The last 18 months have seen major disruption to the way we live and work as a direct result of the pandemic, the full impact of which is still working its way through global systems.
On top of that, we are in a period of dislocation caused by changing alliances (by way of example in terms of Brexit, tensions within the EU and the cooling of relations between the US and China), climate change and the accelerating impact of technological change.
In this article we wanted to share with you some thoughts as to what we are already seeing, and what we are expecting to see in the future, in the hope that we can help you to spot and manage issues that may be on the horizon.
Global supply chain
In the UK, we have already seen first-hand the impacts of problems with the global supply chain, not least in relation to the supply of petrol, rising gas prices and sporadic supermarket shortages. Those of us who have embarked on building projects will have seen the disruption in terms of supply of materials and availability of labour. What we are hearing from our clients is that those issues which are affecting our personal lives are but mirrors of much greater difficulties that are being seen right across the business spectrum. The increasing use of a ‘just in time’ model for supply of materials and the use of larger vessels for the transportation of goods and globalised supply chains have magnified the impact of supply chain disruption. By way of example, the blockage of the Suez Canal by Ever Given caused a level of disruption which was unprecedented. This sort of disruption can lead to a scramble for goods, concomitant increases in demand and hence price for limited goods, further increasing the pressure on the supply chain. This has the inevitable consequence that, from time to time, the supply chain will fail for a group of customers and, disputes will result as counterparts try and manage the adverse consequences.
But these are not the only pressures on supply chains, larger companies based in more sophisticated jurisdictions are coming under increasing societal pressure to address and manage risk in relation to a whole variety of newer concerns, such as climate change, energy transition and labour practices in the developing world, and much global business is still being done on the basis of supply chain contracts that simply do not address these issues. As these larger companies can be seen as potential deep pocket targets, there will be pressure to pass on any liabilities up and down the supply chain. That is leading to newer and more complex types of claim, with a close interface with regulation on many of these issues, which, of course, is not harmonised on a global basis.
Climate related litigation and energy transition
As a firm that has always carried out a considerable amount of energy related work, Clyde & Co has seen a development in the sort of issues that are now being run, alongside the traditional contractual breach type claims. Again, much of this is being driven by societal pressure and changing public opinion. By way of example, in relation to the extraction of fossil fuels, perhaps 20 years ago when many of the contracts were put in place that are now the subject of dispute, issues of environmental damage were often not addressed at all, or only as an afterthought. There might for example have been reference to rather nebulous standards such as ‘good oil field practice’, or ‘protection of the environment’ in respect of which it was very difficult for an injured party to obtain redress. Alternatively, the contract might have required the parties to adhere to current environmental legislation, but often subject to provisions excluding liability for changes in the law – a contractual contradiction perhaps not anticipated at the time of drafting. As a result, environmental claims often did not succeed.
Today, societal attitudes have changed, and contracts have been changed to address environmental issues. Now when considering new projects, the issues of environmental liability will be one of the major considerations and there will be detailed drafting which goes alongside much stricter regulation. So when it comes to disputes, it is now much more likely that an environmental damage claim will succeed.
In relation to climate change, the story is somewhat behind that of environmental claims, in the sense that there are many more contracts that do not address issues surrounding liability for climate related issues. However, the attitudes of society have changed very quickly, and the pressures for energy transition are increasing. At present there are a hundred or so claims around the world, being brought by NGOs and other interested parties in relation to climate damage. Many of those claims are speculative, and will not succeed, but a significant minority are succeeding, and they are having a major impact both on companies and on governments, and those claims are going to drive the pace of change, in relation to best practice surrounding climate change.
Cyber and data disputes
Ransomware incidents – often targeting organisations that process large volumes of personal data, such as retailers, healthcare organisations and educational facilities – are on the rise. The increased frequency and severity of these attacks, paired with the strict notification obligations set out in the GDPR, is creating a marked uptick in data subject litigation following cyber incidents.
In the UK, we are observing an increased prevalence of claimant firms operating on a low-cost, high-volume basis often with a conditional fee agreement or other funding arrangement in place and advertising for volumes of claimants following cyber incidents. Data-related claims are fast becoming the new PPI. These claims are often difficult for organisations to manage in a cost-efficient manner due to the relatively low value of the individual claims and the relatively novel legal concepts involved.
Some of the more widely publicised personal data breaches have also resulted in Group Litigation Orders being sought, such as those against easyJet and British Airways. This is another factor which is driving up defence costs and further encouraging the litigious climate surrounding cyber incidents, by facilitating easier access to litigation for prospective claimants.
Litigation arising out of personal data breaches is still very much in its infancy in the UK and it is only very recently that the courts have started grappling with some of the issues at hand. There is a sense, following the judgment in Warren v DSG Retail , that the scales have tipped some way in favour of those defending claims relating to data breaches. However, the much-awaited Supreme Court decision in Lloyd v Google LLC stands the prospect of reversing that trend. Whatever the direction of travel of these developments, it is clear that data-related disputes will remain a firm fixture on the litigation landscape.
Data risks therefore remain a board-level priority for organisations in every walk of commercial life. It is essential for firms to keep their cyber security under constant review, and to ensure that they are properly prepared to deal with a data breach if the worst should happen. No commercial entity should be without a carefully thought through incident response plan, which is regularly updated and rehearsed, and a roster of subject matter experts to call upon if the need arises. Speed of response is essential, but by the same token rushing can lead to a bad situation becoming worse still.
While the status of regulation and regulator varies from sector to sector, there is a very clear pattern across the board of increasing regulation, increasing disciplinary action and increasing sanctions.
For many professional services firms, the risk of intervention by their regulator is at least as significant as – and in some cases more significant than – the risk of liability claims being made against them. For any entity which handles large quantities of personal data, the risk of very substantial ICO fines looms large. In financial services, the FCA and PRA routinely bare their teeth. In the pensions sector, the Pensions Regulator now has criminal powers to investigate and prosecute those who avoid employer debts to pension schemes. The Competition and Markets Authority recently issued record fines. The list goes on.
The government has recently concluded a consultation on its wide-ranging White Paper ‘Improving trust in audit and corporate governance’ which among other things will lead to the establishment of a new regulator, the Audit, Reporting and Governance Authority (ARGA), which will have enhanced statutory powers to regulate, investigate, discipline and sanction company directors as well as accountants, auditors and actuaries. The White Paper also proposes an extension of the current definition of Public Interest Entities which if enacted would see around 1,500 new companies subject to the jurisdiction of the new regulator.
These pressures mean that firms need to invest significantly in compliance systems and personnel, and that where issues are identified there is an imperative for thorough investigation by independent subject-matter experts and decisive remedial action to be taken. There are also many examples of regulators overstepping the mark, generating appeals which lead to much-reduced or overturned sanctions. All the signals are that the rise of the regulators will continue and that any concept of ‘light touch’ regulation will soon be a thing of the past.
Even when the sun is shining, the risk of fraud has to be managed and mitigated with appropriate thought and planning. However, experience tells us that times of economic pressure can drive up the frequency and value of claims, regulatory interest and other disputes arising out of issues concerning fraud. There is no reason to think that the novel circumstances of Covid-19 will be any different. We see two particular areas to which those charged with managing the risks facing their businesses would be well-advised to give their consideration.
The first area stems from the unprecedented level of government support that has been extended to private businesses through programmes such as the Coronavirus Job Retention Scheme. Since the start of the scheme, a total of 11.6 million jobs have been put on furlough for at least part of the duration of the scheme, with the cost to the taxpayer standing at over £68.5bn.
The priorities during implementation of the scheme were, understandably, speed and ease of access. However, the limited oversight at this time means that it was ripe for misapplication, either fraudulent or otherwise; and businesses making the applications were themselves dealing with entirely new circumstances. As time has passed, however, there is more pressure from government to go back and scrutinise claims more carefully on behalf of the taxpayer.
As this inspection pressure increases, anything that has been ‘hidden’ by individuals and business during the maelstrom of the pandemic will start to emerge. We would expect to see an increase in the number of claims for fraud increasing, and a knock-on effect of other claims around advisors and suppliers. As the immediate pressure from the pandemic decreases, it would therefore be prudent for business leaders to be proactive in making sure that their house is in order in case the inspectors do come knocking. Similar considerations will of course apply to other types of government support, including business rates relief, VAT deferral and the Additional Restrictions Grants.
The other area which ought to be high on the agenda is a consideration of how the ongoing loosening of the moratorium on insolvency procedures might affect businesses. As the legislation unwinds management will face pressures to keep businesses operating, but careful analysis will be required to ensure that companies are properly trading. These issues will also have ramifications on sustainable and stable business who will have to consider the effect of dealing with businesses in more precarious positions as part of their day-to-day commercial activities.
Class actions, funding and the rise of technology
Alongside some of the issues in terms of the subject matter of the disputes that we are starting to see, there have been other changes in the way in which disputes have been run, which have had, and are continuing to have a meaningful impact. From a corporate perspective, perhaps the most alarming change has been the growth in class actions, across a variety of different sectors and subject matters. Of course, those cases that tend to get noticed are those that have successfully been launched, and there are still a significant number of actions that don’t get off the ground. However, it feels like only a matter of time before there are significant procedural developments in relation to class actions which lead to more claims getting past those early hurdles and into court.
Allied with the class actions, and often a feature of them, is the rise in the availability of disputes funding, and many of these class actions involve an element of funding and/or contingency. Less well known, is the fact that disputes funding products, whether for single cases or portfolios of cases, are increasingly available for corporate clients who are able to use funding to manage exposure to litigation costs and, in some cases, to take those costs off the balance sheet. This can be useful not only where a company has cash constraints, but also where a legal team needs to manage its own internal budgets, which may otherwise hinder its ability to pursue meritorious claims.
Finally, on this topic, the pandemic has forced all stakeholders to adapt to and adopt technological change, to improve the efficiency of the litigation process, at a speed and with a momentum that has not been seen before. Over the last 18 months, the headline change has been the use of technology to facilitate virtual and hybrid hearings-and in our view, this is not going to go away, even after the pandemic subsides. For example, the ability to bring witnesses and other participants from distant parts to a hearing virtually, has the potential to save significant costs and management time. But behind the scenes there have been significant improvements in terms of the technology surrounding all stages of the litigation process-and this aligns with client’s aspirations for a ‘greener’ and more efficient process.
In light of the rapidly evolving environment in which we live, both in terms of our businesses and the management of legal risk, it is more important than ever for general counsel to try and find the time to take a step back, and scan the horizon for some of the unfamiliar issues that might be on the way. Some of these risks can be planned for with amendments to contracts and generally keeping up with best practice, some perhaps not. But forewarned is forearmed.