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Changes To Litigation Risk In A New Economic Environment – Litigation, Mediation & Arbitration -…

Changes To Litigation Risk In A New Economic Environment – Litigation, Mediation & Arbitration -…

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COVID-19 has dramatically altered the litigation landscape.

It is not only that new types of legal disputes are emerging.
More fundamentally, the economic and strategic considerations
affecting organizations’ litigation decisions are shifting.
This article examines that shift, and explores some key resulting
consequences for organizations going forward as they conduct
litigation in the pandemic environment.

The changed litigation landscape

The pandemic has substantially reduced economic activity and
liquidity, while simultaneously heightening health and safety risks
in every facet of our world. These two phenomena have triggered
crisis decision-making across all segments of society, affecting
every industry and every person. The result has been widespread
disruption, harm and loss. The financial loss is being borne only
partially by governments, despite unprecedented publicly-funded
emergency economic relief.

The losses that are not compensated for through government
programs, and that are not otherwise remedied through existing
contractual, statutory, regulatory or informal allocations of risk
and responsibility, fall into two categories: a) those that may be
remedied through some form of dispute resolution; and b) those that
will not or cannot be remedied from a source outside the
organization. 

In some cases, the financial pressures created by the pandemic
will drive a party to settle on terms that would have been
unacceptable a few months ago.

These latter losses will in many cases be absorbed by the
organization, and thus passed on indirectly to its stakeholders
(customers, shareholders and others), or else they will cause the
organization’s insolvency and a corresponding direct and
immediate allocation of losses to the organization’s
stakeholders. One obvious likely effect of COVID-19 is thus an
increase in insolvency-related litigation involving creditors
seeking to ensure that losses come to be stranded with others, and
not themselves.

It is in respect of the first category of losses noted
above—unresolved losses where there is a claimant willing and
able to advance a dispute, and an adversary solvent enough to
defend—that traditional economic and strategic circumstances
and assumptions have changed most significantly. These changes
manifest themselves differently depending on whether one is dealing
with an existing dispute, or new litigation arising from
COVID-19.

Changes affecting existing disputes

For existing legal disputes currently working their way through
a formal dispute resolution process (whether in court, arbitration
or otherwise), three major changes need to be considered.

First, there has been a material change in the value-for-money
analysis associated with pursuing a litigated outcome. In the
current liquidity and risk environment, the perceived benefits of
expending substantial funds on a multi-year litigation process with
an uncertain outcome are changing for some litigants. Many parties
need to free up cash, reduce costs or eliminate contingent
liabilities now. In some cases, the financial pressures created by
the pandemic will drive a party to settle on terms that would have
been unacceptable a few months ago. In other cases, the effect of
the pandemic will be to cause a reduction in immediate legal spend
and the deferral of litigation activity to a later date.

A second major shift in the litigation environment relates to
the potential insolvency of one’s litigation adversary. With
even some of the healthiest corporate players now financially
threatened, litigants need to consider carefully whether to settle
their disputes sooner or later, taking into account the potential
that the financial viability of their litigation adversary may
worsen. For plaintiffs, an early settlement now on
less-than-optimal terms may be preferable to waiting for better
terms, given the enhanced risk that the defendant may not survive
the wait. For defendants, a plaintiff’s liquidity and solvency
concerns may enable early settlement on terms more favourable to
the defendant, or could incentivize the defendant to extend the
proceedings in the hope that this will result in the plaintiff
ceasing to remain financially viable.

A third factor is that government-imposed physical distancing
requirements have resulted in reduced access to courthouses and
tribunals, suspended filing deadlines, and (in many but not all
matters) postponed trials, hearings, applications and motions.
Out-of-court discovery procedures are likewise often being
deferred, particularly where defendants can identify a compelling
reason for delay, such as inability to meet with clients or access
their documents, or a bona fide basis to insist on in-person
examination. While courts are still hearing urgent matters and
certain classes of disputes (such as class actions) in some major
centres—where hearings are proceeding on an ad hoc
basis by way of video conference, teleconference or in
writing—the bulk of the court-driven and tribunal-driven
litigation process is on hold. This creates, at least for now, a
defendant-friendly environment because plaintiffs cannot as
effectively push matters forward in many cases, and therefore
cannot leverage the pressure created by an impending hearing or
deadline.

Some commercial parties will prefer private dispute resolution,
with the goal (if not always the effect) of expediting the process,
controlling the costs, and achieving greater certainty of
outcome.

COVID-19 is thus influencing litigation leverage and litigation
risk. The cost/benefit analysis of litigating, and the strategies
and tactics needed to arrive at an optimal outcome, must be
assessed anew by all litigants. Although the effect is not
universal, there are many existing disputes in which the
opportunities for compromise and early settlement have been
enhanced. In others, the outlook is more likely to be one of
delays.

Changes affecting disputes resulting from COVID-19

The pandemic is generating a host of new legal disputes,
including class actions. Human crisis creates a fertile environment
for plaintiff class action lawyers, who do not need to look very
far for claims they are willing to underwrite. COVID-19 is one of
the greatest crises in modern history, and could well be the
greatest single generator of class actions to date in history,
given the widespread unremedied harm and loss suffered by
individuals across all segments of society.

Class action activity in the first few months of the pandemic
already includes:

  • personal injury claims (e.g.,
    alleging failure to protect against COVID-19);

  • employment claims (e.g., for mass
    layoffs, unsafe working conditions);

  • securities disclosure claims (e.g.,
    alleging failure to disclose the effect of the pandemic on the
    organization in a timely fashion);

  • consumer protection claims (e.g., for
    not refunding payments relating to purchases that could not be
    fulfilled); and

  • insurance claims (e.g., for not
    providing coverage for certain types of losses).

The range of class actions that COVID-19 is generating will
continue to grow. Successfully defending some of these class
actions will be vital for the organization being
targeted—that is, the significance of the claim may be such
that the survival of the organization depends on either
successfully defending against it, or negotiating a compromise
resolution that allows the organization to continue. The leverage
for class counsel, and the determination of defendants, are
heightened.

The pandemic is also producing a range of new inter-party
commercial disputes, such as novel force majeure claims affecting
supply chain and construction contracts, claims through which
buyers seek to terminate corporate acquisition agreements based on
material adverse effect clauses, interim operating covenants, bring
down requirements or other alleged breaches, whistleblower suits
relating to improper receipt of government funds, and cybersecurity
claims, among a variety of others.

Many of these claims will likewise be of heightened importance
for defendants, for at least two reasons. First, less material
disputes are now more likely to be resolved at the business level,
given cash scarcity, a less efficient justice system and the need
to prioritize business continuity. Second, the pandemic is
generating “bet the farm” litigation at a higher rate.
The breaches of material contracts are more frequent; the dollar
values of the losses are higher.

A related trend in the non-class action litigation space may be
increased use of private arbitration and other alternative dispute
resolution mechanisms outside the traditional court process. In the
short term, this consequence is arising from the shutting down of
the court system. In the longer term, it is expected that some
commercial parties will prefer private dispute resolution, with the
goal (if not always the effect) of expediting the process,
controlling the costs, and achieving greater certainty of
outcome.

It is not yet known how courts and arbitrators will react to the
unprecedented cluster of problems and losses created by COVID-19.
The effects of the pandemic are far broader than any single private
law dispute. It is likely that adjudicators, in assessing the
merits of any particular claim arising from COVID-19 (whether a
class action or an ordinary inter-party claim), will weigh the law
and the equities carefully before laying the concentrated financial
risk of the pandemic on the shoulders of any single defendant.

Due diligence takes a different form in a crisis, and
adjudicators can be expected to be attentive to whether a defendant
took steps that were reasonable based on the limited time and
information available. The assessment of what constitutes
reasonable contractual risk allocation will likewise be performed
differently when dealing with a risk no one considered or could
readily have fully accounted for. Ultimately, there are some losses
for which our system of private law will not be prepared to
compensate.

Originally published May 7, 2020.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.



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Dominic Levent Solicitors
Email: Enquiries@dominiclevent.com
Phone: 020 8347 6640
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