Research Trends and Conclusions: Commercial Litigation 2010
Tom Barnes -
As the global financial crisis begins to recede, it has become clear that the large-scale up-tick in disputes that traditionally accompanies a downturn has not materialised. There have been elevated levels of activity in some sectors, but “Don’t let anyone tell you that a counter-cyclical deluge has hit the top city firms,” a lawyer from a magic circle firm advises.
The current financial crisis differs from its predecessors in that parties on both sides of the dispute are likely to be affected by a lack of funds. While the crisis has caused an increase in the potential for disputes, it has also prompted a widespread reluctance to pursue them. In these straitened times, companies are becoming more attuned to whether they would win a proposed court case, and if they would be able to collect anything if they did. The market has become smarter and more circumspect, while clients have become more cost-conscious and are often keener to restructure and renegotiate than litigate. A general reluctance to ‘pull the trigger’ was cited, with one lawyer noting that “It’s a cash flow issue in many cases; starting a case is a big commitment of funds.” In this environment clients are reluctant to litigate, but if they do, lawyers say, they are tougher in the courtroom, with both sides reluctant to making concessions and concerns of negative publicity being outweighed by more pressing financial considerations.
Some sectors remain active, energy related disputes in particular. The recent BP oil spill “will keep hordes of lawyers busy for a decade at least”, sources say. IP disputes continue to occupy lawyers around the world, and unsurprisingly there are high levels of restructuring and insolvency related work from the Lehman Brothers case and others. Disputes with criminal aspects – such as claims relating to Ponzi schemes – are also further up the agenda, and interviewees also highlighted more claims of legal malpractice. As firms become more diligent in chasing unpaid bills, possibly resorting to court action, their clients often counterclaim for legal malpractice. “It’s ugly, but it’s not uncommon,” one US litigator tells us.
Banking disputes were often cited. Banks are facing claims from customers over failed investments, and director and officer liability work is on the up. However, even these factors have not combined to drive dispute numbers to unusually high levels. In the UK in particular, banks are good at working with rather than against each other. “We have claims against counterparties, but they have claims against us. If you know you are going to face a counterclaim, in many cases you will be better off settling,” as one source puts it. The public, high-profile nature of a court case, not to mention the expense, makes cutting a deal more attractive, especially when you are likely to continue working with your adversary in the future. Further, where clients are unable to meet their obligations, there is a greater acceptance of the renegotiation of deals and a will on both sides to find alternative solutions. Settlement discussions that would previously have occurred just before the case reached court are now being held much earlier. Furthermore, many of the lawyers we spoke to reported being “flayed by conflicts” as their firms have previously acted for both sides of a dispute between two banks, leaving them unable to sue either. Clients have a greater focus on safeguarding their survival than on pursuing disputes, which also puts downward pressure on litigation levels.
Third-Party Funding
However, other trends are pushing litigation levels upwards. Chief among these is the emergence of third-party funding. We received more reports of activity in this sector in the course of the research for this edition than in previous years, with lawyers from a range of countries citing the “often quite insistent” entreaties of organisations who aim to assist process or litigation funding. In the words of one nominee, “I’ve had more conversations with third party funders in the last six months than the previous 30 years.”
The full effect is still to become clear, but reports reached us of an increase in the number of cases being brought, including those that would previously have been settled for want of funds, and class actions in particular are proving popular. In some cases it can also raise the stakes: when one side invests large amounts of extra funds in a case, leading to increased filing of expert opinions for example, that forces the other side to do likewise. We also received reports of a shift in the market in terms of the firms involved. Top-tier firms that do not traditionally take on contingency fee work are now able to receive an immediate injection of funds that allows them to consider cases that would not otherwise have been feasible. This in turn allows clients to retain the services of market-leading litigators and secure a level of representation and a resulting confidence that encourages them to bring cases they may otherwise not have pursued.
Class actions are regularly seen as a future source of large amounts of work for lawyers in jurisdictions that do not currently allow group litigation, and several nominees reported the possibility of new regulations being drafted in the near future that would relax the restrictions and open up a steady stream of work. Other local changes are also taking place to refine and improve the practice of litigation, with the judiciary in many jurisdictions looking to take the initiative. Cases such as those relating to Equitable Life and BCCI highlighted the unwieldy nature of some aspects of the UK courts, which are now looking to allow judges to manage cases better, bringing in innovations such as the use of video conferencing and electronic disclosure, with the aim of increasing the speed and efficiency of the court system and limiting some of its perceived excesses.
Rise of ADR
This appetite for procedural reform is driven in part by competition from alternative methods of dispute resolution. We received reports of civil courtrooms in the US lying empty and judges with no more than three cases a year. “Most Federal judges will tell you they haven’t got enough to do,” said one US litigator. This is in part attributed to the rise of ADR, and in particular the popularity of commercial arbitration. “It has really taken hold”, says one nominee, “and is impacting on the flow of cases into the courts.” Parties are now generally viewed to be more willing to arbitrate than litigate, and arbitration institutions are reporting a steep rise in the number of cases they are handling.
Many put this down to the increasing globalisation of business, with the larger number of cross-border deals leading to a similarly high level of cross-border disputes. The neutrality offered by commercial arbitration proceedings, coupled with perceived advantages over litigation in the enforcement of judgments and in confidentiality, is attractive in this context. The prevalence of arbitration provisions in international business contracts ensures this is likely to continue.
Given that the research for this publication involved the canvassing of leading commercial litigators and their clients around the world, it is perhaps unsurprising that the feedback we received about arbitration’s effectiveness was not wholly enthusiastic. Many suggested that the traditional view of arbitration offering lower costs and shorter timescales no longer rings true and interviewees cited dissatisfied clients, delays with tribunals and in some cases concerns about their quality, concerns emphasised by the limited rights of appeal available. Nonetheless, the trend is widely accepted to be moving towards arbitration and away from litigation, and this isn’t predicted to change in the near future.
In this context it is no surprise that law firms are moving to broaden the scope of the services they offer to clients. Multiple sources suggested that arbitration and litigation are “exactly the same skill set” and many of the featured lawyers in this publication are practising in both areas. “It makes sense”, said one London based nominee, “and it makes you a better lawyer overall.”
The tough economic times are also prompting an ever more demanding attitude from clients. There is a greater emphasis on handling matters in-house where possible, and much more attention is being given to staffing levels in their outside counsel’s law firms. Nominees cited a greater sophistication and demand for cost-effective and efficient litigation tactics, which translates into an increasing focus on the skills of individual lawyers and away from the wider capabilities of the firm overall. Companies no longer ask their law firms to “throw bodies at the problem”, but rather are looking for counsel who have more experience, are comfortable going to court and work more effectively. Many sources noted that clients are no longer hiring “the institutions”, law firms with long standing litigation pedigree, on reputation alone but are now looking to focus on specific top litigators. With times tight, the cases that make it to court are of the greatest importance and as a result clients demand the very best representation.
This shift in attitude is also apparent in the growing popularity of alternative fee arrangements. A desire to share the risk with outside counsel has led to greater interest in innovative billing methods, a trend common to virtually all the practice areas covered in our publications. These can include discounted rates or low up-front figures coupled with a “success fee”. However, many cited the difficulties in applying these techniques to litigation, with its uncertain outcome and a flexible definition of “success”. Clients are keen for a firm figure on cost before they commit to a major case, but this is extremely difficult for their firms to give. In some cases, firms are compromising by providing an estimate at the beginning followed by periodic reviews, but it is an issue that is affecting an ever greater number of our featured litigators.
While recent events have demonstrated the folly of attempting to predict the future with any certainty, there were a number of areas mentioned to researchers as possible sources of business going forward. In previous recessions there were large amounts of insolvency related litigation, and while that has not yet happened to any great extent many are expecting the amount of restructuring disputes to rise. Cartel cases were mentioned more than once, and the increasing effect of internationally focused legislation, such as the Foreign Corrupt Practices Act in the US and the UK’s far-reaching Bribery Act, are likely to prompt demand for counsel. Corruption, bribery and whistle-blowing related cases are all predicted to increase, and the trend toward D&O related matters is to continue. Coupled with a widely expressed hope, if not perhaps yet a firmly held belief, that a gradual return to prosperity will facilitate an increase in litigation, both clients and litigators see room for growth in the future.