Coronavirus has dealt the world untold amounts of damage, on both a fiscal and personal level. Almost a quarter of a million people have lost their lives, lockdowns have had a devastating effect on the economy and resulted in millions of people losing their jobs, and stock markets and business activity around the world have suffered from historic declines in recent months, ending long-running streaks of economic growth in most of the world. With the dearth of devastation left at the feet of businesses and governments globally, many may be left asking two questions. Is anyone at fault? And should someone pay? This is bound to result in a rise in the amount of litigation in the business world, but what form are these cases likely to take, and what part are law firms to play? To answer these questions, we will focus on two areas of law that are likely to see a rise in civil disputes: employment and contract law.
This week marked the opening of several non-essential retail stores in England after twelve weeks of lockdown, with a few retailers such as IKEA and HMV opening their doors to a limited number of consumers. With this return of activity to the high street there comes an associated risk in infection to staff and consumers alike. This has resulted in different business taking a few steps to assure that individuals maintain social distancing guidelines by placing markers around their stores and even instructing employees to monitor any breaches.
However, despite these measures, it will be incredibly hard to completely neutralise the risk of employees contracting the virus. While the risk of contracting the virus outdoors is relatively low, this risk increases drastically when indoors. Additionally, with growing calls for the government to reduce the two-meter rule to improve business performance, these risks will rise. Some are bound to get sick, and some will unfortunately die. The question regarding litigation, it what the ground rules of such litigation will be?
To win a workplace injury claim, a claimant must prove that they became infected at work and that their employer had failed to follow the latest government advice on protecting workers when the transmission occurred. Many personal injury solicitors have acknowledged that this will be very difficult to prove for most, as it would require the victim to prove that they became infected at work. However, this does not entail that it is impossible to succeed in these claims. The standard of proof necessary in civil claims is on the balance of probabilities, requiring only a 51% or greater likelihood that the illness was contracted at work.
This leads us to ask what defences are available to an employer in such an event. These are examined a case study produced by US litigation law firm Duane Morris. They conclude that simply meeting the legal standard set under government guidelines is unlikely to swing a jury, as they will probably expect businesses to exceed the minim expectations provided for by the government. A defence of volenti non-fit injuria is equally likely to fall on deaf ears unless the claimant was being extremely reckless in his conduct, such as by routinely licking surfaces, or, god forbid, shaking someone’s hand!
They, therefore, conclude that causation is the only viable defence available to employers. They will have to contend that the claimant cannot say where they caught the virus. However, this also suffers from a few pitfalls. While a defendant can provide evidence that their facilities surfaces have been thoroughly cleaned and inspected, the virus can also spread by individuals sneezing and coughing. Add to this that some carriers of the disease are asymptomatic, it becomes impossible to say that no other visitors were infected. And while contact tracing apps could be utilised to prove that no one entering the premises had tested positive for Covid-19, the UK government is not expected to release any such app anymore.
All of this means that law firms’ employment practices are likely to advise clients to take several steps to mitigate these risks from arising in the first place. Firstly, law firms should have a firm grasp of the government’s new guidance on social distancing and public health standards to aid clients in adhering and exceeding what is expected of them. This will assure that clients are beyond reproach if a claim is brought forward. Secondly, law firms should advise clients to listen to employee concerns when it comes to the risk of infection and ensure that they are addressed in a timely and efficient manner. This means that businesses should provide employees with all the necessary PPE to secure their safety and peace of mind when dealing with customers and the public. In this way, businesses can reduce the risk of any employment litigation.
Turning to contract law, three main risk factors arise that face companies and insurers in the coming months; force majeure clauses, material adverse change (MAC) clauses, and business interruption claims. Each risk shall be addressed separately below.
The coronavirus crisis has led to several countries imposing lockdowns and quarantines on incoming passengers and goods, resulting in the disruption of several global supply chains. This has led some companies and their legal advisors wondering whether this outbreak counts as a force majeure event. A Force majeure clause is a contractual remedy that will only apply where there is an express clause in the contract. A party relying on the clause must prove that the event falls within one of the circumstances described within the clause, it was out of their reasonable control, their ability to perform their obligations was impeded by the event, and that they took all reasonable steps to seek to avoid or mitigate the event or its consequences. The terms of the clause then dictate the remedy to be provided.
However, problems arise when trying to define the pandemic as such an event. Can the closure of borders amount to an unforeseeable and insurmountable impediment to the execution of a contract? Most of these clauses are also unlikely to include a pandemic in their wording but may provide references to government intervention in preventing performance. Additionally, just because performance becomes expensive does not mean that businesses are off the hook; the event must prevent performance from being able to take place. This means that litigation over such clauses and their meaning is bound to follow in the coming months.
The second risk has already started to manifest itself in litigation in recent months in the form of buyers regretting decisions made in pre- COVID times. An example of this is recent rumblings from LVMH over their agreement to buy Tiffany and Co for $16.2 billion in November of 2019. At the time, Tiffany had a $100 million profit. After the pandemic, and because of the economic headwinds, this has turned into a net loss of $65 million in Q1. Once an acquisition is agreed, there are very limited circumstances under which a company can back out of the deal. One such method is by relying on a MAC clause, which gives the buyer the right to terminate the agreement if it is materially affected by certain events. However, the pandemic is unlikely to amount to such an event, due to its industry-wide effect. Additionally, LVMH also suffered a similar drop in profits. This has precluded LVMH from being able to back out of this specific deal, but will not stop companies from contacting their legal advisors on the viability of their own MAC clauses in purchases that have recently been rendered unattractive by the effects of the pandemic. However, an agreement between Sycamore partners and L brands shows how companies can be spared years of expensive litigation in similar circumstances.
The final contractual risk faces insurers of business during the pandemic. Facing a potential maelstrom of claims, insurance groups have taken a conservative approach to interpret what is covered by the business interruption clauses included in most commercial policies, seeking to argue that they are meant to provide for losses arising from closures due to damage to property, and not closure arising from a pandemic. Due to the lack of consensus on the meaning of these clauses, the FCA has sought a declaratory judgment to resolve the contractual uncertainty regarding the clause. If the courts rule against the insurers’ interpretation this will result in a cavalcade of claims against insurers, with Lloyds of London CEO John Neal warning of “tens of billions, if not hundreds of billions of losses that will be discussed over time”.
The conflation of the above factors will probably lead to increased work in dispute departments of law firms in the coming years as the meaning and scope of contractual terms are litigated within the courts. This trend may also be aggravated by the impact of sophisticated and well financed litigation funders who will also drive the growth of class action claims. However, the pandemic has also left the business with dilapidated cash reserves and little resolve to fund expensive cases that could take months, if not years to resolve (especially considering the building backlog of cases in the courts due to their reduced functionality during the lockdown). As a result, law firms will need to reduce their costs and be cautious when advising clients to pursue any claims that can be settled more amicably.