There are a wide range of reasons why claims and disputes arise. Common causes include contractual breaches, failure to supply goods, business interruption, breakdown in shareholder relations, transaction arrangement failures, and M&A-related issues. But in the current environment there is an increased likelihood of contentious business issues. In this article we take a look at some of the expected drivers of increased dispute activity, and how organisations can prepare themselves.
As always in relation to potential disputes, organisations can 1) be at risk of a claim made against it and need to be prepared to defend this, and 2) be faced with a decision whether to pursue a claim against another party.
1. Preparedness
It is critical that businesses take proactive steps to prepare and protect themselves. Steps can include assessing contract risks to understand areas of exposure and exploring potential legal remedies available. Preparation is key, and organisations should gather and preserve relevant data and evidence while ensuring that the right resources are available to deal with the issue.
2. Decision to pursue a claim
A number of factors can influence the decision to make a claim and these can pull in opposite directions. For example, two significant opposing factors are the 1) the need to maximise shareholder value and recovery of losses, versus 2) the prioritisation of business focus on day-to-day operations. Organisations need to weigh up what is the best use of resources against the potential outcomes. This needs careful consideration and robust analysis to support the decision.
Expectations for 2023
Supply chains
- It is well documented that businesses across a wide range of sectors are experiencing supply failures, delivery delays and long lead times down the supply chain, and that the big drivers of these issues include the residual impact of pandemic-related supply issues and port congestion, the ongoing conflict in Ukraine, and rising energy costs causing supply shocks.
- These factors pose a significant threat to supply relationships due to the non-performance of contracts and failure to meet contractual obligations, which can result in financial losses. There will be disputes over who must bear these losses, therefore, businesses can face an exposure to claims against them, but other businesses may have an opportunity to recover their own losses from contractual breaches.
ESG
- Environment and sustainability related claims are an increasingly prevalent part of commercial transactions and financial arrangements, which can include representations about sustainability credentials and carbon footprint.
- 'Greenwashing' is when organisations make false, overstated or unsubstantiated sustainability claims, and these are expected to trigger an increasing volume of disputes.
- An example of this is where the sustainability or climate impact of a project is misrepresented to investors. When this is uncovered, the project can lose value and investors can seek to recover losses from those responsible for the misrepresentations.
- Similarly, disputes can arise after M&A transactions. The climate impact of a business can be factored into the sale price, and a buyer can make a claim if seller representations about sustainability turn out to be false or overstated.
Understanding data remains critical
- In EY's Claims & Disputes team's recent survey, the majority of respondents felt their clients were underprepared to pursue or defend themselves against a potential surge of claims. It is as important as ever that organisations take proactive steps to prepare and protect themselves.
- Whether an organisation is defending a claim or is anticipating the need to do so, or whether it is assessing the information available as part of the decision to pursue a claim itself, managing the data is essential.
- Organisations generate and store large volumes of data and knowing how to access and use this is critical, not least in the context of preparedness for claims. Organisations should consider:
- Do they have access to all the data that’s needed?
- How confident are they in the ability to quantify losses?
- What plans are in place to identify, gather, preserve and analyse the evidence and data that is relevant to assessing the actual and counter-factual performance.
- What support might be required if they are overwhelmed with data, or at a loss to know which information to collect and how to collect it in a comprehensive and secure way.
- What combination of structured and unstructured data should be captured, and how to approach this with minimal disruption.
