Chapter
Conciliation vs. litigation: what has driven the choice?
Corporates find themselves in a difficult balancing act of responding to the pandemic with solidarity, whilst protecting shareholder value.
Responsible contractual behaviour
At the start of the pandemic, the Cabinet Office issued guidance (pdf) actively encouraging counterparties that have been impacted by the pandemic to act in a conciliatory fashion and to avoid ‘destructive disputes and insolvencies.’ According to our survey results, it appears that – in general – Corporates have heeded this advice. Amongst our survey respondents, 63% of Corporates and 52% of Lawyers say they – or their clients – have taken a more conciliatory approach to disagreements with counterparties since the pandemic began.
Our Corporate respondents told us that since the pandemic began:
63 %have taken a more conciliatory approach to disagreements with their counterparties
81 %
have applied reliefs to contract terms with their counterparties
44 %
are more likely to use alternative dispute resolution methods (ADR) after the pandemic
Four in five Corporates (81%) and three quarters of our Lawyer respondents (74%) say they – or their clients – have applied reliefs to contract terms with counterparties since the pandemic began. The most common form of relief applied by our Corporate respondents involves granting or receiving time extensions (69%). Others included renegotiation of other contract terms (59%) and granting or receiving payments for additional costs (25%).
Meanwhile, 77% of Corporates have resolved a dispute through some form of alternative dispute resolution (ADR), the most favoured remedies being neutral evaluation (applied by 49% of Corporates) or negotiation (applied by 42%). Interestingly, based on their experience of using preventative measures of this type during the pandemic, a significant minority of Corporate respondents (44%) indicated that they would be more likely to use ADR to resolve disagreements with their counterparties following the pandemic. In particular, our respondents cited the greater flexibility, time and cost savings of these measures as compared to formal legal avenues.
Stewards of shareholder value
Whilst corporate legal leaders appear to have demonstrated a certain level of solidarity in the current environment, our survey indicates that this approach has not solely been driven by an altruistic desire to take a more conciliatory approach with their contractual counterparties.
Both Corporates (70%) and Lawyers (92%) indicated that the most influential factor, when deciding whether or not to pursue a claim over the next 12 months, would be the ongoing need to navigate the business impact of COVID-19 as a priority. The second most influential factor (as reported by 62% of Corporates) was the need to protect shareholder value. In other words: survival and self-preservation comes first.
In practice, the prioritisation of these business fundamentals has already been in evidence throughout the pandemic in two areas.
Firstly, since the pandemic began, a third of Corporates (32%) and Lawyers (34%) alike say that they have deferred or stopped investigations into potential claims which they would have pursued in times unaffected by the COVID-19 pandemic. 79% of Corporate respondents attributed this to their pre-occupation with navigating the business impact of COVID-19.
Secondly, where disputes have arisen, three in five Corporates (63%) and around half of Lawyers (46%) say that the pervasive impact of the COVID-19 pandemic on organisations’ finances and operations has imposed greater pressure to settle disputes at an earlier stage than normal.
In the current environment it appears the pre-occupation of businesses with managing the initial impact of the pandemic has led to the deferral or early settlement of claims. However, many of our respondents also indicated that they expect to see a step change in the need to maximise the recovery of losses once the current package of government support for businesses and employees and the insolvency moratoriums end.
EY viewpoint:
“The survey provides evidence for what we’ve seen in practice with our clients since the pandemic began. Companies focused first on adapting, finding ways to survive and, where possible, thrive. In many cases, that meant working with supply chains and other third parties to find solutions and, where mutually beneficial, adapt contractual arrangements. But companies are, as always, focused on protecting shareholder value and clients are increasingly asking us to apply scrutiny to their contractual arrangements, particularly where they see risk of value leakage or opportunities to recover losses.”
Matt Fritzsche, Partner, Claims & Disputes, Forensic & Integrity Services, Ernst & Young LLP
Chapter
What lies ahead?
The majority of respondents expect to see a rise in legal claims as a result of COVID-19, but few are prepared for the post-pandemic surge.
Surge in claims expected in 2021
The majority of respondents are in agreement that COVID-19 will cause an increase in the volume of claims and disputes in 2021. The survey findings show that:
- Around three in five Corporates (59%) and two thirds of Lawyers (66%) anticipate a rise in legal claims as a result of COVID-19 compared with the volume of claims during times of ‘normal’ trading.
- 34% of Corporates, versus 26% of Lawyers, consider that this increase has already happened. Around two in five Corporates (41%) are bracing themselves for the surge to occur over the next six months, whilst a quarter of Corporates think it is further down the line.
- Just under half of Corporates (47%) anticipate raising, or have already raised, a claim resulting from the pandemic. Around a third (31%) anticipate receiving, or have received, a claim resulting from the pandemic.
Perhaps of greater concern is that one in seven of the Corporates told us that the risk of claims from the pandemic presents a going concern risk to their business, with a further three in seven (43%) anticipating that any claims would have a material financial impact on their business.
Assessing the potential financial impact of pandemic related claims:
43%of Corporate respondents anticipate that any claims would have a material financial impact upon their business
1 in 7
Corporate respondents consider the risk of COVID-19 related claims brought against them presents a going concern risk to their organisation
Corporates are feeling unprepared
Given the expected increase in claims volumes and the potentially significant financial implications, it is critical that organisations take proactive steps to prepare and protect themselves. Yet, a sizeable minority of Corporate respondents (43%) feel unprepared to deal with any potential increase in claims arising from the pandemic.
Our respondents told us that, amongst the factors influencing their sense of being unprepared are:
Claim volume pressures and insufficient resources to address increasing volumes given current workplace constraints.
Increased pressure to settle quickly due to broader business and financial pressures.
High degree of uncertainty regarding the ongoing impact of COVID-19
Concern about the pending impact of Brexit related disputes on their workload.
In my experience, very few businesses cater for unlikely events (a lot of them don't even cater for likely events). So very few organisations are prepared for any kind of unlikely or unpredictable events.
In terms of the practical steps that can be implemented to minimise the potential claims risk, according to three in five Lawyer respondents (62%), the most important action they would advise organisations to take is a holistic risk assessment to understand areas of contract risk and the potential legal remedies available. However, perhaps as a consequence of Corporates’ pre-occupation with navigating the business impact of the pandemic, only 45% of Corporate respondents indicated that they have undertaken such an assessment to date.
Differing perspectives on the claims risk universe
Whilst both sets of respondents agree that breach of contract claims are overwhelmingly the most likely type of dispute to arise from the pandemic, there is some divergence in opinion thereafter.
Our Lawyer respondents anticipate a far higher likelihood of insurance claims (42% versus 29%) and construction claims (35% versus 26%) compared to our Corporate respondents. In the case of insurance claims, this divergence may be down to lawyers having a greater awareness of the implications of both the High Court (September 2020) and recent Supreme Court (January 2021) judgements on the Financial Conduct Authority’s test case for COVID-19 business interruption claims, which open up potential recovery options for policyholders.
Interestingly, the second most likely type of dispute that our UK based Corporate respondents anticipate will be pursued were investment treaty disputes. This indicates a potential expectation that claims will be pursued against foreign states for alleged breaches of investor protections contained in an investment treaty, likely as a result of the widescale restrictions on trade imposed by governments to address the public health impact of the pandemic.
Consistent with the type of disputes highlighted above, Corporates think they are most likely to be in dispute with their clients/customers and suppliers. In contrast, Lawyers predict a higher likelihood of disputes involving a broader group of stakeholders such as insurers, landlords and tenants.
In both cases, our survey responses highlight the importance of organisations undertaking a holistic assessment of their contract risk and the potential legal remedies open to them to proactively mitigate and minimise their overall claims risk exposure.
EY viewpoint:
“In contrast to some of the views in this survey, we have noticed a change in the corporate risk/return appetite with merger and acquisition (M&A) transactions and associated warranty claims, price adjustment mechanisms and other related disputes. Whilst many of these claims can be rationalised on broader technical grounds, on further scrutiny they appear to mask attempts to recover lost transaction value due to the impact of the pandemic.”
Maggie Stilwell, Partner, Claims & Disputes, Forensic & Integrity Services, Ernst & Young LLP
For some further insights into the impact that COVID-19 is likely to have on the UK’s dispute resolution market, please see our separate article "How the pandemic is changing attitudes towards third-party funding".
Chapter
Beyond the pandemic
Many respondents expect that the impact of Brexit on the disputes landscape could be equal to or greater than the impact of COVID-19.
Although the UK and EU have now concluded the UK-EU Trade and Cooperation (Brexit) Agreement, which will govern the economic and trading relationship after the end of the transition period on 31 December 2020, our survey suggests that the anticipated legal and contractual implications for businesses operating in international trade remains high on the agenda for legal leaders.
Whilst both sets of respondents agreed that COVID-19 will have a bigger impact on the disputes landscape in the immediate term, significant minorities in each cohort think that the potential impact of Brexit on the disputes landscape could be the same or bigger.
Respondents who believed COVID-19 presents the bigger impact cited the global impact of the pandemic compared to the perceived regional impact of Brexit as their rationale.
Other respondents saw different, but equal impacts. For example, many respondents anticipated that COVID-19 and the associated global economic shock would present the immediate challenges of contractual non-performance and disputes arising from insolvencies. In contrast, many respondents highlighted that Brexit would present a fundamental change to legal and contractual frameworks and predicted that this would have a lasting impact on the nature, subject matter and procedure of disputes.
EY viewpoint:
“The emergence of vaccine nationalism, and formal EU complaints in relation to border controls and checks arrangements in Northern Ireland are emerging indicators of some of the Brexit related disputes that may arise.”
Maggie Stilwell, Partner, Claims & Disputes, Forensic & Integrity Services, Ernst & Young LLP
Special thanks to YouGov and EY’s Jack Rye for their contributions to this study.
Summary
Immediately after the pandemic struck, the Government responded to predictions of a wave in contractual claims and disputes by appealing to corporates and lawyers to be conciliatory. On the whole, they were. A year on, however, our survey shows that companies and law firms are expecting a surge in claims and disputes. In fact, some survey respondents say it has already arrived. Either way, it appears Corporates are underprepared to pursue – or defend themselves against – the expected increase in the number of claims.
