If your details are on law firm marketing databases, you will likely have received dozens of publications regarding Covid19 and the impact it may have on business contracts. Many of the articles helpfully summarise the doctrine of frustration and how force majeure clauses might apply, as well as considering material adverse change (“MAC”) and similar clauses which may be triggered by the pandemic.
This article considers whether Covid19 might impact on parties’ strategies in upcoming arbitrations, and in particular whether parties might be able to take advantage of the early dismissal or summary judgment procedures set out in the various arbitral institutional rules.
It is easy to imagine how consideration of early dismissal might arise in arbitration proceedings flowing from the Covid19 pandemic. For example:
- Frustration – There are well known limits to the doctrine of frustration. Parties may argue that the contract was frustrated when, in fact, it is obvious that the pandemic and its consequences merely made the contract more onerous or financially disadvantageous expensive to perform. Equally, it may be obvious that performance became impossible due to government restrictions or the unavailability of resources.
- Force Majeure – The applicability of a force majeure provision will depend on its terms. Some provisions will expressly refer to “epidemics” or “pandemics”, sometimes even by reference to a declaration of a pandemic by the World Health Organisation (this happened on 11 March 2020 for Covid19). Some parties may seek to enforce their contract despite the clear applicability of the force majeure provisions, while others may claim force majeure when the facts do not fall into a specified category of force majeure
- Material Adverse Change – Again, the applicability of such terms will depend on the drafting. But it can be anticipated that parties may put forward claims or defences based on MAC clauses that are fanciful, especially if they are seeking to draw out any arbitration as part of a defence strategy.
Many of the leading arbitral institutional rules provide for some form of early dismissal or summary judgment procedure. To take just two of the leading institutions:
- The International Chamber of Commerce (“ICC”) clarified in its Note to Parties and Arbitral Tribunals dated 1 January 2019 (the “Note”) that the power provided by Article 22 of the ICC Rules – the tribunal’s ability to adopt the procedures for the arbitration that it considers expeditious and cost-effective – included the power to summarily dismiss claims or defences. Paragraph 75 of the Note permits parties to seek dismissal if a claim or defence is ”manifestly devoid of merit”.
- The SIAC Rules contain a specific provision for early dismissal: Rule 29 allows parties to apply to the tribunal for early dismissal of a claim or defence that is “manifestly without legal merit”.
Rule 29 of the SIAC Rules was introduced in 2016, and the most recent data available from SIAC’s annual reports indicate that parties have begun to use the provision. According to the 2018 SIAC Annual Reports, there had been 22 early dismissal applications in just the first two years since Rule 29 was introduced (4 of which were granted). It seems clear, therefore, that SIAC tribunals will increasingly find themselves determining such applications.
Early dismissal for Covid19 disputes
Most disputes involving frustration, force majeure or MAC clauses are heavily fact-dependent. Whether performance has been frustrated, whether the event constitutes a force majeure event and whether circumstances have changed materially are all questions of fact.
Tribunals will usually, therefore, be reluctant to summarily dismiss these kinds of Covid19 claims or defences before the parties have been able to put forward evidence and test their opponent’s evidence. Tribunals may even feel there is a presumption against early dismissal for these kinds of issues, bearing in mind the requirement in Article V(1)(b) of the New York Convention that parties be given the opportunity to present their cases.
This idea is particularly relevant in the context of SIAC arbitrations. Rule 29 expressly states that that the claim or defence must be “manifestly without legal merit” (emphasis added). This suggests that a tribunal should only order early dismissal where there is a legal impediment to a claim or defence, not a factual one. An example of a legal impediment might be a claim which is time barred. Whereas a factual impediment might be that government-imposed Covid19 restrictions did not materially affect the performance of a contract such that the MAC clause was triggered. This is more likely to require a level of inquiry that seems beyond the tribunal’s powers under Rule 29.
But the distinction between legal merit and factual merit is not clear cut – even a limitation defence has a fact (the time since the cause of action arose) as its basis. SIAC Rule 29 acknowledges this, requiring the application to include the “facts and legal basis” supporting the application. Further, even if there is a presumption against early dismissal for some Covid19 claims and defences, Tribunals should perhaps treat the presumption as rebuttable (albeit perhaps with a high bar). It is to be expected that some parties will point the finger at the Covid19 crisis without any legitimate basis.
Tribunals faced with situations that are clear cut should not be dissuaded from expediting justice if a party puts forward frivolous or vexatious allegations of fact. This is especially so where scrutiny of the parties’ evidence is possible during the early dismissal application – as well as reviewing relevant documents, there may also be cases where witness evidence on the point could be taken, rather than leaving the matter to be determined at a full merits hearing (by which time the parties will have endured more time and costs of arbitrating). Certainly, this may be a wise move for a Tribunal which thinks early dismissal is likely to be appropriate, but is concerned to protect the enforceability of its award.
The Covid19 pandemic is going to throw up a whole range of legal and procedural issues in the international disputes context. It is likely that early or summary dismissal applications will be a regular feature of arbitrations arising out of the crisis. Parties, their counsel and tribunals will need to navigate a territory that is mostly unchartered – without a significant body of precedents to draw upon, it will be difficult to predict how any given tribunal will rule on an application. This uncertainty may mean that early dismissal applications are deployed to increase the pressure on opponents to reach a quick, commercial settlement.
This publication is intended as a general overview of the subjects dealt with. It is not intended to be, and should not be used as, a substitute for taking legal advice in any specific situation. Sharpe & Jagger LLC cannot accept any responsibility for any actions taken or not taken on the basis of this publication.