An unforeseen, far-reaching and truly global crisis like the Covid-19 pandemic will almost certainly leave its mark on every aspect of our lives and the global economy for many years to come. Immediately, we are seeing the crisis most severely affect public health and health care services. However, like most industries and business areas, litigation finance will also see a substantial shift in demand patterns as a consequence of Covid-19.
The need for courts, lawyers and their clients to adapt to virus containment strategies has already caused fundamental changes in the field of dispute resolution. On a procedural level, the virus has caused delays in the justice system, and courts have begun suspending proceedings, holding remote hearings or hearing urgent cases only. This will likely create a substantial backlog of cases. Additionally, complex legal questions have already been raised by the widespread disruptions, containment and social distancing rules.
1. Litigation on the rise
In the past, economic volatility and destabilisation have resulted in an uptick of disputes, as businesses have had difficulties performing existing contractual obligations or have faced significant financial pressures on their day-to-day operations, liquidity and capital resources.
The 2008 financial crisis made waves across the global economy, and the pandemic’s overall impact will in some ways be comparable to the global recession that followed the first financial crisis of the century. The first recession had dramatic effects on the legal industry: law firms faced pressure from clients to cut fees and businesses faced cashflow challenges that meant in-house legal departments were immediately scaled down. Litigation generally increased, and plaintiffs and defendants often needed financial assistance to pursue or defend their claims. Law firms became increasingly low on funding and litigation budgets generally shrunk in the face of acute financial constraints on all economic players.
Today, like in 2008-09, external funding is becoming more and more essential to support the rightful administration of justice. Funders are stepping in to fill the gap, offering to shoulder some risk and provide capital injections to support clients’ assertion of their rights in courts or tribunals. The traditional benefits of litigation funding, i.e. the ability for clients and law firms to manage downside risk and move litigation costs off their own balance sheet to the litigation funder, are becoming more important than ever to law firms and businesses alike in the current economic climate.
2. Certain areas more litigation-prone than others
There will be a multitude of cases filed that directly stem from the pandemic, and no business will be immune from the possibility of liability lawsuits. Some of the greatest impacts of the pandemic can be seen in the fields of corporate malfeasance, supply of goods, compliance, insurance and employment law.
a) Corporate malfeasance and compliance pressures
As financial pressures mount, businesses will be under increased scrutiny. This means that companies will have to make all relevant disclosures related to risks and uncertainties arising from the impact of COVID-19 on their past and current financial state and its effect on future periods. The looming recession will ultimately lead to more business defaults, which in turn will multiply claims against corporates. Robust and vigilant compliance with financial and other regulation will be imperative to businesses to prevent litigation disrupting their businesses.
b) Supply of goods
Supply chains will slow down or freeze up entirely due to business closures, lack of staff and transport delays. Many suppliers will simply be unable to fulfil contractual obligations or will inevitably face delays in delivery of goods and services to coronavirus. In addition, the strict health and safety measures that businesses have to implement have already led to significant delays. Many have predicted that this will lead to an increasing reliance on force majeure clauses in business-to-business relations. Force majeure clauses allow for defaults in the event of “unexpected circumstances” and disagreements about the range of cases that these clauses cover may ultimately result in litigation.
Many businesses hold relevant business interruption insurance, but these policies often contain exclusions for viruses, such as Covid-19. Insurance claims are currently on the rise as disruptions to services and the cancellation of events are severely affecting commercial policyholders. However, insurers will generally adopt robust defences and refuse to cover losses. There is a chance that many of these businesses will ultimately see in-court resolutions to their claims and that some claims will be more successful than others.
d) Employment law
Disruption to operations in the workplace means employment law cases will also be on the rise. Businesses could face employment protection lawsuits in circumstances where customers and employees have faced reduced salaries, a denial of sick leave, increased medical expenses or other damages at the hands of their employers.
3. Litigation funding to plug important gaps in the justice system
Litigation funding is essentially a counter-cyclical industry and receives more attention in times of uncertainty like the current pandemic. Parties will continue to seek certainty until a clearer image emerges on potential resolutions of the crisis.
A more efficient administration of justice can be secured when plaintiffs or defendants face capital disruptions and pressures to refocus their priorities and as a consequence resort to litigation funding. The monetisation of claims left unresolved will become more important for businesses, and litigation funders can, as they traditionally have, step in to assist in securing benefits for plaintiffs. However, claims will generally take longer to be resolved, and court delays and disruptions will not leave litigation funders unaffected.
As courts, governments and people learn about the possibility of using litigation funding to assist in times of hardship, this crisis may mean that its value in adding speed and efficiency to the resolution of disputes will become overall more apparent.
Written on May 7, 2020 by