Future disputes risks: How ready is business for the challenges that lie ahead?

Whatever view a business takes of risks, with forethought there is much that can be done to anticipate and mitigate the downsides that disputes can bring, and provide the legal resilience needed to navigate the future confidently.

Yet, according to our research, relatively few businesses today are likely to have devoted significant time and resource to identifying and managing the future disputes risks that may hinder, or even derail their plans.

Impact of innovation and change – the inevitability of disputes

Recent events have demonstrated how businesses can be exposed rapidly and unexpectedly to disputes risks. Whether it is Covid-19, the existential threat posed by climate change, the war in Ukraine, the increasing vulnerability of our supply chains and critical infrastructure to cyberattacks or geopolitical tensions, the list of catalysts for disputes can seem endless.

The next few years promise to be even more unpredictable. In addition to these existing threats, a new wave of disruption is already taking shape, bringing with it opportunity and challenge in equal measure.

Technologies such as artificial intelligence (AI) and virtual and augmented reality hold extraordinary promise if used responsibly. But the speed of change has meant that policymakers and regulators are having to work at pace to develop rules and guidelines to address the range of perceived risks.

In parallel, established sectors are continuing to undergo radical change, driven by an influx of new investment and new entrants looking to create value and profit with their innovative ideas and lower-cost operating models.

Innovation and change often bring with them a variety of novel disputes risks.

While it will never be possible to operate in a world that is free from disputes, businesses that quickly and effectively anticipate and mitigate the risks that may arise in the future will invariably have a significant competitive advantage over those that do not.

Understanding future disputes risks

In response to this increasingly important area of risk management, we have undertaken a programme of study into the anatomy and lifecycle of future disputes risks.

We have focused initially on two distinct case studies: emerging technology – specifically AI and virtual worlds – and the commercialisation of the space sector. In our view, both provide engaging and effective illustrations of the variety, complexity and scale of issues that businesses will have to assess.

Our analysis highlights practical insights for all businesses, irrespective of whether they are in the space sector or have any immediate plans to invest in these specific emerging technologies.

Moreover, we have built a visual model – the Allen & Overy Disputes Risk Tide – to show how in any sector and under any business model the risk of a dispute is likely to emerge, develop and eventually evolve into an established and manageable challenge.

As part of our research, we have also conducted a global survey of senior business and legal executives to find out their perspectives on future disputes risks. We have focused in particular on their confidence in their organisation’s preparedness to deal with future disputes and their views on the threats that pose the greatest disputes risks to their business in the short to medium term.

Investing in capability building

We hope that this report and the wider body of materials that we have produced stimulate thinking and debate among boards, senior management and their legal, risk and compliance teams and help them consider the business case for investing in the skills and capabilities needed to identify and mitigate future disputes risks.

Research into business attitudes

Allen & Overy has commissioned research into businesses’ understanding of – and attitude to – present and emerging disputes risks, along with their readiness to deal with them.
The purpose was to identify potential exposures and evaluate the business case for disputes risk management. 750 business leaders and senior legal executives were surveyed from across a broad range of industries around the world.

The study focused on three main themes: respondents’ perceptions of future disputes risks, their confidence in the protections their organisations have in place to mitigate those risks, and their ability to identify and assess new and emerging threats.

Disputes risks are business risks, and the findings indicate limitations in awareness of and preparedness for future disputes that could prevent companies from effectively innovating ahead of their competitors or hamper their business continuity.

The majority of respondents believe their organisations are prepared to take risks, including disputes risks,
to gain a competitive advantage. The ambition should be to avoid disputes, win them or limit the damage associated with them.

Yet most respondents currently lack the capabilities to deliver these outcomes reliably. They are not fully confident in their contractual protections or their ability to predict or control where their disputes will be heard. What’s more, the visibility they have of future disputes risks is limited due to a lack of effective horizon scanning.

Perceived risks

The disputes risks that respondents see on the horizon are an insight into how their organisations view the world. They are also indicators of where businesses should focus their risk mitigation. Respondents were asked which factors or events were most likely to result in disputes in the next five to ten years, although their predictions equally reflect present-day threats.

Notably, AI ranks as the fifth most commonly identified factor or event – above energy security and geopolitical tensions. It is hard to imagine it would have ranked so highly a year ago. The increasing impact of AI on business and the volume of recent publicity surrounding the implications of its adoption have no doubt played a role in it being cited by so many respondents. AI is now firmly on the radar as a significant disputes risk.

Of the 30 options presented to respondents, the most anticipated source of disputes risks is climate change, including the transition to net zero – 58% of respondents identify it as a disputes risk factor over the five to ten-year horizon.

Natural disasters (54%) and public health (53%) are the second and third most commonly identified factors or events. Over the past few years, the news agenda has been dominated by high-profile natural disasters, unfavourable weather patterns and the global Covid-19 pandemic – as with AI, this may well have informed the way that respondents perceive future disputes risks.

It is understandable that the factors and events that were identified by the largest numbers of respondents as giving rise to future disputes risks are those that are currently in the headlines. Attempting to predict the future is extremely difficult for any business. As we discuss later, it is even harder for those who do not invest in the structures and resources required to try to do so.

Interestingly, the four most anticipated future disputes risk factors (climate change, natural disasters, public health and environmental harm) are all capable of having wide-ranging impacts on businesses themselves, the markets in which they operate and their relationships with others. They are likely to give rise to a much wider range of disputes with a much broader group of counterparties than those arising from ordinary commercial activity.

There may be little that businesses can do to stop these events from happening. But identifying and articulating these (and other) future disputes risks can help ensure appropriately tailored legal and practical mitigants are put in place to increase resilience. In other words, looking ahead allows for a more targeted allocation today of resources and efforts.

Ensuring contractual protections (such as force majeure clauses) align with and operate to mitigate perceived risks is one way to do this. For example, businesses that see natural disasters as a significant future disputes risk may want to build in bespoke provisions permitting deferral of performance should a natural disaster occur, in addition to including the usual well thought out generic provisions. The aftermath of the Covid-19 pandemic certainly led to a renewed focus on the precise drafting of force majeure provisions because their utility was really put to the test.

Compliance is another area where businesses can develop a more customised approach to disputes risk mitigation if they have a better sense of what is on the horizon. For example, if a business identifies climate change as a significant future disputes risk, focusing time and resources specifically on ensuring compliance with climate-related obligations will be crucial, whether those are around supply chain due diligence, corporate reporting or otherwise.

For those who identify AI as an important disputes risk, tailored mitigation over the next few years will be as much about tracking and responding appropriately to legal developments (which will likely come at pace over the next few years) as about building in contractual or other protections to avoid liability.

A price worth paying

Legal disputes arising from risk-taking and innovation are accepted as a price worth paying by 57% of survey respondents. To gain a competitive advantage, many will accept the risk of disputes and litigation.

Interestingly, disputes risk appetite varies inversely with the size of the organisation: respondents in businesses with a turnover of more than USD10bn are much more likely to favour risk-taking than those in businesses in the turnover bracket of USD1bn to USD10bn.

Respondents in the largest companies, those with USD50bn+ in revenue, are more than twice as likely to agree that disputes are a price worth paying for innovation as those in businesses with revenues of USD1-5bn – 90%, compared to 43%. Willingness to take on future disputes risks is also markedly higher in the United States (U.S.) than the rest of the world. Almost two-thirds (64%) of respondents in the U.S. consider disputes or enforcement a price worth paying for innovation compared with just 47% in the UK. This may reflect differences in business culture.

There is also sectoral divergence, with respondents in the private capital sector being the most accepting of disputes risk.

These findings indicate that size does not dampen entrepreneurial spirit, an attitude perhaps more commonly associated with start-ups. It may be that deeper pockets enable larger businesses to take on these risks and be more bullish. The attitude of respondents from the biggest businesses may also be affected by their more systemic approach to horizon scanning, suggesting there is much to be gained by trying to identify and assess future disputes risks to build the legal resilience required to weather them best.

Business exposure

Although most business leaders (99%) anticipate they will have at least some exposure to disputes risks over the next 3-5 years, overall they are predisposed to focus on the most pressing and immediate risks facing them.

While 43% of respondents believe their organisations are at least moderately exposed to future disputes risks in the next twelve months, under a quarter (24%) perceive this level of exposure over the next three to five years. This indicates that most businesses are concentrating on their present-day challenges.

Only a small percentage have an awareness of disputes that may develop in the medium to long term. This suggests there is work for businesses to do if they want to predict the types of disputes they may face in the medium to long term, to enable them to take steps to mitigate those risks now.

Confidence in stakeholder relationships

Most disputes risks stem from relationships. Confidence in these relationships is an indicator of the ability to mitigate the risk of future disputes. Businesses could gain by improving weaker relationships.

Respondents express confidence in their relationships with influential stakeholders such as regulators (81%) and shareholders (75%), suggesting that these relationships are strong enough to help avoid or resolve future disputes.

However, confidence declines when it comes to external stakeholders whose behaviour can be harder to predict. Only 35% of respondents are confident in their relationships with customers. For respondents in the retail sector, it may reflect the growing influence of consumer rights and the increasing use of class actions as a litigation strategy in some parts of the world. Equally, less than a third (32%) of respondents are confident in their relationships with distributors. This is perhaps not surprising in a period where supply chains are increasingly heavily regulated and subject to unprecedented levels of external scrutiny.

There are particular concerns about relationships with non-governmental organisations (NGOs). Only 8% of respondents are confident that their relationships with these parties will help them tackle future disputes.

These stakeholders are growing in influence in many sectors as social and cultural issues become increasingly prominent in the public discourse around business activity and corporate behaviours. The top factors respondents identify as leading to disputes risks in five to ten years’ time are all areas in which NGOs have loud voices and a growing appetite to litigate to achieve their aims.

Businesses that see the management of stakeholder relationships as part of a holistic approach to risk management, and forge closer partnerships where advantageous, are likely to be less exposed to disputes risks when something goes wrong. Knowing how to deal with different types of stakeholders is crucial. NGOs are increasingly turning to litigation as a strategy to draw public attention to the issues that matter to them and try to influence corporate behaviour rather than necessarily to win in any claim. Listening and responding appropriately to these stakeholders and maintaining a longer-term dialogue with them can play a crucial role in helping to reduce the risk of escalation into a formal claim and all the associated costs and reputational risk.

Confidence in contractual protections

Where contractual relationships are concerned, a principal way of managing risk is in the drafting of appropriate contractual terms, including those that seek to manage how any dispute will be resolved if it arises.

Questions posed specifically to General Counsel and Heads or Directors of Legal focused on their confidence in these areas. This can be taken as an indicator of whether or not they expect favourable outcomes from disputes. There are perceived gaps in legal readiness.

When asked how confident they were in the robustness of the contractual protections that their organisations currently have in place, 57% were at best slightly confident. 30% were moderately or very confident.

Similarly, 50% of legal respondents had at best only slight confidence in their ability to ascertain quickly which courts or tribunals would resolve a future dispute (with around a third being more optimistic). And 54% were at best only slightly confident about the suitability of the choice of forum in their contracts.

These findings suggest a mixed picture on confidence in contractual protections. Those organisations that lack confidence in their protections may wish to review and manage their precedent agreements or revisit their approach to negotiations to tighten their protections on future deals.

A regular review of policies and approaches is also important even for those who do have confidence in existing arrangements. Perceptions as to future disputes risks will change over time, and drafting specific contractual risk mitigants that are tailored closely to specific perceived risks may provide additional protection alongside more generic protections.

The findings on confidence in choice of forum also indicate scope for greater focus on the drafting and negotiation of these provisions, which too often are considered to be ‘boilerplate’.

The forum in which a dispute is resolved can have a significant impact on the time and cost burden of resolving the dispute as well as the outcome of the dispute itself, so getting the choice right can significantly reduce litigation risk.

Horizon scanning

Horizon scanning is the practice of having systems, resources and processes in place to ensure access to reliable and relevant data about new and emerging risks. Effective horizon scanning enables more effective risk mitigation, but it is not always an area of focus.

There is a clear case for developing these capabilities. More than three quarters (77%) of respondents agree that investing resources in identifying disputes risks over the next five or more years will enable value creation. By contrast, only 11% say they have invested in horizon scanning and have a clear and consistent approach to using it. The rest are limited in their ability to identify future disputes risks.

Overall, more than half (53%) of respondents have yet to invest in horizon scanning and 11% say they have no plans to do so. Investment levels vary depending on the size of businesses.

Businesses with revenues of USD26bn and above are the most likely to have invested in horizon scanning: more than 80% confirm investment in this kind of strategy.

The most common barrier to investment is the cost, with more than half (52%) agreeing that it is an issue. Budgetary limitations are especially pronounced within smaller organisations – 62% of respondents in businesses with revenues between USD1bn and USD5bn cited this as a barrier. In addition, just over a third (34%) of all respondents said a lack of in-house skills hampered investment in horizon scanning.

Avoiding investment in horizon scanning to save on costs is a missed opportunity. In the medium to long term, having the capacity to identify and assess disputes risks will not only prevent business disruption but also deliver a range of competitive advantages.