Member Article

We are facing the growing and exponential spread of COVID-19 and a state of emergency was recently declared in Portugal. As a result, it is important to assess what impact this situation may have on the ability of businesses to meet the obligations they have assumed under the contracts they have made.

The current situation is generating tensions in contractual relationships between companies. These can arise at the level of suppliers, customers, landlords, tenants, contractors, developers, and financial institutions, etc.

If not resolved, the tensions may escalate into conflicts which, in turn, could lead to judicial or arbitral litigation. In any dispute, regardless of the merits of the positions of the parties, the likelihood is that resolving the problem through court litigation is too slow for the speed businesses desire. It is also too costly for businesses with fragile liquidity and will create additional problems, in particular, breakdowns in contractual relationships, many of which are intended to continue over time.

In these exceptional circumstances, companies are faced with three factors that are fundamental in dispute resolution:

• Time. Whatever the solution, the urgency of resolving tension or a conflict is crucial to ensuring the impact is as small as possible. Urgency is not compatible with the average time of two years for a court decision at first instance 1 and of one year for an arbitral decision.

• Cost. In a scenario of lower liquidity in the short or medium term, it is crucial for disputes to be resolved in the least costly way possible. This circumstance is not consistent with the relatively fixed and comparatively higher costs of judicial and arbitral proceedings.

• Maintaining commercial relationships. Most companies are facing problems that result from the current circumstances and they do not want to put at risk the commercial relationships they will need to pursue their activity when things go back to normal.

The solution that takes into account these three factors is the use of alternative dispute resolution (“ADR”) mechanisms. These mechanisms are voluntary in nature and their result can be founded on (i) creativity and consensus, that is, an agreement between the parties involved, or (ii) adjudication, that is, a decision or determination by a third party, which may or may not be binding.

There are several ADR mechanisms available that can respond to the pressing needs of businesses. They have already been tested to a certain extent in Portugal, but are widely used at the international level. The most significant are (I) assisted negotiation, (II) mediation, (III) expert determination, and (IV) emergency or fast-track arbitration.

What these ADR mechanisms have in common is that they are voluntary in nature, because their use as an alternative to the traditional method (the courts) depends on the express agreement of the parties.

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