Managing litigation risk Part 2: preventing disputes escalating

It's a rare business that wants to spend time and money on a dispute - it's more usual that they try to avoid disputes from arising that may result in litigation or regulatory action (and we've outlined a number of steps that businesses could take to do just that).

However, even with the best systems and procedures, no business can expect to avoid disputes completely. What then can be done to prevent an unavoidable dispute from escalating?

Urgency

Problem: A complaint or grievance is ignored or given a low priority. The opportunity to nip the problem in the bud is lost and a dispute leads to litigation or regulatory action.

How to avoid this

Act quickly. There can be adverse consequences if a complaint or grievance is ignored or assigned a low priority, particularly in the retail and regulatory spaces.

You will be facing potential risks beyond the disaffection of your customer, such as social media campaigns and the involvement of regulators. Ensure that your crisis action plan responds to complaints or grievances that could result in regulatory action or litigation that threatens the viability of your business.

Have a robust system for assessing and escalating complaints and grievances to ensure that high-risk ones are not missed, and low-risk ones do not become more serious due to a failure to deal with them properly.

Make sure that your document management system allows you to identify and recover all relevant documents without delay.

If you operate in a regulated industry with formal reporting obligations, document your obligations and implement systems and processes to ensure that they are followed.

Early assessment

Problem: Decisions are taken without complete information or analysis.  

How to avoid this

Analyse potential outcomes and costs before deciding how to respond to a dispute. Investigate the facts. Before making any decisions, undertake a "warts and all" assessment of your potential exposure or the value of your claim. Determine what litigation or regulatory action will cost and include an assessment for the downsides that may be experienced from a financial and reputational perspective. Involve necessary stakeholders and those who can add value as early as possible. This might include commercial specialists, insurers (with due attention to notification requirements), external legal counsel or media consultants.

Realism

Problem: Decisions are taken with unrealistic expectations. 

How to avoid this

Calculate what is a realistic settlement value before finalising your strategy. Be prepared to pay more, or accept less, than you think the claim or dispute is worth to avoid litigation or regulatory action. Ensure that management has a realistic assessment of the costs and potential downsides of litigation or regulatory action. Do not allow emotion or points of principle to overwhelm decision-making.

Early negotiations

Problem: Negotiations only occur after litigation has been on foot for some time. By then, substantial costs have been incurred, goodwill has evaporated and positions have hardened. 

How to avoid this

Experience shows that costs can be avoided, time saved and commercial relationships preserved if disputes are tackled informally as soon as they arise.

Do not ignore non-financial risks such as gaining a reputation as a soft touch, promoting copy-cat claims or creating an adverse precedent, but be realistic about their likelihood.

Be prepared to involve senior executives at an early stage in negotiations - this underlines the importance of a resolution of the dispute. Explore whether, in resolving the dispute, you can turn a negative into a positive.

Alternative dispute resolution

Problem: There is a desire to resolve a dispute early and to keep it out of litigation but the contract does not allow you to explore alternative avenues for resolving disputes. 

How to avoid this

When documenting a transaction or project, pay close attention to provisions which create alternative avenues for resolving disputes - such as expert determination or arbitration - that can divert a dispute away from litigation. Consider requiring negotiation or mediation as a compulsory first step.

Reflection

Problem: The dispute is a repeat of an earlier problem.  

How to avoid this

Undertake a review when disputes are resolved. Seek to understand what the dispute is telling you about the way you are conducting your business. Ask whether there is a pattern of behaviour or a recurring issue which requires remedial action. Consider adjusting your processes and procedures. Additional training may be required to correct a lack of awareness of recurring risks. 

Related Insights

• Managing litigation risk Part 1: stop disputes arising