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Do dispute resolution clauses have immunity from Covid-19?

08 June 2020

The economic impact of Covid-19 on businesses is profound. Government restrictions, supply chain and logistics challenges, cash-flow pressures and employment issues are all affecting the ability of businesses to comply with contractual obligations. Such instability and uncertainty is likely to result in an increase in disputes.

Whether businesses must comply with dispute resolution clauses in commercial contracts is, therefore, going to be a point to be very carefully scrutinised when it comes to the management of disputes. 

What is a dispute resolution clause? 

A dispute resolution clause is a contractual provision in which parties specify how a dispute arising out of their contract will be resolved. In the negotiations leading to the execution of the contract, the parties may have considered that it was desirable from a commercial point of view not to immediately start litigation or arbitration proceedings when a dispute arose, but to try and reach a resolution by more cordial and less adversarial means.

Many commercial contracts contain what are known as a ‘multi-tiered’ or ‘escalation’ dispute resolution clause by which the parties agree steps which they are to take to seek a resolution to their dispute before they commence court or arbitration proceedings. Such a clause may provide for a series of meetings between increasingly senior representatives of the parties to seek an agreed resolution followed by a specified alternative dispute resolution process if the parties representatives have been unable to reach agreement.

Are dispute resolution clauses binding?

The issue for many businesses, particularly when faced with significant economic challenges resulting from Covid-19, is that a contractual clause requiring a staged approach to resolving disputes may be time consuming to follow and may delay obtaining a resolution by court or arbitration proceedings.  It is in such circumstances that businesses question if they are bound by a multi-tiered dispute resolution clause.

If the terms of a dispute resolution clause are sufficiently clear and create an enforceable obligation requiring the parties to engage in a staged approach to resolve a dispute, the courts will enforce the terms the parties agreed when they executed the contract.

The decision in Cable & Wireless PLC v IBM United Kingdom Limited [2002] EWHC 2059 (Comm) confirmed that a sufficiently well drafted dispute resolution clause is capable of creating a condition that must be fulfilled before litigation can be pursued. In that case, the court found that the dispute resolution provision in the agreement created an enforceable obligation which required the parties to engage in mediation.

In the more recent decision in Emirates Trading Agency LLC v Prime Mineral Exports Private Ltd [2014] EWHC 2104 (Comm), a multi-tiered dispute resolution clause required the parties to try and resolve their dispute by "friendly discussions", failing which either party could refer the dispute to arbitration. It was held that the friendly discussions were a condition precedent to the right to refer the claim to arbitration and the courts should seek to give effect to what the parties agreed in the contract.

Businesses should always be mindful of the dispute resolution provisions in a commercial contract. In the event that an enforceable dispute resolution clause is ignored by, for example, a party commencing court proceedings before engaging in mediation as required by the contract, the likely consequence is that a court will exercise its discretion to stay the proceedings to enable mediation to take place and there may be adverse cost consequences for party that ignored the dispute resolution clause. 

Does Covid-19 change things?

As ever, much will depend on the terms of the dispute resolution clause and the specific circumstances, but it is likely to be very difficult for a party to claim that it is released from the obligations recorded in a dispute resolution clause because of Covid-19 or restrictions imposed by the government.   

In limited circumstances, a force majeure clause may apply to excuse parties from performing their contractual obligations, but even if Covid-19 is deemed under the contract to constitute a force majeure event, a failure to comply with the contractual terms will only be excused where a party is prevented or hindered from performing the obligation in question. Similarly, in the absence of a force majeure clause, the doctrine of frustration would only apply when performance of the obligation has become impossible.

Notwithstanding the significant disruption caused by Covid-19 and the restrictions imposed by the government, it will be rare for a party to credibly claim that they are unable to comply with the terms of a multi-tiered dispute resolution clause.

Telephone and video conferencing platforms are readily available to enable parties to engage in  discussions, without prejudice meetings and mediations on a virtual basis, and in circumstances where courts are conducting hearings by video or telephone, it unlikely that a court will find that a party is excused from complying with a multi-tiered dispute resolution clause simply because face to face meetings could not take place.

That approach to such clauses would also be consistent with the “Guidance on responsible contractual behaviour in the performance and enforcement of contracts impacted by the COVID-19 emergency” issued by the government on 7 May 2020. Whilst the guidance note is not legally binding, it sets out several recommendations regarding contractual behaviour during these unprecedented times and encourages parties to act responsibly and fairly when performing and enforcing contracts where there has been a material impact from Covid-19. In particular, responsible and fair behaviour is strongly encouraged in relation to 

  • “commencing, and continuing, formal dispute resolution procedures, including proceedings in court” (para. 15(m)); and
  • “requesting, and responding to, requests for mediation or other alternative or fast-track dispute resolution” (para. 15(n)).

In addition, the government is strongly encouraging “parties to seek to resolve any emerging contractual issues responsibly – through negotiation, mediation or other alternative or fast-track dispute resolution – before these escalate into formal intractable disputes” (Para 17).

Conclusion

The courts will enforce a ‘multi-tiered’ or ‘escalation’ dispute resolution clause in a commercial contract and it will be rare for the steps set out in such a clause to be impossible to perform because of the Covid-19 pandemic or restrictions imposed by the government. Businesses facing existing or potential disputes must, therefore, continue to abide by the terms they agreed in their commercial contracts. 

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