous service who have been made redundant are entitled to a redundancy payment up to a statutory maximum (which remains the same). This is based on age, length of service and salary.
  • The changes will also apply to Statutory Notice Pay and awards for unfair dismissal.

Furloughed workers:

  • Employers have been able to bring furloughed workers back to the office for any amount of time and for any kind of shift pattern since 1 July while still being able to claim the CJRS grant.
  • From 1 August the Government has advised that employers and employees should be able to exercise discretion as to whether they can work safely from the office.
  • The furlough scheme will end on 31 October 2020.

https://www.gov.uk/government/news/new-law-to-ensure-furloughed-employees-receive-full-redundancy-payments

https://www.gov.uk/government/publications/changes-to-the-coronavirus-job-retention-scheme/changes-to-the-coronavirus-job-retention-scheme

https://www.gov.uk/government/speeches/pm-statement-on-coronavirus-17-july-2020

For employment law advice please contact Rupert Farr: Rupert.Farr@blaketurner.com or 020 7480 6655.

CASH FLOW AND CORONAVIRUS – What directors must do

Paul Cooper at Blake-Turner has for many years advised clients experiencing cash flow difficulties.  All too often an otherwise sound business hits a hurdle and all of a sudden it is “insolvent” because it realises it will not be able to pay certain debts as they fall due in the next few weeks and months.

To describe the current Coronavirus pandemic as a “hurdle” would be a massive understatement, but the responsibilities of directors remain exactly the same.

What directors must do

1.     Change your priorities:

As soon as the directors of a company realise that there is a real prospect of them not being able to meet their debts as they fall due (“cash flow insolvent”), whether now or in the future, then when making decisions they must make the interests of creditors paramount.  If they fail to do this, then they risk making themselves personally liable for some of the debts of the company.

2.     Plan carefully:

Whilst it is far from clear when the current crisis will end (this blog was created in March 2020), we are being given assurances by the Government and international organisations that will possibly be in around 3 months’ time. Also, that the government will assist by way of backing bank loans and paying 80% of furloughed employees’ wages.

Therefore, if you are a director of a company who envisages being cash flow insolvent in the coming three months you need to plan now.  If your business is fundamentally sound, you may well be justified in continuing to trade, even if that incurs a lot of debt, provided that you reasonably consider that when we emerge you are likely to be able to trade through those losses and pay off those loans. In those circumstances, creditors will obviously be far better off than they would be were you to simply give up now and allow the company to go bust.

3.     Record your decisions to protect yourself:

It is important to protect yourself personally as a director by keeping minutes of your board meetings at which you make the decision to continue to trade. Also, to regularly review that decision and minute each review and the reasons for your decisions. Also, keep copies of your cash flow forecasts as they evolve over time. If the worst subsequently happens, a contemporaneous record of your thought processes and decisions will be of great assistance in defending any claim against you personally by a liquidator or the Official Receiver.

4.     Seek advice:

If you carry out your cash flow forecasts, and budget thereafter, and come to a view that it is unlikely that you will be unable to trade through and/or recoup your losses and/or pay off the short term debt, then you must immediately seek advice from an insolvency lawyer such as Paul Cooper at Blake-Turner, or an insolvency practitioner.  A director can be made personally liable for certain debts if they continue to trade and spend money where it is not reasonable for them to do so, and in continuing to spend money and incur liabilities they will ultimately make the creditors worse off. Taking professional advice and minuting decisions will show you acted reasonably at all times and be crucial in ensuring you do not become personally liable.

5.     If it comes to the worst:

A business can often be saved by putting the company into administration and selling that business.  This is often by way of a pre-pack sale in which most if not all of the current debts of the company can be left behind and a new company continue to trade the business and save the employees’ jobs. Blake-Turner have extensive experience in this area.

There are also other options if you decide you cannot continue to trade, such as liquidation or a CVA.  Please click on the foregoing links for further information in that regard.

At Blake-Turner we have years of experience of assisting distressed companies.  We understand the desire to save and restructure where possible and we can advise you of various strategies by which you can do this.  Please contact Paul Cooper on +44 (0) 7967 014788 or at paul.cooper@blaketurner.com