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Arbitration and Virtual Hearings: Contract Disputes in the COVID-19 Era

Arbitration and Virtual Hearings: Contract Disputes in the COVID-19 Era

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One of the most important issues facing businesses in CEE is the impact of the ongoing COVID-19 pandemic on litigation and arbitration. In-person court and arbitration hearings have become problematic, if not impossible, and the importance of certain boilerplate contract clauses has skyrocketed. Zsolt Okanyi, Global Head of Dispute Resolution at CMS, Malgorzata Surdek, Head of Dispute Resolution at CMS Poland, and Daniela Karollus Bruner, Head of Dispute Resolution at CMS Austria, evaluate the current situation.

Concerns are Increasing

Concerns about potential disputes arising from the pandemic are increasing, Surdek reports. “Although I don’t see many COVID-19 disputes being litigated yet,” she says, “certain businesses have already started seeking pre-litigation advice, for example construction companies assessing time delays and additional remuneration claims and policy holders who want to test their business-interruption policies. However, in the near future I expect to see more and more actions related to insolvency and restructuring, cyber security issues, and state-aid related measures.”

And on the bankruptcy front, Karollus Bruner says, you can only hold them off so long, “A number of insolvencies are on hold due to the supportive measures taken by governments at the start of the pandemic,” she says. “I think we will see the number of cases rising due to delays in various industries.”

How Courts Have Adapted

Courts across CEE were almost frozen by the pandemic in the first months after its arrival, but they have started moving more smoothly. According to Surdek, “in the spring, the entire court system in Poland came to a standstill, except for a handful of criminal cases. However, judges did proceed to issue decisions in all instances where a public hearing was not required; for example, providing interim measures to secure parties’ claims. Public hearings have now resumed despite the imminent second wave.”

Although things are moving more fluidly now – at least for the time being – Surdek believes online hearings may become more common soon. But not yet. “Virtual hearings are possible in Poland under COVID-19-related legislation, but they are more theoretical than real at the moment, because courts still need to upgrade their IT infrastructure and those involved – such as judges, experts, and counsel – need to become more tech-savvy. Unfortunately, this means that severe delays are likely to continue.”

In Austria, Karollus Bruner explains, the situation is different, as “all judges and courts use business Zoom and are already holding regular virtual hearings.” Simultaneously, she says, courts have taken steps to protect those who are forced to attend. “Court facilities have been limited to restrict the number of people in one building at any one time, which has led to certain changes – for example, hearings starting as late as 6.00 p.m.”

It took a while for Hungarian courts to adapt to the new reality, Okanyi reports. “The court system is still primarily document-based, and it took six weeks to organize the widespread use of Skype for Business.” And in any event, he says, “when the first-wave lockdown was eased, things returned to normal – with the addition of social distancing and the wearing of masks during hearings.”

Ultimately, Okanyi says, the effects of COVID-19 will likely linger long after the pandemic itself is gone. “We need to understand that the backlog caused by the lockdown could take years to clear,” he says. “In Bulgaria, the courts stopped all cases between March and September and the question now is how can these cases be cleared? Who will pay for the additional judges and courts that will be required? People need reassurance that justice will be done.”

The Way Forward for Alternative Dispute Resolution

In this atmosphere, what is the best way forward for clients who may need to engage in mediation or arbitration? Karollus Bruner sounds a positive note: “Arbitration courts have embraced modern technology much more than national courts. However, arbitrators are greatly concerned, as always, with due process, which means they can be reluctant to allow virtual hearings unless all parties agree. Thus, it’s now easier for parties to come up with delaying tactics by saying that they can’t prepare for a hearing because their client can’t travel. Indeed, in one of my cases, a hearing has been postponed for another six months even though it had already been scheduled for eighteen months after the claim was initially filed.”

“Mediation has always been a good option – but it is especially so now, during the pandemic,” Surdek adds. “For example, I currently have one mediation case where the clients cannot travel due to restrictions in their organizations. We conduct meetings using Microsoft Teams, and, despite some data privacy concerns, it works quite well. In arbitration, evidentiary cases need a great deal of backup, where the parties must have strong IT support including not only conferencing capability but also document sharing software.” Of course, she admits, “it still only needs one party to withhold its consent and the hearing cannot go ahead.” Still, she says, there’s no doubt that, “arbitration in Poland is still some way ahead of the court system in terms of utilizing modern technology.”

The Takeaway

When asked what businesses can learn from the current state of affairs, Karollus Bruner is unequivocal: “Caution should be taken at the beginning stages of a relationship to take the current circumstances into consideration. Normally, in a country with a properly functioning court system, litigation might be preferable over arbitration, but in either case the importance of advance planning cannot be overstated. Parties need to realize the importance of boilerplate clauses.” And where disputes do arise, technology is critical. “Given the variable and ongoing travel restrictions,” Karollus Bruner says, “parties need to ensure that their expert witnesses and counsel have the necessary IT infrastructure to be able to play a role in the case. And if a hearing is going to be virtual, parties need to consider if a witness is alone, is reading from a prepared statement, or if there is some other external influence.”

“It’s important to bear in mind that one size does not fit all,” Surdek warns. “If a case has very few or no witnesses, it can be arbitrated virtually. Cases can also be heard in stages, where a court can proceed with the parts of the case that do not require witnesses or expert cross-examination, as that can be postponed to a future date.”

Okanyi finishes with a salient point: “In the future, clauses such as force majeure and dispute resolution, which for years have been boilerplate clauses, will require much more attention. Parties must think carefully about whether to pursue a formal claim in court or arbitrate, and indeed what events will or will not constitute force majeure for the duration of the contract.”

It is clear that the disruption wrought by the pandemic is far from resolved. For courts, arbitrators, and businesses, contract disputes in this new era of COVID-19 will continue to present challenges. 

This Article was originally published in Issue 7.11 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.