We need to build on the lessons learned from the 2007-2008 financial crisis

This article was co-authored by Helen Mahy CBE, chair of The Renewables Infrastructure Group, a non executive director at SSE Plc and formerly Group Company Secretary and General Counsel National Grid Plc.

Anyone who helped lead a business through the aftermath of the 2007-2008 financial crisis, will remember the steep increase in legal action as businesses scrambled to recover from a nosediving economy and sought out every possible source of value. With COVID-19 set to have an even more significant economic impact, a similar legal spike seems inevitable as businesses restart globally after lockdown.

However, while both events stimulated an increase in disputes and legal action, the COVID-19 aftermath is creating a unique situation. Everyone has been affected, and no business is immune. Successfully managing the spike in disputes in the wake of COVID-19 will require a complete shift in the way these are handled.

What’s driving business disputes? 

All businesses, from retailers and restaurants, to highly specialised manufacturing firms, will have been affected to varying degrees by COVID-19, and contractual disputes related to supply chain are inevitable. Problems typically start with order cancellations and refusal to accept shipments, and we have already seen supply chains filled to overflowing, with no outlet in sight.

There are a number of different solutions for handling these types of contractual issues. Informal negotiations to achieve a pragmatic solution are desirable, but if these fail you could move to a more formal mediation process. Opening litigation proceedings should be a final option, but many companies have traditionally rushed to court from the outset.  

However, with the likelihood of disputes increasing, the way that businesses typically handle these issues needs to adapt.

Why should disputes be handled differently?  

Firstly, litigation is time-consuming, costly and distracting. Given the uncertainty facing management teams – and the sheer volume of disputes likely in the aftermath of the pandemic – achieving quick and pragmatic solutions is more important than ever.

Secondly, while environmental, social and governance (ESG) criteria have become much more of an issue for investors in recent years, the social aspect has been viewed as less important by businesses. With COVID-19, this is changing.

The pandemic has brought social issues to the fore, and investors are now looking closely at the safety of staff, how businesses interact with local communities, and how they support small suppliers. In the long-term, businesses are far more likely to be judged on whether they are doing the ‘right’ thing, rather than just the contractual thing, making it more important than ever to look at pragmatic solutions and alternative dispute resolution.

What’s next for legal strategy? 

Being agile and adapting quickly is essential, and businesses need to be pro-active in developing strategies to deal with practical and legal uncertainty, and the contractual disputes that arise.

Developing these strategies will require a close review of all facets of the business, from key contracts and how they have been affected by COVID-19, to business interruption insurance policies, loans and payment agreements, and supply chain protections and contingencies.

Some contractual issues may not come to light immediately and you will need to prepare for the long-term, but it is important to marshal all the relevant facts now and be ready to negotiate and reach the fast, effective solutions that will be essential for bouncing back quickly post-COVID. Sustainability in business, over the longer term, should take in to account a wider range of impacts and not just purely it’s bottom line.