The Year of the Ox represents a fresh start and an opportunity to ‘turn things around’ (牛转乾坤) for the better.1 The question considered below is what will the ‘Niu’ (牛)2 Year hold for in-house counsel operating in Asia and tasked with resolving commercial disputes?
Naturally, there will be disputes relating to COVID-19 and efforts to contain its spread. These will often be resolved through negotiation, particularly if the relevant contract clearly allocates the risk between the parties of force majeure events. Some long-term contracts, however, may need to be renegotiated as a result of turbulence in the market. Any deadlock in the negotiations could potentially be resolved through arbitration, although that cannot be assumed and will depend on the precise terms of the contract. Other types of disputes that could feature over the coming months include environmental disputes relating to the decommissioning of oil and gas facilities, M&A transactions that have gone sour, and private equity deals that are being unwound. With that said, this is obviously not an exhaustive list, with commercial disputes being as varied as the contracts from which they spring.
To the extent arbitration is used to resolve commercial and other types of disputes, participants will benefit from the recent evolution in arbitration procedures accelerated by COVID-19. This includes the conduct of hearings on a virtual platform, potentially saving the parties significant costs. Such costs can already be transferred in many jurisdictions to a financier through the use of third-party funding. External counsel ‘bullish’ (in keeping with the Year of the Ox) about a particular case may soon be able to accept an instruction on a contingency basis (i.e. no win: no fee) if mooted changes to the regulation of the legal profession in Hong Kong and Singapore come to pass. This would be transformational, eliminating costs for clients, changing the business model of many law firms, and potentially unlocking claims that might otherwise have lain dormant.
Types of disputes
Force majeure claims
Commercial contracts are not immune from the disruption caused by the coronavirus pandemic, with travel bans, work-from-home requirements and shutdown orders making it difficult or impossible for many companies to fulfil their contractual obligations on time. Many companies continue to face these challenges, with various parts of the world hit by a second (or third) wave of COVID-19 infections.
In such circumstances, a party may seek to avoid or reduce its obligations by claiming force majeure. However, there is no general right to claim force majeure. It is purely a creature of contract. Thus, the resolution of a force majeure claim will depend on the precise terms of the contract. Some force majeure clauses expressly include a ‘pandemic’ as a qualifying event. Even if not expressly stated, the broad language typically used in force majeure clauses will usually encompass a pandemic. A potentially more difficult question is whether the indirect effects of COVID-19, such as mandated lockdowns, supply chain disruptions or voluntary business closures, constitute a force majeure.
In the absence of a contractual right to claim force majeure, a party may seek to rely on general legal doctrines under the applicable law (such as frustration, impossibility, rebus sic stantibus, etc) to suspend, revise or excuse further performance under a contract. However, a high threshold must usually be met, such as the occurrence of an unforeseeable event that radically transforms the parties’ obligations or renders performance excessively onerous or impossible. Questions may arise as to whether the consequences of COVID-19 meet this threshold, particularly if an obligation is merely rendered more expensive or inconvenient to perform rather than impossible.
(For an in-depth discussion of the contractual terms and legal doctrines that might be triggered by COVID-19, please see the following link.)
Long-term supply contracts
Commodities in Asia are often supplied pursuant to long-term contracts. Many long-term contracts include mechanisms that require the parties to sit down periodically and renegotiate certain aspects of the contract, including the most sensitive provisions such as the price. Significant changes in the underlying market, like those caused by COVID-19 or market deregulation, can make it difficult for parties to reach an agreement during a contract renegotiation. In such circumstances, a question may arise as to whether a party has a right to refer a failure to agree to arbitration, expert determination, or some other formal process.
In 2020, Dechert acted in two separate arbitrations relating to a failure of parties to reach an agreement in LNG price review negotiations. More price review disputes relating to various commodities are likely to feature in 2021 given the enormous disruption being experienced in many commodity markets.
Decommissioning disputes
Decommissioning in the oil and gas industry refers to the works required to remove the infrastructure used to operate a field after it ceases production and to rehabilitate the site. More than 200 offshore fields are expected to stop producing in Southeast Asia by 2030, with total decommissioning costs estimated to range from $30 billion to as much as $100 billion.3 These fields are often situated in countries with underdeveloped decommissioning regulations, while the applicable contracts may be silent as to who is responsible for decommissioning costs and what is to be done to ensure that the environment is protected.
This lack of clarity is fertile ground for disputes. Host States may argue that oil and gas companies have a responsibility to decommission the project in a manner that addresses environmental concerns, while oil and gas companies may counter that the contractual allocation of benefits and burdens places that responsibility on the State.
M&A disputes
In 2020, the value of global M&A deals amounted to US$2.8 trillion, which was US$600 billion less than that agreed in 2019.4 While activity rebounded in the third quarter of 2020 (such as AstraZeneca’s US$39 billion acquisition of Alexion in December 2020),5 various transactions continue to be put on hold as parties seek to extricate themselves from deals that no longer make commercial sense and/or for which financing is no longer available given the prevailing market conditions.
Examples of failed M&A transactions include Boeing’s USD 4.2 billion deal to purchase Embraer’s commercial aircraft business in Brazil, Xerox Holding’s proposed $32.85 billion takeover of HP Inc, and Softbank’s additional investment in WeWork. Claims have been brought over these deals because the underlying markets had changed so much that any mitigating sale by the seller is likely to crystalise significant losses. Such disputes typically revolve around whether the buyer is entitled to terminate the contract (e.g., based on inaccurate representations and warranties given by the seller), alleged breaches of interim operating covenants (e.g., furloughing employees, reducing capital expenditures) or the occurrence of a ‘material adverse event’.
Even in cases where the deal proceeds to a closing, disputes may still arise over other issues. This might include the valuation of the shares to be acquired, the appropriate post-closing purchase price adjustments to be made, and/or how the company is to be operated and managed – particularly where the seller retains a stake in the company or where part of the purchase price is contingent on the future performance of the company (known as an ‘earnout’). Dechert’s international arbitration team is currently handling a number of post-M&A disputes.
Private equity disputes
The global value of the businesses owned by private equity firms reportedly dropped by 20% by March 2020 as a result of COVID-19.6 While a strong recovery began to take hold from the third quarter of 2020, private equity managers still face a host of challenges in 2021 that may lead to disputes. Common problems include misrepresentation in the accounts, mismanagement in the running of the companies, premature exits by key stakeholders, and withdrawals by sponsors seeking to cut their losses in underperforming funds. Global lockdowns are also making it difficult to conduct sufficient due diligence and site visits on pending deals,7 which could lead to disputes if serious irregularities are discovered post-acquisition.
Changes in the way cross-border disputes are resolved
Virtual hearings
The restrictions imposed by governments around the world to stem the coronavirus have forced a rapid evolution in how litigation and arbitration hearings are conducted. Virtual or remote hearings are now widespread. Arbitration rules have been amended to confirm that such hearings are permissible.8 The ICC9 and HKIAC10 arbitral institutions have introduced guidelines to assist parties and the tribunal on practical aspects of remote hearings. It has also become standard practice for parties to agree to a ‘virtual hearing protocol’ to govern the conduct of a virtual hearing. (Dechert has produced its own virtual hearing template to assist parties in virtual hearings.)
A survey conducted by the UK Civil Justice Council found that a substantial majority (69.37%) of respondents considered that video hearings were mostly effective in allowing the parties to present their case.11 It is thus likely that hearings will continue to be conducted remotely even after inter-state travel returns to normal. Certainly, procedural hearings and case management conferences will now almost always be conducted remotely unless all participants reside in the same location. Merits hearings will also be conducted virtually well into the future. With that said, the cost savings from avoiding international travel for a physical hearing can be offset to some extent by the costs associated with a virtual hearing, including the engagement of a service provider to manage the digital platform so that the hearing runs smoothly. In-person hearings may also be preferred by arbitrators in order to facilitate their deliberations during the course of a hearing and immediately afterwards.
Negotiations and mediation
Perhaps inspired by the common suffering and disruption caused by COVID-19, there has been a discernible increase in the desire of companies and governments to resolve disputes amicably. Non-adversarial options include negotiations, conciliation and mediation.
The use of mediation has also been given a boost by the Convention on International Settlement Agreements Resulting from Mediation (Singapore Convention) coming into force on 12 September 2020, which has been signed by 53 States (although only ratified by six of these States).12 A court subject to the Singapore Convention is required to enforce a mediated settlement agreement unless one of the limited grounds for refusing enforcement has been established. This makes it easier for parties to enforce mediated settlement agreements in a jurisdiction to which the Singapore Convention applies, as discussed in an earlier briefing.
However, given that only six States have ratified the Convention, the vast majority of mediated agreements will depend on local court procedures for their enforcement (or the willingness of the parties to comply voluntarily, which will often be the case). It is therefore fair to assume that companies, state-owned entities and governments doing business abroad will continue to rely on international arbitration as the principal means for resolving complex disputes. A key point of distinction among arbitration, litigation and mediation is that 166 States have ratified the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention), which ensures that an arbitral award can be enforced in almost any jurisdiction around the world.
Third-party funding and contingency fees
Third-party funding (TPF)13 has become a popular means of financing arbitrations and reducing, if not eliminating, the risks and costs of an arbitration for the funded party. Such arrangements have long been permitted in jurisdictions like London, New York and Australia, and have also been legalized in recent years in the major Asian dispute centers of Singapore and Hong Kong. (Dechert acted in one of the very first TPF claims in Singapore after it was legalised in early 2017, which led to the team being highly commended in the Financial Times Asia-Pacific Innovative Lawyers Report 2019.14 )
TPF is regulated by statute in Singapore and Hong Kong. While there is some uncertainty about its legality elsewhere in Asia, the winds of change look favourable. The Supreme Court of India has recently observed that ‘there appears to be no restriction on third parties (non-lawyers) funding the litigation and getting repaid after the outcome of the litigation’.15 Malaysia has also announced proposed amendments to its Arbitration Act to allow TPF. In civil law jurisdictions such as China and Korea, where the doctrines of champerty and maintenance do not exist, there do not appear to be any restrictions against TPF.
But perhaps the biggest change in 2021 could be the possible legalisation of contingency fees in Singapore and Hong Kong. While such arrangements are currently not allowed in either jurisdiction, there are strong indications that this will soon change. In particular, Singapore’s legal community has reacted positively16 to a recent public consultation exercise proposing legislative amendments to allow contingency fee arrangements17 and Hong Kong’s Secretary of Justice’s Sub-committee of the Law Reform Commission published a consultation paper at the end of last year recommending that Hong Kong’s laws be amended to allow contingency fee arrangements for arbitrations seated in or outside of Hong Kong.18 This could be a game changer for how arbitrations in Asia are conducted and funded.
Conclusion
Regardless of the types of commercial disputes that may arise, there are ways in which even the most complex and protracted disputes can be resolved amicably, failing which, the latest procedural trends promise to reduce the risks and costs of arbitration. Indeed, TPF and contingency fee arrangements could potentially eliminate the costs altogether.
Given these developments, one might say, tongue in cheek, that it promises to be an ‘ox-picious’ year. Indeed, consider the etymology of the word, ‘vaccine’. It derives from the Latin word, ‘vacca’, meaning ‘cow’ as a result of the early use of the cowpox virus to treat smallpox humans.19 The next 12 months literally could be the year of the vaccine. And with it there could be both a willingness by parties to compromise commercial claims on reasonable terms and a determination to pursue with renewed vigour those which cannot be settled.
Footnotes
1. The phrase ‘牛转乾坤’ (niu zhuan qian kun) is a play on an old Chinese phrase with the word ‘ox’ which means ‘to turn things around.’
2. The word 牛(‘niu’) in Mandarin means ‘ox’.
3. Energy Voice, ‘Southeast Asia braces for huge wave of decommissioning’, 9 December 2019 (https://www.energyvoice.com/oilandgas/asia/213619/southeast-asia-braces-for-huge-wave-of-decommissioning).
4. https://www.statista.com/statistics/267369/volume-of-mergers-and-acquisitions-worldwide/#:~:text=In 2020%2C the value of,dollars in the previous year.
5. https://www.astrazeneca.com/media-centre/press-releases/2020/astrazeneca-to-acquire-alexion.html.
6. https://www.mckinsey.com/industries/private-equity-and-principal-investors/our-insights/a-rolling-disruption-covid-19s-implications-for-private-equity-and-portfolio-companies.
7. https://www.mckinsey.com/industries/private-equity-and-principal-investors/our-insights/preparing-for-private-equity-exits-in-the-covid-19-era.
8. See, for instance, ICC Arbitration Rules 2021, Article 26(1) and LCIA Arbitration Rules 2020, Article 19.2.
9. https://iccwbo.org/dispute-resolution-services/hearing-centre/icc-virtual-hearings/
10. https://www.hkiac.org/our-services/facilities/virtual-hearings.
11. UK Civil Justice Council, Rapid Review: The Impact of COVID-19 on the Civil Justice System – Report and Recommendations, 4 June 2020.
12. Belarus, Ecuador, Fiji, Qatar, Saudi Arabia, and Singapore.
13. Third party funding is an arrangement by which a funder agrees to finance the legal expenses of a party pursuing a claim in return for a share of the damages awarded if the claim succeeds. It is also possible for a defence to be funded, particularly if it forms part of a portfolio of disputes that a company has agreed will be funded.
14. https://www.ft.com/content/703fab9a-498a-11e9-bde6-79eaea5acb64
15. Bar Council of India v AK Balaji (2018) 5 SCC 379.
16. https://www.lawsociety.org.sg/wp-content/uploads/2020/02/October-8-2019.pdf.
17. https://www.mlaw.gov.sg/news/public-consultations/public-consultation-on-conditional-fee-agreements-in-singapore.
18. https://www.hkreform.gov.hk/en/publications/orfsa.htm.
19. https://www.nature.com/articles/d42859-020-00007-6.
By Shilun Chen, Miranda Elvidge, Daniel Gaw, Lukas Lim, Mark Mangan, Ananya Mitra