Impact of Covid-19: trending legal topics and challenging scenarios
Alberto Suárez Tramón
DJV ABOGADOS, Madrid
Acceptable economic levels; fewer bankruptcy procedures than in the years after the 2008 financial crisis; fairly good employment rates; promising opportunities for investment and private equity movements with an interesting liquidity background and a soft recession forecast for the future in the mid-term: all these factors characterised our economies just three months ago, worldwide.
However, a sudden and unpredictable event has appeared, changing all our recent expectations and creating an uncertain scenario, which will force us to confront difficult legal and economic issues on both the macro and micro levels.
Covid-19 has brought one of the biggest challenges in almost a century to the international community, comparable with the deep recession that followed the Wall Street crash of 1929 and even more difficult to treat in the short term. Many businesses have been locked down for around three months and nobody knows exactly how Covid-19 is going to act from now on, or when we will have an effective vaccine which would allow us to return to the ‘old’ normality. How long we will have to live under this current ‘new normal’, as some have called it?
From a legal perspective, the Covid-19 crisis has not only forced the issuance of new provisional rules in order to regulate the lockdown period itself and its immediate impact on businesses and employment, but also new long-term acts, regulations and other rules at a national and international level.
Small entrepreneurs, big companies and individuals alike will surely require legal measures for dealing with several issues, such as the impact of the compulsory closure of their businesses in recent months. This measure has brought a decline in income, made paying rent impossible, caused employee dismissals (due to an inactive period) and created solvency issues, which have in turn forced the renegotiation of financing agreements directly affected by the new income forecasts for borrowers.
For example, in Spain the doctrine known as rebus sic stantibus and the legal concept of force majeure (expressly established in Article 1105 of the Spanish Civil Code) were often used as legal arguments for renegotiating contracts due to the unforeseen changes that the Covid-19 pandemic wrought in relation to many agreements, which were executed under very different circumstances. The same has likely occurred in other jurisdictions, where similar principles or legal doctrines exist, such as the theory of ‘frustration’ in the United Kingdom; the ‘commercial impracticability’ doctrine in the United States; business basis theory in German law (die störung der gescháftsgrundlage); and the French version, known as ‘théorie de l'imprévision’. New developments of these theories will probably take place due to litigation arising from the conflicts between parties under their legal agreements, which will surely be studied for future similar cases both in civil and common law systems.
This crisis could also represent a paradigmatic example of a typical clause of ‘material adverse change’, leading some financial and M&A agreements to an early termination scenario, sharing a similar legal basis with the aforementioned legal concept of force majeure (given that this means a significant change has taken place, preventing the fulfilment of the agreement by one or more parties). Thus, specific analysis of these kinds of agreement and provisions must be carried out, considering the current context, in order to determine their applicability and also whether they are convenient for the relevant party.
Ultimately, the impact of Covid-19 on the legal market is evidenced by new regulations enacted ad hoc in several areas, including: leases; finance or commercial agreements; employment regulations regarding temporary or definitive dismissals; tax exemptions, payments or returns delays; licences or authorisation terms and foreign investments etc.
Likewise, we must add to this list all European Union regulations related to the financial aid granted to Member States to help them recover from the economic and financial distress created by the Covid-19 pandemic.
There is therefore no doubt that lawyers will play an important role in helping clients adapt (from a legal perspective) to this ‘new’ reality, by planning and negotiating, where appropriate, on their behalf, their agreements and legal relationships vis-à-vis third parties.
Once again, a new and historical challenge has arisen for legal institutions, politicians and legislators, who are dealing with adversity on a global level. The challenge is shared by lawyers, who must be the strategic partners of their clients on this difficult path, helping them to adapt and get to know a multiplicity of specific, applicable legal rules, doctrines and principles for each new situation.
Other issues regarding the legal industry, which were not discussed here, will require special attention from lawyers, such as the almost-mandatory digital transformation for law firms, which surely has been accelerated as a result of the Covid-19 lockdown, or the challenging scenario for a lot of small or mid-size law firms, which will face difficult years ahead due to their clients’ crises.