As the world continues to adapt to the so-called "new normal" following the unprecedented challenges brought about by the COVID-19 pandemic, one key question that is being asked time and time again: what does this mean for me and my business?
In terms of dispute resolution and litigation practice, it is clear that the pandemic has not stopped individuals or companies from filing actions with the courts. In Guernsey this is known as "tabling the cause", pursuant to Section 10(1) of the Royal Court Civil Rules, 2007 (RCCR).
A number of trends, however, have started to emerge in terms of the types of litigated disputes that are likely to arise out of the pandemic. What is particularly interesting is how the novel nature of COVID-19 has resulted in different trends emerging compared to those experienced previously, such as the litigation that followed the global financial crisis of 2008.
Commercial Contracts and Settlement
The pandemic has had a significant impact on businesses around the world in terms of production and supply. In the UK, contributing factors have included social distancing requirements and people being put on the government's furlough scheme (a job retention programme) and therefore not working.
This has led to a decline in the output capacity of a number of businesses. Many companies (including a number of highprofile retail outlets) have also been forced to initiate redundancy processes in an attempt to avoid becoming insolvent and thereafter facing administration and/or liquidation. As a result, they are having to operate with significantly reduced personnel and this has had a direct impact on how they are able to conduct their business.
These challenges remain ongoing and some businesses have been unable to fulfil part or the whole of their contractual obligations. Equally, for those with long-term contracts, one party may be required to seek the variation or renegotiation of terms, or, in a more extreme scenario, termination of the contract by virtue of a hardship clause if there is one.
Such a trend has similarly been experienced in Guernsey as businesses here are often reliant on imports from manufacturers and supply chains based outside the island, or indeed have outlets that are part of a chain of retail outlets now in administration. Therefore, the limits experienced in the UK in terms of cash flow shortages. This is therefore having direct effect on the operation of certain commercial contracts in Guernsey.
In Guernsey, there is no equivalent of the English Sale of Goods Act 1979 or the Supply of Goods and Services Act 1982. In fact, there is little by way of Guernsey law on contracts, with no statute and, until recently, little reported case law. The recent Royal Court judgment in Smith v Carey Olsen  GRC 062 gave very helpful guidance to the court's approach to issues arising in Guernsey contract disputes, especially in citing the well-known maxim "La convention fait la lois des parties". As a result of the pandemic, it is anticipated that Guernsey could see an increase in litigated disputes in relation to a party's obligation under a commercial contract. Smith v Carey Olsen hopefully means that the view of the Royal Court in Guernsey regarding this kind of action is now more certain.
Owing to the impact of COVID-19, one question is on every commercial lawyer's mind: will the pandemic qualify as a force majeure event or can it be considered a material adverse change (MAC)? Both these situations might enable a party to be excused from fulfilling its obligations under the contract. A MAC will potentially allow a party to walk away from the arrangement altogether. The novel nature of this pandemic is distinct in that nothing on such a global scale has been experienced in our lifetimes. As a result, it is anticipated that new case law may well emerge to decide on the issue.
In Guernsey, there is very little case law relating to the operation of force majeure contractual provisions. However, in Woodbourne Trustees Ltd & Generali Worldwide Insurance Company Limited – Guernsey Judgment 3/2011, the Royal Court confirmed, at paragraph 87, that if relevant factors have been considered so that a rational decision is made, it will be upheld as a result that:
"It is no part of the Court's function to second-guess the contracting party and to arrive at the Court's own conclusion on the matter; that would be to usurp the function given by agreement to the contracting party."
In effect, the "la convention" maxim is similar to the position in Guernsey's sister island, Jersey, in that where parties have freely entered into an agreement, it will be afforded a high degree of sanctity. As a result, it is probable that a force majeure clause would be upheld by the Royal Court in Guernsey provided that the contract as a whole is deemed validly formed and has been properly entered into.
It goes without saying that, ultimately, each case would need to be considered on the facts in question and would require specific analysis of the wording of the force majeure clause. The wording is important firstly in terms of what constitutes a force majeure event, and whether this would include a specifically prescribed event, or cover a broader range of criteria.
Where the term "pandemic" is used, it has been accepted amongst many practitioners in the UK that COVID-19 would likely suffice this definition following the World Health Organization's classification as such on 11 March 2020. It is presumed that use of the word "epidemic" could also be similarly recognised. Where a broader set of criteria is used, it is expected that the courts will interpret such wording generously if a party has in fact faced a genuine difficulty in effecting performance of the contractual obligation.
In addition, given that restrictions have been re-introduced in the UK, it could be that the resulting economic impact has a further or continued effect on the ability of a party to perform their obligations under a contract. The result of this non-performance may be that one party seeks to litigate in respect of any loss caused by the defaulting party. It is probable, however, that force majeure will be most relevant to commercial contracts in Guernsey where there is an external element, involving either manufacture in, and/or supply from, the UK. This is because, as things currently stand, the pandemic is under control locally on the island so that there are no present internal restrictions.
Where there is no force majeure provision in a contract, it may be that a party seeks to rely on the doctrine of frustration of contract. As with force majeure, in Guernsey there is very little case law which considers this legal principle and as a result the position is again somewhat ambiguous.
However, it is thought that the Royal Court in Guernsey would require performance to be made genuinely impossible as a direct result of the matter in issue. That is to say, the inability of an individual or company to fulfil its obligations under the contract would need to be causally linked to the impact of the COVID-19 pandemic.
This is the approach that was adopted by the Jersey courts in Mobil Sales & Supply Corporation v Transoil (Jersey) Limited  JJ 143 where it was said that performance of any obligation under the contract would need to be rendered completely impossible. It is suggested that it cannot be, therefore, that the contract is simply more onerous to fulfil for one of the parties. This is similar to the position in the UK in that it is a high threshold to cross and so it is doubtful whether we will see a litigation trend in this respect. Nevertheless, it may of course be that a party ultimately has no other choice in the current and ongoing circumstances.
Insolvency and Stakeholder-Driven Litigation
Guidance for directors of Guernsey companies
Given the current economic pressures faced by many businesses, we expect to see an increase in insolvency or "zone of insolvency" events as businesses react to the ongoing market volatility and companies and their directors adapt to protect their business, employees, shareholders, and other stakeholders.
With Guernsey's new insolvency law (the Companies (Guernsey) Law, 2008 (Insolvency) (Amendment) Ordinance, 2020) expected to come into force imminently, the direction of the law in Guernsey is one of increasing scrutiny of directors' conduct in the lead up to insolvency.In the present economic climate therefore, the conduct of directors of, for example, retailers, suppliers, building companies, property holding companies, infrastructure funds, investment management houses and hedge funds (where such directors are facing challenges that they will not have had to deal with in the past) will be key. Directors of such companies are likely to find their conduct under intense scrutiny as they seek to fulfil their fiduciary duties to those companies, to identify the right options for those companies and to mitigate any risk for both their companies and themselves. The decisions directors make now will be judged, with the benefit of hindsight, in years to come, and will have an impact on the future of many companies, as well as the shape of shareholder and board litigation.
Preservation of asset value should be the focus in the short term. In order to fulfil their fiduciary duties in that regard, directors will need to fulfil a number of requirements. These will include the need to:
- act in good faith and in the interests of the company, ensuring that where a conflict of interests exists, the nature of that conflict is disclosed (as required by Section 162 of the Companies (Guernsey) Law 2008);
- have regard to the laws that apply to the companies over which they are appointed, and act and take advice accordingly;
- be proactive in their assessment of the commercial and financial position of the companies they are managing;
- record (on a contemporaneous basis) all significant decisions;
- consider how corporate governance processes might be improved;
- have regard to all the circumstances that they know (or ought to know) will or may affect the value of the company's assets and liabilities;
- consider whether the company has entered, or may be about to enter, the zone of insolvency; and
- have regard to obligations to creditors and consider the benefits of a regular dialogue with shareholders and creditors.
In the absence of sufficient evidence in relation to the above, directors may find that they are opening themselves up to claims in misfeasance, breach of fiduciary duty, wrongful trading, fraudulent trading and for the recovery of distributions and dividends. In addition, the existing regime for directors' disqualification permits an administrator or liquidator to apply to the courts for an order prohibiting a person from being a director, secretary or other officer of any company or any specified company (set out in Part XXV of the Companies (Guernsey) Law, 2008).
It is worth noting that a recent English decision in System Building services Group Ltd v Michie  EWHC 54 (Ch) has confirmed that a director's statutory and fiduciary duties will continue into a formal insolvency process. The Guernsey courts would likely treat this decision as persuasive guidance and this has the potential to open up accessory claims against those who assist directors in wrongdoing, based for example on knowing receipt and dishonest assistance.
Setting aside company transactions involving Guernsey companies
In times of economic hardship, certain past transactions may come to be regarded as not as advantageous to a company as they may once have seemed. We expect to see an increase in the use of the courts by companies seeking to unravel such transactions. Applications may arise, for example, in the context of an insolvent winding-up, or where a new board is considering how to extricate itself from contractual arrangements that may appear to have been subject to a conflict of interest or made for an improper purpose and which it has inherited from its predecessors as follows.
- By a liquidator to set aside a preferential transaction.
- By a creditor of a Guernsey company to set aside a transaction
intended to defraud creditors (so-called "Pauline
actions"). In due course, Guernsey's new insolvency laws
will introduce statutory claims for liquidators and administrators
to set aside:
- transactions at an undervalue taking place six months before the insolvency event (or two years in the case of a transaction with a connected party); and
- an extortionate credit transaction in relation to the provision of credit given to the company within three years before the relevant insolvency event. By a liquidator, creditor or member of a company where it appears, in the course of a winding-up, that any past or present officer of the company (or any other person who, directly or indirectly, is or has been in any way concerned in it has participated in the promotion, formation or management of the company) has appropriated or otherwise misapplied any of the company's assets, become personally liable for any of the company's debts or liabilities, or otherwise been guilty of any misfeasance or breach of fiduciary duty in relation to the company.
- By a creditor if it can be established that there was an intention, on the part of the debtor in entering into a transaction with another party, to defeat the interests of the debtor's creditors and the debtor was balance sheet insolvent at the time or became so as a result of the transaction.
"Insolvent" trusts and Guernsey trustees facing diminishing asset values and cash flow
Any asset-holding structure, including a trust structure, the purpose of which is to maintain and grow asset values and income, will be under strain in challenging economic times. Trusts will not be immune and, like corporate directors, trustees will likely find their conduct under increasing scrutiny as reduced global demand across many sectors leads to investments falling in value or failing and cash flows reducing. Professional trustees will need to take steps to preserve asset value and may need to think about ensuring there is liquidity available to meet increased requests from beneficiaries for support in order to avoid any claim against them for breach of trust. It is also possible that the continued existence of a trust will come under threat where, say, there is a change in trustees in circumstances where pre-existing liabilities (potentially unknown) will have to be considered.
Where the claims against a trust's assets are greater than the value of those assets, and liabilities are not capable of being met as they fall due, then a trust will, in effect, be "insolvent". In the current economic climate, it seems inevitable that more Guernsey law trusts will become insolvent and it is likely that the Guernsey courts will be asked to intervene increasingly in the administration of insolvent trusts. For instance, in the long running ITG Limited & Ors v Glenella Properties Limited & Ors  GCA 043 litigation, the Court of Appeal recently considered the priority in which creditors of a trust are to be paid in the event of an insolvency and held:
- in relation to whether creditors claiming through a former trustee's right of indemnity took priority over creditors claiming through subsequent trustees or whether all creditors took pari passu, that the "first in time" principle applied so that claims through the former trustee's right of indemnity took priority through the indemnity of subsequent trustees; and
- a trustee making claims against trust assets in the exercise of its right of indemnity for expenses and liabilities properly incurred by it as trustee took priority over unpaid creditors of the trust claiming by virtue of their right of subrogation to that trustee's right of indemnity
Enforcement of Guernsey security
Given the popularity of Guernsey holding structures for investment into the UK, secured creditors with exposure to such structures will need legal advice in those jurisdictions where enforcement strategies are being considered. Enforcement of share security over Guernsey companies in those structures will generally be one of the options. The last few months have seen a level of "knee-jerk" security enforcement in Guernsey, typically in relation to debtors which were already under stress and which were unable to sustain the immediate impact of pressure from COVID 19. However, the volume of such enforcements has not been material when compared against the size of the market and lenders appear to be taking a measured approach, not wanting to enforce (and risk crystallising losses) unless circumstances dictate that such steps are necessary.
It is difficult to predict when one might expect to see a significant increase in the above-identified litigation trends or to compare events now with what happened during the economic downturn caused by the banking crisis in 2008. Then, it was around a year before a significant increase in litigation was seen. However, there are a few key observations that may be made.
First, the courts' willingness to consider, where appropriate, the conduct of proceedings by way of remote hearing is likely to be here to stay and the unprecedented economic impact of COVID-19 may influence the way disputes are resolved and arguments deployed; parties may be encouraged to think of new and more cost effective ways to resolve disputes with, perhaps, an increased use of alternative dispute resolution procedures. The Courts will continue to be increasingly "digitised".
Fraud will likely remain a feature of future disputes; the economic crisis may reveal fraudulent activity that would have gone undetected in more favourable economic times and give rise to the conditions in which fraud and/or other corporate misconduct is more likely to be perpetrated, and more worthwhile to pursue.
Finally, third-party litigation funding, which may be attractive to plaintiffs who might otherwise be unable to access justice and give businesses the opportunity to pursue valid claims whilst mitigating their financial risk in respect of the costs of litigation at a time when cash reserves may be under strain, is likely to increase.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.