Regulation affects many types of organisation and many in-house lawyers work in a regulated sector.Understanding the role of regulation and staying compliant are key parts of the legal team’s role. Organisations in any sector can find themselves in litigation, either as a claimant or a defendant. Here we consider some of the issues if you're the defendant.
Staying compliant and dealing with litigation
A big part of the in-house role is to keep your organisation compliant with industry regulation and relevant law. Another is to have a plan in place should your organisation find itself involved in litigation.
Regulation and compliance
Regulation is the control and monitoring of an organisation or industry sector by rules made by the government or a government-appointed body. Regulators tend to be classified as economic regulators and non-economic regulators.
It's worth reciting the overall purposes of regulation. According to the World Bank, these are:
- To protect consumers against monopoly abuse;
- To protect investors;
- To monitor the performance of a service provider and reduce asymmetry of information; and
- Protect other interests such as the environment and consumer rights.
Whatever sector you work in, you’ll want to ensure that your organisation is compliant with, and meets, its obligations. The starting point is a regulatory heat map and plan that includes:
- A register of applicable laws and regulation and an assessment of your compliance requirements;
- A commitment to undertaking regulatory audits to understand areas of risk and how you’ll manage them;
- Contacts for external sources of information and advice to keep you up to date, including changes in the pipeline and regulatory initiatives and consultations;
- Contact points with regulators throughout your organisation who will optimise the flow of information;
- Advice about the powers of the regulator and what controls exist on the disclosure of information;
- Scenario planning to respond to regulatory actions. Examples include dawn raid procedures and responses to data breaches;
- A communication plan for dealings with regulators. This should include your organisation’s board and senior management, where appropriate. Most communications with regulators will be at operational level, but occasionally you'll want a more tailored approach;
- Appropriate sign-off and escalation procedures, including whistle-blowing arrangements; and
- Horizon scanning, to ensure you build forthcoming regulatory and legal changes into budgets and plans in time to get your organisation compliant when new regulations come into effect.
Legal teams are increasingly involved in helping their organisations with strategic and long-term business planning, government relations and lobbying activity. For example, changes in law and regulation resulting from Brexit in the coming years will put legal issues at the heart of business strategy and plans on supply, sales, locations, staffing and other issues.
Regulators as stakeholders
In a regulated environment, the regulator is a key stakeholder in your organisation. It's important, therefore, to manage your arrangements and communications with them as cordially as possible. No organisation wants to be in conflict with its regulator. Nor will it want to respond instinctively to any request or enquiry from the regulator without due regard to its importance or significance. Instead, aim for a managed, balanced and mature process that takes account of both parties’ positions and immediate and wider/longer term needs.
You can play an important role in understanding the regulatory approach and in developing good working relationships with lawyers and policymakers working for the regulator.
It’s also a good idea to develop a process for determining if, and how, your organisation will respond to consultation exercises. You may wish to respond independently or as part of a trade group. Either way, make your points clearly and avoid taking trivial points and including unnecessary minutiae.
Dispute resolution and litigation
Litigation is nearly always unwelcome. Often drawn out, it’s a distraction from the organisation’s core activity, expensive and potentially disruptive to business plans and relationships. It’s a risk in all sectors as commercial organisations face actions by competitors or consumers, while public bodies could be subject to judicial reviews of their decisions.
Businesses often underestimate the management time, the lawyers' time, the opportunity cost and the actual irrecoverable costs involved in fighting a case - even if you win. So, when the "red mist" of outrage is all pervasive in your management team following a claim having been made, make sure that you are the calm and analytical voice of reason!
For these reasons, you’ll need to plan for the risk of litigation. Here are some options to consider.
Alternative dispute resolution
What do your contracts stipulate regarding the resolution of potential disputes? Most complex commercial arrangements build in various levels of discussion and escalation to resolve misunderstandings and disputes so as not to disrupt the business process. These often include references to alternative dispute resolution (ADR) procedures. Mediation and arbitration are the most common types of ADR and can be effective alternatives to litigation.
Mediation and Arbitration can both be quicker, cheaper (sometimes not much) and more confidential than court processes and can be committed to contractually but cannot oust statutory rights.
Mediation, broadly, is more focused on resolving the issues in play through pragmatically resolving the dispute and which address the emotional needs of the individuals (such as managers and stakeholders) involved. Even where mediation does not totally fix the issues it often greatly reduces the number of points under discussion - which is why the courts' protocols encourage parties to try these routes before committing to litigation.
Arbitration and Expert (factual) Determination are more focused on getting a third party to determine disputed facts (often a retired judge or a technical expert in the issue in dispute).
Consider also ADR arrangements provided by professional bodies, where appropriate. For example, The Royal Institute of Chartered Surveyors (RICS) has an extensive suite of dispute resolution services available, where applicable. Many other professional bodies do, too.
Some sectors, such as retail financial services and legal services, are subject to compulsory ADR in the form of ombudsman schemes. Elsewhere, there are many ADR providers dealing with commercial and consumer disputes and it is important to understand them and when they can become involved in a dispute which affects your company. In a formal litigation context, unreasonable failure to submit to ADR can have financial consequences.
As an in-house lawyer, you can be influential in minimising the risk of litigation by building dispute resolution processes into contracts and advising on the pros and cons of different forms of ADR. You can also help the organisation to resolve things before they even get that far through provisions like no fault mutual escalation clauses within supplier and customer contracts. After all, in most cases, you will want to keep working with these people after the dispute is resolved so the sooner it is closed off the better!
It’s dry stuff when there's no dispute on the horizon, but your organisation will thank you if it gets embroiled in a lengthy and expensive dispute and experiences first hand the disruption it can cause. So take the lead and be proactive.
If your organisation does become involved in litigation, you’ll need a project plan and sign off steps and authority frameworks just as you would for any other major business project. As a minimum, build these factors into your plan:
- The right people. As well as the core legal team of in-house lawyers and external counsel, you may need to include the CEO, COO, CFO and Communications Director in the project group (or their deputies), depending on the scale and nature of the dispute. Also involve HR if it's an employment related issue and, increasingly, whoever looks after data privacy in your company as personal data is caught up in almost all disputes;
- Communications. Who needs to be informed and when? Consider the needs and demands of auditors, regulators, insurers, the stock market, the media, your customers and your suppliers. Have a clear process for dealing with all relevant communications at the right time and factor in legal privilege issues;
- Decision-making and authorities. Different decisions will need to be taken as the claim proceeds. By mapping out the litigation process, staging posts, sign off authorities (people, role, topics for decision by each and levels of sign off) and attendant risks, you’ll help ensure the right people are involved at the right time. Build in authority for procedural aspects of the case and for major tactical and financial steps;
- Costs. You'll be responsible for providing regular updates and projections, including to insurers. To do this, you’ll need good, timely information in a format - numbers(!) - that your CEO, CFO and other senior managers will recognise. Always factor in the costs of winning and losing the case and of any appeals and work out how you are going to manage requests for % chance of success. Understand what your auditors will want to report and how they will report it as this might end up forming a running public commentary on your prospects of success on larger, long running matters;
- Disclosure. To manage the investigation and disclosure process, you’ll need to understand how your organisation’s IT systems and record management functions work and who in your business runs them;
- Tactics. Agree negotiation parameters for any mediation or settlement negotiations so that the people going into the room can actually close things out rather than having to break up proceedings to seek permission;
- Winning. Once litigation is underway, it's easy to be drawn into the process. However, remain clear about the pros and cons and the risks of proceeding or settling. Ask what will winning or losing will look like and what it’ll mean for the organisation and its reputation and do this regularly at pre-agreed points when it might make sense, given what has now been learned, to settle rather than to continue to fight; and
- Learning. Use learning to reduce the risk of similar claims in future and to help the organisation reassess its risk appetite. It may want to be more cautious in future.
If your organisation is planning to commence, rather than defend, litigation, these points are even more important. Assess carefully the strength of your claim, the quality of your disclosure evidence, the possible duration and cost of the claim and any potential opportunities for a counterclaim.
Once a case is started, it can be very difficult to stop, particularly if your case is not as strong as it initially appears. Remember litigation is normally a painful marathon so make sure all of your team, managers and stakeholders really understand what is involved personally and corporately and really have the stamina to "go the whole course" if needed.
Protecting your organisation's reputation will be a key consideration in a dispute. This is one reason why you'll always want the Communications Director/Corporate Communications as one of your key stakeholders. If the dispute escalates to formal proceedings, remember also your relationship with the court. You must protect your organisation's position, of course, and you'll have your professional responsibilities. But how you conduct litigation is an important aspect of the organisation's reputation, affects how costs are awarded in the judgement and is part of your personal professional duties as a regulated person. For example, if you're a public body subject to judicial review, it's important not to take bad points and to conduct your case professionally, not least as the court is reviewing the legality and reasonableness of the organisation's procedures in other respects.
Managing an organisation’s relationships with regulators is often part of the legal team’s remit. Developing a regulatory heat map and plan for your organisation will help you advise your colleagues about their regulatory duties and plan for future changes. This will become increasingly important as Brexit negotiations progress.
If your organisation gets involved in litigation, your department will take centre stage. Your role is to put procedures and personnel in place to process the litigation and ensure decisions are taken calmly and appropriately in full knowledge of the potential consequences, costs and risks.
To read the next article in this series titled 'Common functions of the legal team - corporate functions' click here.