Why is this an important issue now?
- The forces that are reshaping the global economy—geopolitical tensions, rapid regulatory change, the advance of AI, heightened cyber risk, and more—are also exposing multinational businesses to increased risk of disputes with counterparties, stakeholders, and regulators.
- Shifting economic and geopolitical tectonic plates increase the risk of claims.
- With corporate revenues under pressure, the threat of shareholder activism—and possible derivative lawsuits—is on the rise.
- In periods where regulation is relaxed—as we are seeing with governments across the world introducing reforms to boost business competitiveness—civil litigation often rises, with advocacy groups looking to the courts to guide corporate behavior as a substitute for state rule-making.
- Rapid policy change can also lead to more investor-state arbitration as incentive regimes change to match new priorities, for example in the energy sector where the rolling back of low-carbon policy in certain jurisdictions (e.g., the U.S.) is impacting the economics of renewables projects.
- Heightened geopolitical tensions raise the prospect of sanctions being imposed, which in turn can lead to breach of contract claims and disputes over “frustration”, asset freezes, insurance claims, and more.
- Intellectual property is also in the spotlight in a more volatile world, with businesses facing increased risk of IP “theft”. As a result, rightsholders may be forced to consider more offensive tactics.
- As AI, backed by governments and the markets, develops at phenomenal speed, the potential for a backlash or a rebalancing by litigation, if not regulation, increases. The tussle between rightsholders and model developers continues. We have yet to see a resolution of the use of personal data in AI training sets and we are seeing lawsuits focusing on harms caused to individuals. The hyped environment gives rise to a risk of “AI washing”, where businesses overstate the abilities and conceal the limitations of what they can do with AI.
- The inevitability of cyber attacks—and the extent of the disruption and damage they cause—mean that risk management in the space has matured rapidly. As a result, methods deployed here can offer lessons as to the approach that businesses could be using to manage other threats. As far as disputes are concerned, we are seeing post-attack lawsuits over data breaches, commercial disputes, and shareholder litigation.
- Climate change and its environmental impact is a fertile basis for disputes, including by way of class action and for “greenwashing” as well as for harms caused by extreme weather events. At the same time, some jurisdictions are seeing a rise in anti-ESG litigation.
- Competition class actions are another emerging threat, particularly in Europe. Here they are being used as a way to tackle alleged harms in scenarios where business activities are moving ahead of regulatory development, for example in fast-developing areas of technology. The rise of litigation funding is also making class action lawsuits easier to bring.
How can businesses scan the horizon for potential litigation risks?
Any assessment of future disputes risks begins with an analysis of the fundamental changes expected to impact the business over the short, medium, and long term, and the likelihood of those changes materializing. In this regard, the starting point is similar to, and can build on, the business’s existing risk forecasting.
Where future disputes risk diverges from traditional risk analysis is that, rather than an evaluation of harms to the business itself, it requires an analysis of potential harms to third parties which might lead to litigation or enforcement action. Here it is important for boards and senior decision makers to shift their thinking away from macro threats in a generalized sense and towards the possible motivations of different stakeholder groups to take legal action.
There are six key questions that businesses should ask themselves.
What will drive the threat of litigation?
The underlying drivers of litigation risk include external factors which are outside the business’s direct control. These can encompass the following:
- Structural megatrends/existential threats:
- Environmental events (e.g., climate change, natural disasters).
- Societal change (including change in social attitudes).
- Demographic change.
- Public health (e.g., pandemics).
- Resource scarcity.
- Technological change (e.g., AI).
- Data issues (e.g., ownership/accessibility/use).
- Political forces:
- Nationalism vs globalization; focus on national security; promotion of local champions; data sovereignty etc.
- Interventionist vs laissez faire policy in different markets.
- Shifts in ideologies (e.g., through change in administrations in key markets, shifts in the global power balance) playing out in different approaches to important issues such as trade policies, sanctions, and human rights.
- Economic factors (e.g., growth, unemployment, inflation, interest rates, exchange rates, market fluctuations).
- Regulatory/legal dynamics in response to structural, political, societal or economic changes (e.g., around energy mix, sustainability/DEI, data privacy, consumer protection etc.)
Alongside these external factors, changes driven by internal factors can also have a bearing on litigation risk, for example:
- Launch of a new product or service (e.g., AI).
- Corporate reorganization (e.g., mergers, offshoring, outsourcing, changes in workforce/working practices etc.)
- Expansion into or withdrawal from markets/jurisdictions.
Which other parties might be involved?
Once the “what?” has been mapped, boards and management teams will then need to assess the “who?”. Unlike other risks, a dispute cannot arise in the absence of an opponent. It is critical to understand which entities, groups or individuals might look to pursue a business in relation to an act, omission or event, and, on the flipside, which third parties a business might look to sue for damages.
These could include:
- Contractual counterparties, such as:
- Customers/clients.
- Suppliers/service providers.
- Lenders.
- Insurers.
- Peers and competitors.
- Regulators/enforcement authorities.
- Shareholders.
- Workers.
- People to whom to the business may owe a duty of care or who might owe the business a duty of care.
- Rightsholders (e.g., IP rights holders, data subjects, etc.).
- Activists/NGOs.
- Bad actors.
- States/foreign investors.
What claims might exist?
It is then important to understand what form a claim might take. Claims are principally likely to be:
- Contractual, e.g., a civil claim for breach of contract or misrepresentation.
- By operation of law, e.g., a civil claim or enforcement action arising from:
- Breach of duty under national law (e.g., negligence, deceit, breach of statutory duty) or possibly an international treaty.
- Infringement of a property right (including intellectual property)
- Breach of a regulatory obligation.
- Commission of a crime.
What’s the likelihood of litigation or enforcement action?
The next stage is to assess how likely it is that litigation or enforcement action might arise. Factors influencing the likelihood of a claim include:
- The extent of any loss suffered (or at risk of being suffered)—both financial and otherwise (e.g., reputational).
- The number of parties who have suffered a loss (and whether a class action is possible).
- The ability to fund any claim (either independently or from other sources).
- Whether there is a legal obligation or a non-financial incentive to pursue a claim (e.g., might a regulatory or enforcement agency want to make an example of a business? Is there a groundswell of public opinion? etc).
- Whether the claim is innovative/speculative or a well-trodden path.
- Which courts/authorities have jurisdiction and which law applies (and whether there is a risk of being subject to multiple claims and/or conflicting obligations in different jurisdictions).
Considering where a product or activity fits on the A&O Shearman Disputes Risk Tide can be helpful in assessing the likelihood of a claim.
The Disputes Risk Tide
