How Political Risk Experts Distinguish Political Risk From Commercial Risk in Disputes

In an international commercial or investment dispute, a business may experience financial loss in circumstances involving government policy, regulatory change, economic disruption, or wider market conditions. Identifying the different factors involved can be relevant when a dispute requires analysis of political and country conditions.

Political risk and commercial risk can overlap, but they are not necessarily the same. A regulatory change, for example, may have a governmental or political dimension while also affecting ordinary commercial conditions. Similarly, a decline in demand may occur during a period of political instability without the political situation necessarily being the principal factor affecting the business.

A political risk expert may therefore examine the surrounding circumstances, timing, available evidence, and wider country context when considering whether political factors may be relevant to the circumstances being examined.

For matters requiring specialist country or political analysis, see political risk expert services.

What Is Political Risk?

Political risk generally refers to the possibility that political, governmental, institutional, or policy-related developments may affect a business, investment, project, or commercial relationship.

The precise meaning can vary depending on the circumstances of a dispute. Relevant developments may include:

• Changes in government policy or regulation
• Political or institutional changes
• Government decisions affecting particular sectors or activities
• Political instability
• Restrictions affecting cross-border transactions
• Changes in the relationship between public authorities and private-sector participants

The presence of a government decision does not, by itself, establish that a particular loss resulted from political risk. The surrounding circumstances and available evidence may need to be considered.

What Is Commercial Risk?

Commercial risk generally concerns risks arising from ordinary business and market conditions rather than primarily from political or governmental developments.

Examples may include:

• Changes in customer or market demand
• Competition
• Pricing pressures
• Supply and distribution difficulties
• Operational problems
• Financing conditions
• Business strategy decisions
• Contractual performance issues
• General market volatility

These factors can affect a business even where political conditions remain relatively stable.

Commercial risk can also exist alongside political risk. A business operating in a politically uncertain environment may continue to face commercial challenges that are not necessarily attributable to political developments.

Why the Distinction Can Matter in a Dispute

The distinction between political and commercial risk may become relevant when parties have different views about the circumstances surrounding a loss or change in business performance.

For example, a company may associate a decline in revenue with a regulatory change, while another explanation may involve market conditions, pricing decisions, competition, or operational factors.

The relevant analysis may therefore involve more than deciding whether a situation is political or commercial. It may require consideration of how different factors developed over time and what evidence is available concerning their possible relevance.

A political risk expert may address political, governmental, institutional, and country-specific context within the scope of their expertise. Other issues, including financial, accounting, valuation, technical, or legal questions, may require consideration by appropriately qualified professionals.

How Political Risk Experts May Distinguish the Two

Examining the Source of the Event

An analysis may begin by identifying what changed and the circumstances in which the change occurred.

Relevant questions may include whether the development arose from:

• A government decision
• A legislative or regulatory development
• A political transition
• An institutional change
• A broader economic or market development
• A business-specific decision
• Several factors occurring at the same time

The source of an event can help establish its context, but it does not necessarily determine its effect on a particular business or investment.

Considering the Timing

Timing can be important when examining the relationship between political developments and commercial outcomes.

An analysis may consider:

1. When the relevant political or regulatory development occurred
2. When the business impact became apparent
3. Whether commercial difficulties existed beforehand
4. Whether similar businesses experienced comparable developments
5. Whether other significant events occurred during the same period

This type of chronology can help distinguish a development that merely coincided with a commercial outcome from one that may have been relevant to the circumstances being examined.

Examining the Wider Country Context

Political developments do not occur in isolation. A political risk analysis may consider the wider circumstances in which a government action or policy change took place.

Depending on the issues in dispute, relevant contextual factors may include:

• Changes in political institutions
• Government priorities
• Public policy developments
• Relations between public authorities and particular industries
• Political developments affecting regulation
• Economic conditions that may have influenced policy

The purpose of this analysis is to provide relevant political and country context. It does not by itself determine legal responsibility or the outcome of a dispute.

Considering the Available Evidence

Distinguishing political risk from commercial risk requires careful consideration of the available evidence.

Depending on the circumstances, relevant material may include:

• Government publications
• Legislation and regulatory announcements
• Official statements
• Parliamentary or institutional records
• Contemporary reporting
• Economic and market information
• Industry material
• Company records
• Chronologies of relevant events
• Publicly available information concerning political developments

The relevance of a particular source can depend on its date, purpose, reliability, and connection to the issue being examined.

Contemporary evidence may be particularly relevant where the dispute concerns conditions or information existing at an earlier point in time. Later developments may provide useful context, but they may not necessarily reflect what was known or reasonably observable when the relevant decision or investment was made.

Avoiding Hindsight in Political Risk Analysis

Later political or commercial developments can make an earlier situation appear more predictable than it was at the time.

A political risk analysis may therefore distinguish between:

• Information available at the relevant date
• Developments that occurred later
• Risks that were publicly discussed at the time
• Outcomes that became apparent only subsequently

This distinction can be relevant where the dispute requires examination of political or country conditions at a particular historical point.

For example, a political development that became clear several years later should not automatically be treated as evidence of what market participants, businesses, or investors knew at an earlier date. The available contemporary evidence may need to be considered separately.

When Political and Commercial Risks Overlap

Political and commercial risks are not always capable of being separated neatly.

Government policy can affect market conditions. Political instability can affect supply chains or business operations. Regulatory uncertainty can influence commercial decisions. At the same time, commercial pressures can affect how a company responds to political developments.

The appropriate analysis may therefore need to consider multiple factors rather than assigning the outcome to a single category of risk.

An Illustrative Example

Suppose a company operates in a regulated industry and experiences a significant decline in revenue after a change in government policy.

Several factors might warrant examination:

• What exactly changed?
• Why was the policy introduced?
• When did the change take effect?
• Was the market already experiencing difficulties?
• Did competitors experience similar effects?
• Did the company change its operations in response?
• Were other economic or commercial factors affecting revenue?

The political development may be relevant, but the available evidence may also indicate that commercial conditions contributed to the outcome.

This example is illustrative only. The appropriate analysis in an actual dispute would depend on the facts, evidence, instructions, and issues requiring expert consideration.

Political Risk Evidence in International Disputes

Political risk evidence may be relevant in disputes where the surrounding political or country context forms part of the factual background.

Depending on the matter, this may include disputes involving:

• Government policy changes
• Regulatory developments
• Political instability
• Changes in political institutions
• Cross-border restrictions
• State involvement in particular industries
• Country-specific operating conditions

The relevance of political risk evidence will depend on the questions raised by the dispute. It should not be assumed that the existence of political risk establishes liability, causation, loss, or any particular legal outcome.

Further information on the areas in which political risk analysis may be relevant is available through the practice areas page.

The Role of a Political Risk Expert

A political risk expert may examine political, governmental, institutional, and country-specific circumstances relevant to the questions within their instructions and area of expertise.

Depending on the matter, this may include analysis of:

• Political developments
• Government policy
• Regulatory context
• Institutional conditions
• Historical political events
• Country-specific risk factors
• The chronology of relevant political developments

The scope of the expert's work will depend on the issues in dispute and the questions on which specialist evidence is required.

A political risk expert does not ordinarily determine legal liability or decide the ultimate outcome of a dispute. Those matters remain for the relevant legal and decision-making processes.

Questions to Consider When Assessing Political and Commercial Risk

Several questions may help structure an analysis of political and commercial factors.

What Changed?

Identify the event or development said to have affected the business or investment.

What Factors Contributed to the Change?

Consider whether the development involved government action, political developments, market conditions, business decisions, or several factors.

When Did It Happen?

Establish a clear chronology and consider what information was available at the relevant time.

What Was the Commercial Environment?

Consider market demand, competition, pricing, financing, supply conditions, and other commercial factors that may have influenced the outcome.

Is There Evidence Connecting the Circumstances?

Consider whether the available evidence supports a relationship between the political development and the commercial effect being examined.

Were Multiple Factors Involved?

Where political and commercial conditions changed at the same time, the evidence may need to be considered in a way that recognises more than one contributing factor.

Conclusion

Political risk and commercial risk can overlap in international disputes, particularly where government action affects market conditions or where political developments occur alongside wider commercial difficulties.

Distinguishing the two may require consideration of the source and timing of relevant events, the wider political environment, commercial conditions, available evidence, and the relationship between different factors.

Political risk expert evidence may provide specialist country and political context where those issues are relevant to a dispute. The appropriate scope of that evidence will depend on the facts, the questions requiring consideration, the instructions provided, and the expert's particular area of expertise.

Disclaimer: This article provides general information about political and commercial risk analysis and is not legal, financial, investment, or professional advice. The relevance of particular evidence or risk factors will depend on the facts and circumstances of each matter.