Businesses shun litigation during pandemic – but rise in legal claims in 2021 is likely
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Businesses have avoided using litigation to resolve commercial disputes during the COVID-19 pandemic, instead turning to negotiation and mediation, although that is likely to change this year, according to new research published today by EY.
The research suggests that UK companies have heeded official guidance, released by the Cabinet Office in May 2020, which called on corporates to steer clear of litigation throughout the pandemic.
Almost two-thirds (63%) of the more than 100 FTSE350 and private companies surveyed by YouGov for EY said they had adopted a more conciliatory approach to business disputes since the pandemic began.
Four-fifths (81%) of the companies surveyed said they had applied reliefs to contract terms since the pandemic’s onset, with 69% granting or receiving time extensions, 59% renegotiating other contract terms, and 25% granting or receiving payments for additional costs.
Seventy seven per cent of companies surveyed had used Alternative Dispute Resolution (ADR) to resolve an issue during the pandemic.
Stephen Church, office managing partner for EY in Manchester, said: “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.
“Almost two thirds of those surveyed reported that they have taken a more conciliatory approach while the business community grapples with an unprecedented crisis, and this appears to have contributed to a short term move away from companies embarking on litigation.”
Church 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.
“As vaccine roll-outs 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.”
He said: “It also seems that those that have used ADR have seen the benefits of doing so and may be more likely to use this option in future.”
Almost one third of corporate respondents (32%) said that, during the pandemic, they had deferred or stopped investigations which they would have pursued beforehand.
Looking ahead, while 48% of corporate respondents said that a ‘continued desire to take a more conciliatory approach to counterparties’ would influence their decision on whether or not to pursue a claim in the next year, 62% said their decision making would be influenced by a need to ‘maximise the recovery of losses and protect shareholder value’.
More litigation is expected in 2021, although many corporates are not ready and some face an insolvency risk
Both corporates and law firms expect litigation to increase over 2021 compared with ‘normal’ pre-pandemic volumes.
As well as 59% of corporate respondents expecting claim volumes to rise, a parallel EY survey of more than 100 commercial litigation and international arbitration lawyers found that 66% of respondents also expected COVID-19 to prompt an increase in claims.
Almost half (47%) of corporate respondents have raised or anticipate raising a claim as a result of COVID-19, while 31% anticipate receiving or have received a claim.
EY’s research also found that companies do not feel prepared for a rise in litigation and that some are concerned about the potential financial impact of claims and disputes on their business.
Over half of corporate respondents (56%) said they anticipate legal claims and disputes will have a ‘material financial impact’ on their business, including one in seven companies (14%) who believe the pandemic-related claims they may face are a risk to their going concern status.
Despite the financial implications of claims, a significant minority (43%) of corporate respondents say they feel unprepared for a rise in activity.
While 62% of lawyer respondents recommended that businesses should undertake an assessment of their contract risk and evaluate potential legal remedies, only 45% of corporate respondents had undertaken such an exercise.
Victoria Spencer, associate partner in EY’s claims and disputes forensics team based in Manchester, said: “It is of concern that corporate respondents said that they felt under-prepared for any increased claims activity 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.
“That said, in recent months we have noticed an increase in clients wanting to understand contract risk and performance and evaluate financial and commercial remedies open to them, so they can focus actions and limited resources in the right areas.”