Troubles to Come: Glimpsing the Post-Pandemic Landscape for International Business Disputes
Some eighteen months into the Covid-19 pandemic, the world continues to grapple with the immediate effects. Even in parts of the world that have achieved meaningful levels of vaccination, the rise of the Delta variant has lengthened both the pandemic itself, and the governmental countermeasures that result, and the parts of the world whose populations remain largely unvaccinated are still dealing with the first-order health and economic effects of the event.
The fact that the pandemic continues to have these effects, and is likely to continue well into 2022, counsels humility as we strive to discern the path forward for business. In the weeks after the onset of the pandemic, for instance, much of the international business world anticipated a wave of very substantial legal disputes arising out of the application of the law of force majeure to the event. But businesses proved to be adept at managing their way through those challenges, without allowing them to devolve into legal disputes and broken relationships. Thus, while there was a meaningful ripple of force majeure lawsuits and arbitrations, the expected wave did not materialize. It is certainly a cliché at this point, but as we endeavor to look forward, the one thing we can be certain of is that we will face further uncertainty.
Nevertheless, the future landscape for international business disputes, in litigation and arbitration, is starting to emerge, and we can venture some observations about what is already happening and some educated thinking about what is likely to follow. One thing stands out: The volume of international business disputes worldwide jumped in 2020. There are no official statistics for international lawsuits in US courts, but the leading arbitration institutions worldwide do publish statistics, and those show that the number of disputes committed to international arbitration in 2020 was up by 10%, which is well above the pre-pandemic trendline. Given that the pandemic likely stressed middle-market international businesses at least as much as it did larger companies, and that middle-market businesses are less likely to have arbitration clauses in place, it’s a fair bet that litigation of cross-border disputes have jumped as well.
This is no surprise – times of disruption tend to lead to more disputes. And given that the world is not yet even out of the pandemic, it’s reasonable to expect that this elevated incidence of international disputes – and thus elevated dispute risk for businesses – will continue for some time. In addition to the surge in disputes overall, practitioners are also seeing some specific developments in the kinds of cases that are being filed, and business and political developments that indicate what sorts of issues might come to the fore in the near to medium term as well.
International Business Disputes Already Arising
The Covid-19 pandemic has been the single largest force majeure event that has ever struck the international business community – larger than the Great Depression, larger than World War II, and larger than the oil shock of the 1970s or the 2009 financial crisis. It has affected virtually every business sector, to some extent or another, and the entire geography of the world. Thus, unsurprisingly, it has engendered serious business disputes across sectors and worldwide as well. Several such trends are already upon us:
Manufacturing, supply chain, and distribution
The onset of the pandemic in early 2020, for many businesses, brought with it an effective and immediate demand stop – not merely a downturn, but a near-complete stop. Others, meanwhile, saw an immediate demand surge. Combined with the immediate effects of the pandemic and governmental countermeasures, this led in very short order to disarray in logistics and supply chains, and in distribution channels. Overall, that shock eased over the course of the pandemic to date, and the parts of the world that are haltingly exiting from the pandemic are now experiencing marked demand amplification. Thus, even now, supply chains and distribution channels are now facing continuing whiplash, while some parts of the world are still stuck with serious impediments to consumer and business demand.
Disputes that were forestalled during the first year of the pandemic are now crystallizing into lawsuits and arbitrations, as temporary accommodations “sunset” and some supply chain participants simply fail. Businesses are still managing their way through, and there is not yet a massive wave of supply and distribution disputes, but they are now readily visible in the publicly filed cases and in discussions between businesses and their counsel and are likely to continue. Some are being presented as force majeure disputes and many others are presenting as simple breaches of contract or in insolvency proceedings. And now the same kinds of issues are also appearing in construction disputes, as the US and other real estate markets have heated up and international construction supply chains are stressed by the demand surge. Close surveillance of supply and distribution relationships thus remains important at this stage.
Another area that has seen a marked uptick in cases explicitly arising out of the pandemic has been in the corporate transactional deal space. There have been quite a few instances in which parties to prospective deals have invoked the pandemic, in one way or another, to forestall deal closings or to bail out of deals. These disputes have arisen often on the basis of Material Adverse Change or Material Adverse Event clauses, giving rise to substantial litigation and arbitration regarding the scope and applicability of these provisions. Given how the transactional space has taken off since the first stages of the pandemic, it appears that this development might be tailing off, at least in the parts of the world that are exiting the pandemic. But these cases will continue until the world is all the way out of this, and it’s also going to leave some other issues in its wake: The market is now seeing earn-out disputes related to the pandemic, for instance, and moving forward there are probably going to be novel “earn-out” disputes based on non-revenue, post-closing consideration benchmarks. The pandemic will also likely give rise to some novel valuation and damages disputes going forward, as parties dispute how to factor pandemic-era numbers into those measurements.
Tech transactions and intellectual property
Business and consumer adjustments to pandemic life have resulted in increased adoption of technology solutions of all sorts, in all areas of business, from communications solutions to supply and distribution management to business processes and CRM. This increased adoption of new technology solutions has been especially marked among middle-market companies, many of whom had been relatively late adopters prior to the pandemic.
This entails increased exposure to tech transaction disputes, which are still somewhat novel for many businesses. It also entails increased value of technology assets – both for a company’s own IP assets and for those that business license or acquire – and of company data. This in turn raises the stakes of disputes that do arise, and even further, increases the temptation for potential wrongdoers, inside or outside of the organization, to attempt improperly to “monetize” their access to these assets. Accordingly, there has been a marked uptick of IP, trade secret, and non-compete disputes, increasingly including cross-border disputes. And of course, the pre-pandemic trend toward more cross-border cybersecurity exposure and data protection compliance risk has only been accelerated by the increased adoption of tech solutions resulting from the pandemic. Businesspeople and in-house legal leaders thus must now have a working knowledge of their organizations’ entire suite of tech solutions, tech transactions, and the disputes that often arise out of them.
International Business Disputes On the Horizon
The sorts of international business disputes discussed above are likely to continue, both in the parts of the world that are closer to an exit from the pandemic and certainly in those that are further behind. But even the path out of the pandemic will be strewn with business disputes, many of which will be novel.
Many if not most governments have reacted to the pandemic with massive fiscal support for consumers and for businesses. Some jurisdictions have also implemented legal supports, such as debt enforcement holidays and state declarations of force majeure in favor of their domestic businesses. As a result, the pandemic to date has featured remarkably fewer insolvencies than what the business community had feared at the outset. Chapter 15 filings in the US – that is, US insolvencies in aid of primary insolvency proceedings overseas – jumped by 68% in 2020, but insolvency filings worldwide remained steady in many jurisdictions and actually dropped substantially in many others. However, those fiscal and legal supports are now largely reaching their sunsets. Accordingly, a recent World Bank report has forecasted a substantial rise in insolvency proceedings worldwide in late 2021 and 2022, as “zombie” organizations lose fiscal and legal supports and fail to survive. Legal and business leaders thus should monitor the financial health of key counterparties, as well as supply and distribution behavior.
China was of course central to the supply chain story over the last year and a half. There was widespread disruption in business relationships involving China, but contested disputes ended up being fairly rare, in part because China managed to work their way through the pandemic speedily – and probably also because disputes with Chinese counterparties, often sited in China and/or requiring enforcement in China, can be a particularly unappealing prospect, even as business disputes go.
But those relationships remain under strain, especially when the Chinese supplier has its own upstream suppliers in jurisdictions that are still suffering from the pandemic, so again the risk isn’t gone. And going forward, the movement toward supply chain diversification – “China plus one” – is continuing and now appears likely to become a secular trend, and is necessarily going to entail some increase in disputes involving Chinese vendors, as relationships are scaled back or ended altogether. Organizations pursuing supply diversification, particularly with regard to Chinese counterparties, should be planning well ahead for the management of those transitions and endeavoring to manage away from legal disputes within China.
Tax Structuring Changes in Light of the Prospective Global Minimum Tax
This final sort of upcoming cross-border disputes remains somewhat speculative, but it is likely to affect some meaningful fraction of cross-border businesses with operations overseas. This summer, the OECD and dozens of other countries agreed in principle to a global minimum corporate tax regime, in part as a “pay-for” for the huge fiscal outlays of the pandemic.
Many of the details of the GMT remain under development, and it is expected that most manufacturing and other “brick and mortar” operations are likely to be excluded from the regime. But it does appear likely that the GMT will cause substantial restructuring of multinational corporate presences, as the tax benefits currently enjoyed in some jurisdictions evaporate and inter-jurisdictional competition shifts to non-tax measures, such as tariffs and duties. Those restructurings will entail follow-on disputes, as local relationships are ended. Organizations facing potential exposure to the new GMT should begin planning now for the corporate restructurings that will necessarily follow because managing through the transition with minimal dispute risk will be a complicated and laborious task.
The Practice of International Business Disputes and Dispute Risk Management Moving Forward
Even prior to the pandemic, the practice of international arbitration had been moving toward more usage of remote videoconferencing, at least for procedural stages of arbitrations. With the pandemic, remote proceedings – which can result in substantial cost savings – are now being adopted for merits in arbitration, with witnesses appearing and testifying remotely. And even courts in many jurisdictions, including the US, are now regularly conducting procedural conferences remotely, if not yet trials. And the increased overall incidence of international business disputes, as a result of the pandemic, may be expected to further increase the adoption of international arbitration for the resolution of international business disputes, which is already the preferred practice of repeat users of international dispute resolution services and is even more valuable to organizations that encounter such disputes more sporadically.
The business world will exit from the pandemic era, haltingly and over time. But the sorts of international business disputes that have resulted from the event are likely to persist even after it has ended, and for some time to come. Dispute risk will follow. But that risk can be managed effectively, with diligent surveillance and monitoring of cross-border relationships, careful management of incipient disputes, and the use of experienced counsel and cost-saving measures such as arbitration and remote technology. These dispute risk management practices can help to ensure that organizations will enter the post-pandemic landscape with the least possible damage and the best possible competitive posture for the future.