By David Hunt
The year 2023 presents challenges to arbitration lawyers. Many old sources of work – Russian oligarch claims, Energy Charter Treaty claims – have been put in question. But 2023 will also see new potential for disputes arising out of geopolitical tensions, increased economic pressure, and the demands of the energy transition.
If the job of a disputes lawyer is to guide their clients through difficult times, then they should have no shortage of work in 2023. Themes that arose in 2022, such as inter-state violence, economic crisis, and continued environmental pressure will only develop further in the coming year. This level of disruption brings with it growth in disputes, even as clients face increasing pressure to manage their legal spend. At the same time, law firms will face their own challenges as they seek to retool their businesses for a changing economic environment.
The global economy and international civic society will enter 2023 in bad shape. For arbitration lawyers, that manifests itself in three main ways.
1. Continued international tensions
The year 2022 was defined by increasing inter- and intra-state tensions. Russia invaded Ukraine. The United States took further steps partially to decouple its economy from China’s amid increased Chinese revanchism towards Taiwan. Iran was rocked by internal protests. This increasingly hostile environment represents a serious challenge to all international businesses.
Some of the effects have already been felt in the disputes industry. Law firms in London that had built successful practices servicing the disputes of Russian oligarchs, primarily through LCIA and ICC arbitration, have had to retrench or change focus.
This does not mean the end of CIS work. But it will take some time for a clear picture to emerge. For example, both Russia and Ukraine have been threatened with investment claims arising out of actions taken in the ongoing war. Tribunals and claimants will also be faced with questions about how to deal with the various investment claims currently pending against Ukraine. With most of those claims stayed in early 2022 as a result of the Russian invasion, a decision will soon be needed as to whether the claims should be allowed to proceed or remain in legal limbo pending some resolution of the conflict.
With any such resolution still unclear, 2023 may see a range of different scenarios play out. Most likely is a long conflict which will bring with it still more investment disputes (against both sides), as well as increasing numbers of disputes caused by continued interruptions of supplies of goods sourced from Ukraine. If peace, or at least a ceasefire, comes, then Ukraine will be seeking to rebuild its shattered infrastructure, bringing a glut of construction contracts and associated disputes.
In the most extreme scenario, the collapse of either Russia or Ukraine has the potential to revolutionise the disputes landscape. The collapse of the Russian regime would cause immense economic dislocation, but would open the door to Russia returning to the international economic system, as well as new prospects for enforcement of the various investment and commercial arbitration awards outstanding against Russia and its state-owned companies. Likewise, the collapse – however unlikely – of the current Ukrainian government and its replacement with a more Russia-friendly one would likely precipitate a wave of expropriations and contractual disputes.
Sanctions in Russia have forced most western countries to abandon their operations there. This continues to be a significant source of disputes. For instance, there are a number of significant pending disputes arising out of Russia’s actions relating to foreign-owned aircraft in March 2022.
As well as being affected by sanctions, international businesses also have to deal with the growing hostility between China and the United States. We have spent a considerable amount of time in 2022 advising clients on their exposure to increased US oversight of China-focused supply chains, most saliently through the recent Uyghur Forced Labor Prevention Act. As the US increasingly uses economic pressure to achieve policy goals and to limit China’s access to the most advanced technologies, we should expect an increase both in regulatory issues and in disputes between foreign operators and their Chinese suppliers.
Finally, political decisions affect arbitration even outside outright-conflict areas. Within the European Union, numerous states have indicated their intention to withdraw from the Energy Charter Treaty (ECT). While arbitrations under the ECT have been a major source of disputes in recent years, it is questionable whether this will long endure.
2. Recession and monetary tightening
Late 2022 marked the end of a 10-year period of cheap money in the developed economies. As major central banks have increased their interest rates, companies are going to be faced with an increasing cost of servicing their debts. For disputes lawyers, this has three major effects.
First,
increased borrowing costs coupled with an economic downturn will push many overexposed companies into insolvency. Consistent with this, the most recent UK Insolvency Service statistics show a 40 per cent increase in corporate insolvencies in Q3 of 2022 compared to the same period of 2021. In particular, Q3 2022 saw the highest level of creditors’ voluntary liquidations since the 1960s. All of that will drive an increasing number of restructurings and associated disputes.
Second,
declining credit availability and increased yield of conventional investments risks undermining sectors such as tech and crypto-assets that grew in the cheap money era. We have already seen the collapse of FTX exposing problems in the regulation of novel crypto-assets. As well as an expected increase in insolvency and restructuring, we expect a significant increase in disputes in both the US and the UK as companies under financial pressure seek to escape or amend their contractual obligations.
Third,
economic pressures will also be felt at the state level. The year 2022 has already seen several states, most notably Sri Lanka and Zambia, faced with serious sovereign debt crises. Most obviously in the firing line for 2023 is El Salvador, badly impacted by an unfortunate attempt to get on the crypto bandwagon by investing state funds in Bitcoin.
3. The energy transition
One encouraging feature of 2022 has been the impetus that fossil fuel price rises have given to the drive to increase supplies of low-carbon energy. Some 91 per cent of the global economy has committed to net zero targets, with the US Inflation Reduction Act and equivalent legislation in other jurisdictions driving massive green investment.
That investment brings its own challenges.
First,
much of the new generation and storage technology is reliant on increased mining of rare-earth minerals. Demand for those products is already driving disputes as states engage in resource nationalism, seeking to expropriate foreign miners, often relying, properly or otherwise, upon environmental or social concerns. While recent attempts to change the constitution in Chile to increase the power of the state to intervene in mining operations failed, countries across Latin America and Africa continue to put increased pressure on foreign miners. This creates significant potential for future investment disputes.
Second,
construction of the new infrastructure of generation plants, transmission services, and storage facilities that will underpin the energy transition will require mobilising and upskilling the construction industry on a global scale. Like any large-scale infrastructure plan, this will result in a major increase in construction disputes arising out of project defects, delays, and variations. Financing these projects will also require certainty of future revenue flows, often in the form of government-backed feed-in tariffs or pricing determined through reverse auctions. Once again, the terms and pricings of those agreements – and any governmental attempts to later amend their terms – will be a major driver of potential disputes. Such disputes are likely to be resolved through either commercial or investment arbitration.
Third,
the energy transition forms part of a wider push to improve environmental standards in business. The Securities and Exchange Commission (SEC) in the United States has proposed rules for introduction in 2023 that would require registrants to include climate-related disclosures in their periodic reporting. This would include reporting about likely climate risks as well as metrics of the registrant’s greenhouse gas emissions. Similarly, the UK already requires quoted companies as well as large private companies and LLPs to disclose their climate risks in their public reporting. All of these disclosures increase the likelihood of litigation by securities holders concerned by either inadequate disclosure or a failure by companies to prepare for the effects of climate change.
The SEC is also taking steps to improve the labelling and advertising of so-called environmental, social and governance (ESG) investments. For example, the SEC recently fined Goldman Sachs US$4 million for inadequacies in its research procedures for funds branded as ESG.
While many of these issues will be resolved through the courts or regulatory processes, this focus on disclosure is also likely to drive an increase in private arbitrations, particularly arising out of warranty disputes resulting from M&A transactions.
So 2023 is going to be an important year. Its events will shape international relations and commerce for years to come. It also represents a time of opportunity, when states and businesses need to summon the energy and willpower to address fundamental environmental challenges. As ever, the disputes that arbitration lawyers see will be shaped by those events.
About the Author
David Hunt is a partner in the London office of Boies Schiller Flexner. His practice focuses on international arbitration, with a particular emphasis on investor-state disputes. David is a go-to lawyer for clients with complex international disputes. He has wide-ranging experience of international commercial and investor-state arbitration across a range of industries, particularly in the telecommunications and financial services industries. David acts as advocate in his cases, speaks regularly on arbitration-related issues, and has recently published an important commentary on the enforcement of arbitration awards in the English courts. He is described in the most recent edition of Legal 500 as “an extremely clever lawyer”.
