Preparing for COVID-19 claims and disputes

Claims and disputes resulting from COVID-19 are inevitable. Over half of those who attended EY’s recent webcast – COVID-19 Claims: Preparing now to protect value later - thought the risk of COVID-19 related claims to their organisations was medium or high. In this article, I explore seven drivers of potential claims and some of the actions that organisations can take today in order to protect value tomorrow.

Seven drivers of potential claims

1.      Contractual delay, non-performance or breaches, wrongful early terminations.

Some organisations are facing significant surges in demand for certain goods and services, but constrained or disrupted supply. Others have seen demand disappear overnight or are no longer able (or willing) to perform contractual obligations. Some companies may be seeking to use the pandemic as a reason to extricate themselves from contracts that, even before the pandemic, they wished they weren’t tied into. This presents fertile ground for contract renegotiations, terminations and breach of contract claims. Whilst contracts are usually drafted with an eye on what might go wrong, the current situation is so unprecedented that the consequences of COVID-19 on contractual relationships aren’t always obviously catered for, increasing the risk of breach of contract claims down the line.

2.      Need to re-negotiate the contract price, delivery obligations, payment obligations or other key commercial provisions.

The current pandemic is impacting the timing, cost and quality of contractual performance for many organisations and often contracts may need to be re-negotiated or varied at speed. A failure to properly document those negotiations and resulting agreements may lead to future claims. Even after unsuccessful contract re-negotiations, as long as contractual rights haven’t been waived, breach of contract claims may still follow.

3.      Failure to recover business impact from insurance contracts (rightly or wrongly).

Organisations will be looking to their insurance policies to see whether they can make claims for COVID-19 business interruptions. Disputes are already emerging between organisations and their insurers over liability for COVID-19 related losses. Where organisations are unable to recover losses from insurance companies, they may be looking to recover their losses through other claims.

4.      Distressed businesses seeking any remedy for survival or liquidity.

There will inevitably be pressures on organisations and employees to put self-interest and business survival before doing the right thing. What may seem initially like fairly small transgressions (such as presenting a more flattering financial position than is really the case to, say, bosses, shareholders or lenders) can lead to bigger future problems. Opportunistic behaviours happening right now are likely to give rise to future disputes.

5.      Failures in segregation of duties and normal activity/supervision, affecting service levels, product quality and compliance.

Responding to organisational challenges resulting from the pandemic is taking up management time and energy - from protecting the welfare of employees to focusing on business continuity and financial viability. At the same time, many businesses have adapted to new working practices and are dealing with employee absences. There may be an increased chance that unauthorised actions are falling under the radar, and this could result in future claims.

6.      Increased regulatory and investor scrutiny on conduct, behaviour and disclosure before, during and after the crisis.

Regulatory activity following the 2008 global financial crisis showed regulators willing to pursue enforcement actions relating to misconduct and fraudulent activity. The 2008 global financial crisis also saw a number of high-profile investor or shareholder claims relating to company disclosures. Taking this in combination with the rise of group litigation in the UK, the greater availability of litigation funding, and the existence of a more financially sophisticated legal community since the financial crisis, investor or shareholder claims off the back of COVID-19 are likely.

7.      Merger & acquisition (M&A) transactions with accounting warranties or price adjustment mechanisms.

For many M&A transactions, the commercial and economic context has drastically changed. Recently acquired businesses may not be performing against pre-COVID-19 forecasts and buyers may be looking to recover value from the sellers as a result - for example through the closing balance sheets used to true up the purchase price or through warranty, indemnity or fraudulent misrepresentation claims. Sellers with earn-out clauses may be receiving less than they expected. Uncertainty now is likely to complicate M&A transactions going forwards, giving unscrupulous transactors opportunities to increase the money they get from a transaction.

Getting claim ready

I think that the risk and likely impact of claims and disputes is significant and likely to be widespread. It is important that businesses are thinking ahead to ensure that they are in the best position to respond to contractual challenges and navigate contentious scenarios to protect value and preserve important commercial relationships. I believe there are practical steps organisations can take now to protect value for the future. However, only a fifth of respondents on our webcast poll described their organisations’ level of activity in preparing to make or receive COVID-19 related claims as high.

Four practical steps that organisations can be doing now include:

1) Identifying and evaluating risk – undertaking an assessment of legal, commercial and financial risk to understand potential claims exposure and focus actions in the right areas.

2) Measuring the impact - assessment of damages can be complex, requires expertise and is separate and distinct from ordinary financial planning.

3) Retaining, documenting and preserving a compelling trail of contemporaneous information - if robust documentation processes are not put in place now, it can be difficult and expensive to try and reconstruct such data after the event.

4) Responding and mitigating – strategic consideration of the possible resolution options available, and active consideration of loss mitigation.

To find out more about the steps your organisation can take now to protect value, listen to the on-demand version of our COVID-19 Claims: Preparing now to protect value later webcast here (there is a short form to fill in on order to access it) or get in touch with me at [email protected].