As we move to a new normal in the post COVID-19 environment, we anticipate a number of unique changes and challenges in the dispute landscape, including:
- An increased uptake of alternative forms of dispute resolution as businesses look to manage costs.
- An increase in post-acquisition disputes as parties navigate through earn out periods.
- A potential growth in litigation and class actions relating to employee entitlements.
Alternative forms of dispute resolution
COVID-19 has forced businesses to cut down on non-essential spending in an effort to remain afloat. We have learnt from the global financial crisis that this cost cutting exercise leads to an uptake of alternative forms of dispute resolution such as commercial negotiations, expert determination, mediation and arbitration.
Another approach where litigation remains the preferred method, is the use of a single court appointed expert. This can be a more cost effective and time efficient method than a traditional approach of each party engaging their own independent expert, which often requires the exchange or reports, joint reports, multiple rounds of expert evidence and lengthy hearings. You can read more about the rise of expert determination here.
Parties who entered into transactions before COVID-19 and where the purchase price is contingent upon subsequent performance or working capital adjustments during the pandemic, may face difficult discussions with counterparties.
The majority of businesses will also have seen their performance adversely affected by the pandemic, resulting in a lower earn out payment and a lower overall price for the business. Some sellers may feel an earn out income is inequitable and initiate a dispute resolution mechanism.
Completion accounts are often used to “true-up” the financial position of the target company between exchanging of contracts and completion. The pro forma completion accounts at signing are prepared by reference to historical figures or “normalised levels”. A difficulty arises where historical or “normalised” figures are significantly different to the position at completion in a post COVID-19 environment and parties may disagree with the outcome of completion accounts.
Employers altering the payment of employee entitlements is an obvious red flag indicating when a business is in distress. The business may miss the regular pay cycle, implement a payment plan of wages or request for full time employees to become contractors. These changes to employment conditions can be fruitful ground for litigation and class actions.
The Full Federal Court recently ruled that casual employees working regular shifts are entitled to paid annual, personal and compassionate leave under the Fair Work Act. Further class and regulatory action against underpayment of employees, which has slowed in the wake of the pandemic, is likely to return to the spotlight.
Initial steps that can determine if your business has an issue with payroll underpayment can be found here.
The impact and fallout from COVID-19 will likely lead to litigation and commercial disputes. The potential areas include disputes arising from acquisitions entered into pre COVID-19 and employee entitlements. Businesses may choose to resolve these disputes using alternative forums to minimise the costs associated with dispute resolution.