Risk-aware general counsel have two major concerns when it comes to litigation – increasingly proactive regulatory authorities and the vagaries of disputes in unpredictable emerging markets. Leigh Jackson reports

It is always hard to separate myth from reality when it comes to litigation, as dire predictions regarding high-cost legal battles often turn out to be overblown or just plain wrong.

But, glancing at recent research on the litigation agenda of general counsel, it is clear that two genuine concerns dominate in the current business environment – the increasingly aggressive march of regulators in Western economies and the risk of getting caught up in disputes in unpredictable emerging markets.

According to a recent Lovells report, 'The Shrinking World', 45% of in-house lawyers view regulatory disputes as medium-to-high risk, despite the fact that regulation currently accounts for a relatively small proportion of contentious legal activity facing major companies.

The research, based on a survey of 180 senior in-house lawyers across France, Germany, Italy, the Netherlands and the UK, also found a clear expectation that regulatory activities would be one of the fastest-growing contentious areas for general counsel to deal with.

Senior lawyers cite the more aggressive stance taken in recent years by competition regulators in the UK and at European Union level. Notably, the UK's Office of Fair Trading (OFT) under its chief executive, John Fingleton, has pursued a string of high-stakes investigations against major companies.

Recent examples have seen the body investigate alleged price-fixing at supermarkets, the structure of charges at UK clearing banks and a sweeping probe into bid-rigging in the construction industry.

Jonathan Pickworth, head of the regulatory and government affairs group at DLA Piper, says the risk to reputation – rather than traditional financial liabilities – was driving regulatory action up the agenda of general counsel.

He says: "With litigation the main risk is financial – you may make or lose money, but with regulatory issues there is a lot more at stake.

"The criminal law underpins regulatory issues – sanctions are often criminal in nature. That is why it is right at the top of the agenda."

While the Competition Act can see businesses facing fines up to 10% of their turnover, a serious breach of the Enterprise Act can lead to up to five years in prison for directors and senior executives; although by common consent, it is only during the last two years that the UK authorities have began to really flex their statutory muscles.

General counsel and senior vice president at AOL Europe, Tony Wales (pictured left), agrees that the threat of criminal offences and public sanctions is having a strong impact on general counsel thinking.

"The sanctions handed out by the regulators are sometimes very severe," he says. "They can have a major impact on the public relations of the company and damage its overall reputation."

However, while the Lovells survey points to a disproportionate level of risk attributed to regulatory issues, companies are still greatly concerned about the traditional risk of litigation with their corporate counterparts.

According to the Lovells research, 75% of in-house lawyers view commercial and contractual disputes as medium or high risk.

Within this familiar area of concern is the far less predictable spectre of contractual disputes in foreign companies. Some 31% of respondents believe cross-border disputes are on the increase.

There is also a clear consensus over the three jurisdictions more likely to keep in-house lawyers awake at night: the US, Russia and China.

The fears relating to US exposure are not hard to discern, with in-house lawyers citing a culture of aggressive litigation, an active plaintiff Bar targeting major corporates and the US model of punitive damages, which offers a major incentive to target companies with speculative claims.

But at least the US's dangers are well-known – in many emerging markets in which global companies are increasingly investing, such as Russia and China, general counsel fear being caught in capricious foreign jurisdictions that might take a hostile view of foreign litigants.

In this context, it is easy to see the contrast with private practice which, as a breed, tend to see globalisation or international expansion as an opportunity. For general counsel charged with managing risk, such growth carries a more tangible downside.

Associate general counsel for JP Morgan, Tim Hailes (pictured right), says: "The US has always been highly litigious, with class actions being a good example. However, emerging nations might have a problem separating their political agenda from their legal system.

"The US is automatically on the radar due to certain aspects of its legal system," agrees Lovells partner Lawson Caisely. "For example, there are a lot of jury awards and punitive damages, so there is the potential for high damages."

Conversely, the view on litigation in emerging nations is, by definition, more about the fear of the unknown.

Herbert Smith litigation head Sonia Leydecker comments: "In terms of emerging markets there are two potent issues. First, political issues, where there are regulations in place for political ends. Secondly, there is the question of reliability – business in some markets have to set up local joint ventures placing them within the system."

Faced with an environment in which it is hard to predict or even quantify risk, the answer for many in-house lawyers is to avoid a court altogether when it comes to foreign disputes instead of turning whenever possible to forms of alternative dispute resolution.

Such fears have promoted the use of arbitration clauses to manage risk in major projects and mandates in emerging markets, a trend most litigators see no sign of reversing.

Pickworth says: "Over the last 10 years the emphasis has been on courts to settle by consent rather than trial, so there is a push towards mediation. Parties should aim to resolve differences outside courts rather than spend increasingly valuable time and money in the system."

The shrinking world – key findings

• 45% view compliance disputes as a medium or high risk
• 75% see commercial and contractual disputes as a medium or high risk
• 38% believe that the number of disputes has increased
• 31% believe that there has been a trend towards more multinational disputes since 2005
• 29% of respondents highlighted concerns about facing a claim in the US. The figure for both Russia and China was 16%