International Arbitration in 2022
How COVID-19 has shaped and will continue to shape the arbitration landscape
In 2021, COVID-19 continued to affect almost every facet of life across the globe, including arbitration.
The pandemic has given and is likely to continue to give rise to new disputes, ranging from the consequences of business interruption across a wide range of sectors to the impact of COVID-19-related measures implemented by States on investors.
Force majeure, frustration and impossibility
The world economy contracted by 3.5 percent in 2020 and business interruption continues to be felt across the globe, notably in the travel, retail and energy sectors. While many corporate entities have sought to adopt a conciliatory approach towards counterparties’ obligations (eg, by reaching agreement on deferred contractual performance and/or payment), many will be increasingly unable to avoid submitting their disputes to formal dispute resolution, including arbitration, as government support schemes are lifted, and agreements to defer or reschedule performance or debt expire.
Where disputes have been submitted to arbitration, COVID-19 has continued to be invoked as part of force majeure, frustration and economic impossibility arguments. Of note, however, is that the threshold to rely on these defences is becoming increasingly high with courts and arbitral tribunals taking the view that the second and subsequent waves of COVID-19 (and the attendant recurring lockdowns and restrictions) are not sufficiently ‘unforeseeable’.
Business interruption and liquidity problems have not yet translated into consistently higher insolvency rates, in part due to extensive State subsidies. However, there is significant distress in certain markets, and the gradual withdrawal of subsidies is likely to lead to a sharp increase in corporate insolvencies, making it important to consider both insolvency-related arbitrations and the effects of insolvency on arbitration. Insolvency affects every phase of an arbitration, from a party’s ability to participate in arbitration proceedings through to the pursuit of arbitral proceedings and ultimately enforcement. The high levels of debt across Africa and Asia are particularly noteworthy, due in part to the slowing of the Chinese economy and the resulting reduction in Chinese foreign direct investment abroad, as well as COVID-19’s impact on the Belt and Road Initiative.
Sector-specific commercial disputes
In the insurance sector, we expect the extent and scope of insurance policies’ coverage of COVID-19 to feature with increasing frequency in commercial arbitration proceedings.
While 2021 was a record year for M&A transactions, a number of high-profile deals were stalled during the pandemic, giving rise to disputes. Examples include the cancelled takeover of Victoria's Secret as well as LVMH’s delayed acquisition of Tiffany & Co. In a recent decision, an ICC tribunal held that EssilorLuxottica could back out of a €5.5 billion takeover. Further, COVID-19 uncertainty has led to an increased use of ‘earn-out’ clauses, adding a variable amount to the fixed price depending on the performance of the target, with the associated litigation risk of such inherently complex clauses.
A growing number of construction and projects disputes are also expected in the medium to long term, as the impact of lockdowns on procurement and execution as well as financial and supply sustainability issues crystallises, and the lockdowns' effect on development timelines becomes clear.
Source: How covid-19 impacts the claims and disputes landscape (April 2021)
Government emergency measures adopted during the pandemic are likely to lead to an increase in the number of COVID-19-related investor-State disputes. Proceedings have already been commenced in the air travel sector, including arising out of Chile’s alleged failure to provide relief to an airport’s concession; Moldova’s claimed use of COVID-19 as justification for terminating a concession; and Cabo Verde’s nationalisation of an airline. They have also been threatened in relation to energy reforms prompted by COVID-19 and pension fund withdrawal measures.
Further disputes are expected, particularly in the healthcare sector, in relation to intellectual property rights and export bans. These cases, which are likely to continue, will test the boundaries of the meaning of “reasonableness and proportionality” in State action of “necessity” and of treaty exceptions such as public health measures.
A further issue is how COVID-19 may impact the way damages are assessed in investment arbitration cases. In particular, it may influence how future cash flows are evaluated in discounted cash flow analyses, perhaps prompting the valuation date to shift towards the date of the award to take into account the impact of COVID-19.
On the procedural front, the main question is whether remote hearings that have flourished during the pandemic will remain a more permanent fixture of the arbitration landscape in 2022 and beyond.
The arbitration community quickly shifted to remote hearings as an alternative to in-person hearings, thus limiting the time and cost consequences of delays due to the pandemic. Institutions have continued to adapt their rules and best practices to address remaining due process concerns. Arbitrators and practitioners have gained more experience with the technology and the logistics of organising virtual hearings.
Still, virtual hearings continue to present challenges, such as the difficulty in accommodating disparate time zones, in efficiently advocating or presenting evidence, or in teams of counsel or tribunals being able to confer during hearing sessions. Long virtual hearings can also lead to screen fatigue, concentration issues and mental health issues. At the same time, virtual hearings can be more cost-efficient and offer greater procedural and logistical flexibility: they are easier to schedule, enable greater mobilisation of stakeholders, and have a positive impact on diversity and inclusion as well as the training of junior lawyers. Overall, virtual hearings have worked well, while aligning with the ESG goals of companies and law firms. Some companies have even started to adopt policies requiring virtual hearings by default and law firms, such as Freshfields, have committed to further limit their carbon footprint by reducing travel and paper usage.
For these reasons, and due to persistent volatile travel and health restrictions, the trend towards remote hearings will likely continue in 2022 and outlast the pandemic. Remote procedural hearings will become the norm, with the cost of travelling for smaller hearings becoming increasingly harder to justify. Remote merits hearings will also likely gain momentum for a wide range of cases as we continue to adapt to new skills and techniques and become more comfortable with the virtual environment. We also expect to see an increase of ‘hybrid’ hearings combining elements of in-person and virtual hearings in cases where parties are not comfortable with purely virtual hearings.