PREDICTIVE LITIGATION AND SUNK-COST MANAGEMENT: ALGORITHMIC FORESIGHT IN ARBITRATION STRATEGY – Harini Karthikeyan & Harshini V.T.

1. INTRODUCTION

Corporate litigation is primarily a matter of managing resources. Every dispute a company faces involves careful consideration of cost, risk, and business priorities. However, many decisions in litigation still rely on instinct, professional optimism, or a reluctance to abandon money already spent. This article examines how predictive litigation tools can enhance how corporations deal with disputes, focusing on international commercial arbitration. It also argues that company secretaries and in-house counsel are in the best position to lead this change within their organizations.

1. THE SUNK-COST PROBLEM IN CORPORATE LITIGATION

The sunk-cost fallacy occurs when companies continue with a course of action simply because resources have already been invested, even if the future outlook is poor¹. In litigation, this tendency can be costly. If a board keeps funding arbitration proceedings not because the case is strong but because stopping feels like admitting previous expenditures were wasted, it is making a governance mistake. Money already spent is unrecoverable. The only question that should guide any decision is whether further spending can be justified based on reasonable expectations for the future.

This issue appears in real disputes. In Halliburton Co. v. Chubb Bermuda Insurance Ltd [2020] UKSC 48, the UK Supreme Court dealt with a prolonged arbitration surrounding Deepwater Horizon insurance claims. While the main issue was arbitrator impartiality, the case illustrates how corporations can get stuck in expensive, lengthy proceedings where costs escalate and the original strategic rationale becomes harder to justify².

Closer to home, Oil and Natural Gas Corporation Ltd. v. Afcons Gunanusa JV (2022 INSC 884) provides an equally instructive example. What began as a commercial arbitration over an offshore construction contract turned into years of disputes over arbitrator fees. ONGC, a public sector entity under audit scrutiny, found it difficult to exit a costly arbitral process. This eventually required intervention from the Supreme Court of India to reconstitute the tribunal entirely³. This case highlights how arbitration proceedings can outlive their initial purpose without proper cost governance and predetermined exit mechanisms, leading to resource consumption beyond any rational assessment made before starting.

At the international level, in Occidental Petroleum Corporation v. Republic of Ecuador (ICSID Case No. ARB/06/11), Ecuador underestimated Occidental’s treaty claims. This led to an award of around USD 1.77 billion⁴. A more disciplined, data-driven assessment of similar investment treaty cases earlier could have significantly altered Ecuador’s litigation approach.

The company secretary’s office, which advises the board on governance and risk, is a logical place to implement more structured, evidence-based litigation reviews. Both the UK Corporate Governance Code (2018) and the King IV Report on Corporate Governance (2016) state that boards are responsible for overseeing material risks, and significant litigation is certainly one of them⁵.