Legal Disruption and Times of Crisis: COVID-19 and (Contract) Law

The term ‘disruption’ has been used frequently, and rather indiscriminately, in recent years, particularly in legal writings on the many facets of digitalisation. In my recent paper, I argue that a clear conception of ‘legal disruption’ can turn an over-used cliché into a useful concept to understand the impact of targeted law reform on existing legal regimes.

For some time, I have been intrigued by the work of the late Clayton Christensen on the notion of disruptive technology and its implications for business (seminally, The Innovator’s Dilemma (1997); for a recent concise account, see CM Christensen, ME Raynor and R McDonald, ‘What is Disruptive Innovation?’). His work provides a useful basis for evaluating the impact of changes to existing laws made to address new developments, such as legal challenges of digital technology, particularly where these depart from the paradigms on which established laws are often based. In an earlier piece of mine (‘Disruptive Technology - Disrupted Law? How the digital revolution affects (Contract) law’), I noted that adapting contract law to the digital world might require changes to some familiar principles and doctrines. However, such changes would not necessarily ‘disrupt’ contract law when assessed against a properly defined notion of ‘legal disruption’.

The COVID-19 pandemic and the changes made to the laws relevant to a wide range of contracts around the world prompted me to develop my nascent conception of ‘legal disruption’ a little further. In ‘The potential of the Covid-19 Crisis to cause legal disruption to Contracts and Contract Law’, I set out my conception of ‘legal disruption’ and explore when changes made to existing laws, whether in response to a crisis such as the pandemic or to technological developments, would cause legal disruption. I do so because a clearer understanding of when legal disruption would occur might reduce concerns over changes targeted at a specific issue and departing from established principles and rules. Therefore, it would be open to the criticism that they undermine the overall coherence of the law. I accept that seeking to ensure that changes to the law retain coherence is important. However, my view is that measures targeting specific developments which would break with coherence should not be precluded if these could provide a better way of addressing that development. For example, developing special liability rules in respect of digital technology which differ from the established product liability regimes might be better.

In his work, Christensen distinguishes between ‘sustaining technology’ and ‘disruptive technology’. The former is the gradual improvement of established technologies. Businesses making established technologies have an established market which sustaining technology allows them to continue to do.  ‘Disruptive technology’, on the other hand, is an innovative development, for which there may be no demand in existing markets. A new market for innovative technology emerges to serve a new customer base, and may eventually cause customers in established markets to switch to such innovative technology, resulting in existing markets to shrink or disappear altogether.

Translating this into the legal context, I argue that there are two interconnected levels of legal disruption. The first arises when a new development requires an adjustment of existing legal regimes because there is uncertainty as to whether the development is covered by existing regimes. New legal provisions are introduced to address the shortcomings which have been identified. However, the mere fact that additional provisions are required does not invariably mean that this has a disruptive effect, particularly where these are mere extensions of existing regimes or are developed by analogy. However, if a more targeted approach is used which breaks with the coherence of the existing regime, the first level of disruption is engaged. As long as such targeted provisions are confined to the specific problem they seek to address without affecting the continued application of existing legal rules to other circumstances, the disruptive effect is limited. It is only once we get to the second level of disruption that it becomes possible to speak of ‘legal disruption’. The effect of level 1 disruption is the emergence of parallel legal regimes: the existing legal regime and the specific regime tackling particular problems in a targeted manner. Legal disruption will occur once legal rules which were initially confined to a specific identified issue start to be applied beyond their original target. Eventually, this could have the effect of eroding the scope of existing legal regimes and result in extending specific rules far beyond their intended target, whether as a result of deliberate law reform or more subtly, eg, through the reinterpretation of existing concepts and principles in the common law.  In short, legal disruption occurs primarily where changes made to the law, initially adopted to address a specific development, are subsequently applied to circumstances beyond that development.

How would this assist in assessing the disruptive effect of the changes made to various aspects of the law affecting commercial and consumer contracts as a result of the COVID-19 pandemic? The legal response has proceeded in three stages: (i) the application of existing rules to the specific issues which have arisen was explored; (ii) additional rules, such as moratoria on loan and rental payments during the lockdown period, were introduced; (iii) as restrictions are eased, the rules adopted at (ii) were scaled-down and will eventually expire or be repealed. If viewed in this way, there might have been level 1 legal disruption at stage (ii), but this has not turned into full legal disruption. However, if some of the changes made at stage (ii) were to become permanent (in effect, at a fourth stage), then this could trigger level 2 disruption, eg, by recognising grounds for excusing temporary non-performance not previously recognised. Such an outcome is not necessarily negative but can result in changes to the law to remove long-standing shortcomings.

In short, a clearly articulated notion of ‘legal disruption’ is a useful tool for gauging the possible impact of legal changes which seemingly undermine coherence. Whilst such changes are confined to their targets, there will be no, or limited, legal disruption—even if the underlying development is very disruptive in a general sense.

Christian Twigg-Flesner is Professor of International Commercial Law at the University of Warwick.