EY research report predicts post-pandemic rise in litigation  

A survey of corporate and legal businesses by EY has revealed that many businesses moved away from litigation during the pandemic, instead favouring more conciliatory methods of dispute resolution. However, the research also suggests that there may be an increase in litigation to come. 

Official guidance released by the Cabinet Office in May 2020, called on corporates to avoid litigation during the pandemic where possible, and it appears that many heeded this advice, instead turning to negotiation and mediation to resolve disputes. 

63 per cent of corporate respondents to the YouGov survey, which included more than 100 FTSE350 and private companies, said they had ‘adopted a more conciliatory approach’ to disputes since the start of the pandemic.

Since the pandemic’s outset, 77 per cent of respondents had used alternative dispute resolution (ADR) and 81 per cent had applied contractual reliefs, with 69 per cent granting or receiving time extensions, 59 per cent renegotiating other contract terms, and 25 per cent granting or receiving payments for additional costs.

32 per cent of corporate respondents also said that they had deferred or halted investigations which they would have pursued prior to the pandemic. 

Matt Fritzsche, a UK Claims & Disputes partner at EY, commented: “Economic disruption and contractual performance issues on the scale we’ve seen in the last year would ordinarily be accompanied by a rise in claims as companies look to protect shareholder value. However, the exceptional circumstances presented by the COVID-19 pandemic have not led to the rise in litigation you’d expect – so far.”

He added: “While we think some of this is driven by a genuine desire to ‘do the right thing’ during the pandemic, a further and perhaps more important factor is that businesses with claims to bring have spent the last 12 months focused on simply navigating the operational impact of COVID-19. Many businesses haven’t had the time or resources to bring potential claims.” 

However, 59 per cent of corporate respondents expect claims to be higher than normal in 2021 as economic restrictions lift and Fritzsche agreed: 

“As vaccine rollouts continue, government support ends and attention turns to recovery, that balance is shifting, and a need to protect shareholder value will prompt businesses to become more active in pursuing claims as a potential avenue for recovery in the near future.”

Many businesses reported seeing a positive impact from using ADR, with 48 per cent of corporate respondents expressing a ‘continued desire to take a more conciliatory approach to counterparties’ and that this would ‘influence their decision on whether to pursue a claim in the next year. However, 62 per cent said their decision-making would be driven by a need to ‘maximise the recovery of losses and protect shareholder value.’

59 per cent of corporate respondents expected claim volumes to rise in 2021, compared to pre-pandemic levels. A parallel EY survey of over 100 commercial litigation and international arbitration lawyers corroborated this prediction, with 66 per cent of those respondents also predicting an increase in claims.

47 per cent of corporate respondents have raised or anticipate raising a claim because of the pandemic itself, while 31 per cent anticipate receiving or have received a claim.

The research also suggested that companies do not feel prepared for a rise in litigation and the potential financial impact that a claim or dispute would have on their business. 56 per cent of corporate respondents anticipated that legal claims and disputes will have a ‘material financial impact’ on their business, and 14 per cent reported that potential pandemic-related claims are a risk to their going concern status.

62 per cent of lawyer respondents recommended businesses should undertake an contract risk assessment and evaluate potential legal remedies; however, only 45 per cent of corporate respondents had undertaken such an exercise.

Maggie Stilwell, UK&I Claims & Disputes Leader at EY, said it was of “concern” that corporates felt under-prepared for increases in claims activity, particularly “given the pressure on available resources, the potential scale of claims, wider operational and financial pressures and uncertainty over the long-term impact of COVID-19.”

However, she added that she had seen an increase in clients wanting to understand contract risk and evaluate financial and commercial remedies, “so they can focus actions and limited resources in the right areas. Independent and impartial advice can play an important role in this process.” 

Corporate and legal respondents agreed that ‘breach of contract’ claims would be the most likely type of claim to arise from the pandemic but differed in opinion on what the next most common type of covid-19 claim would be. 

Corporate respondents anticipated ‘investment treaty disputes’ (31 per cent) and ‘insurance’ and ‘fraud’ claims (each 29 per cent) were the next most likely categories of claim to arise. However, legal respondents considered that ‘insurance’ (42 per cent) and ‘fraud’ (36 per cent) claims were more likely.
 

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