Swimming against the current? Litigation in the wake of COVID-19

5 May 2020

DRD Partners, Lawrence Dore and Kate Miller examine whether the unique challenges to reputation posed by COVID-19 will be enough to hold back a rising tide of legal action.

As COVID-19 continues its spread across the globe, the news is awash with predictions of a deep recession. Economic volatility and fluctuating markets have become mainstays of the “new normal” and business activity will be disrupted for the foreseeable future. Every government is having to walk a tightrope between protecting the health of the public and keeping the cogs of the economy from grinding to a halt. In the weeks since Rishi Sunak announced “unprecedented measures for unprecedented times”, fiscal measures once thought unthinkable have become the international norm.

In this unique context, there has been a marked upsurge in support for business from both the public and politicians; at the forefront of the national mindset is the priority of keeping companies afloat amid the crisis. The pandemic has enhanced public expectation on businesses to “do the right thing” and act ethically, thinking beyond simply their own operations and immediate self-interest.

Periods of upheaval, however, are fertile ground for litigation and the difficult decisions companies are having to make in response to COVID-19 are likely to translate into a wave of legal action. We saw it during the financial crisis of 2008-2009 and history is bound to repeat itself.

There is little doubt that the pandemic will generate a wide array of disputes: class actions against insurers over business interruption policies, employee claims relating to unsafe working conditions and breach of contract, disputes arising out of shareholder dissatisfaction with responses to the virus to name a few. The action against Hiscox Insurance, brought by the Mischon-represented Hiscox Action Group, and supported by the Night Time Industries Association, is an early example.

In the longer term, the liquidity issues and disruption caused by COVID-19 will inevitably lead to many businesses restructuring or entering insolvency proceedings, which will provide a further stream of proceedings for years to come.

Pointing to a predicted “deluge of litigation”, leading UK judges, including Lord Neuberger and Lord Phillips, both former heads of the UK Supreme Court, have called for an emphasis on conciliation to help businesses facing contract disputes arising from the crisis.  They point to countries such as Singapore where rules have been changed to provide companies with “breathing space”. Similarly, some are calling for government-backed solutions, setting up public compensation funds to avert concerns that once lockdowns are lifted, recovery could be hampered by a deluge of costly lawsuits. Given the sheer scale of the crisis and size of the losses, many would argue that such schemes will be unfeasible and are swimming against the current.

What is certain is that a complex and very new environment for litigation has emerged overnight, the reputational ramifications of which are largely untested.  There is a narrow divide in the current climate between a victim rightfully seeking recompense and a villain misreading the public mood and hampering economic recovery.

Any form of heavy-handed litigation, especially if directed at sectors providing essential services, could undermine decades of hard-earned goodwill. As Wetherspoons, Capita and Ryanair can all attest, companies seen to abuse the national effort against COVID-19 have not been treated kindly in the press.

But will the need to get business back on its feet prevent the pursuit of fair compensation and the honouring of contracts? If Burford Capital’s annual report and subsequent share rise is anything to go by, events are set to move quickly and many companies will soon be testing the waters.  Analysis by RPC suggests that the 15 largest litigation funders have amassed a war chest of £2bn in assets, including cash to fund cases, which will be attractive to companies starved of cash and looking to monetise claims.  We can also expect further innovation from law firms seeking to offer support by taking on more risk themselves.

It will be interesting to see how this unfolds. For the time being, it is clear that businesses bringing litigation have a nuanced and largely uncharted landscape to navigate, in which the need for considered stakeholder engagement is paramount. Companies able to communicate clearly the valid need and justification for bringing legal action will fare well; those that find themselves swimming against the current of both public and government opinion risk severe reputational repercussions.