Since the slump of 2002 and 2003 failed to deliver the predicted upswing of litigation and insolvency work, there has been a clear, if little-articulated, fear among the litigation teams of major City firms: are we living on borrowed time?
But with the prolonged market turmoil that has become typical as the credit crunch fast approaches its first birthday in August, the question now is, as many litigators assert, will it be any different this time around?
True, current consensus among senior lawyers is that a substantive upturn in contentious work is now on the cards, even if the economic climate in the
The argument goes that problems in the financial system are too pronounced, while the plentiful supply of debt that offset the short-term pain as companies wrestled with the gloom of 2002-03, has been replaced by the harshest lender terms for 15 years.
Such expectations can be seen from indications that law firms are investing heavily in litigation; a Legal Week poll of more than 100 partners in May found that litigation was cited as the most in-demand practice area, highlighted by 54% of respondents. This is a dramatic change from recent years when litigation would typically rank at the bottom of law firms’ shopping lists.
It is also evident in the
Other signs have included a handful of high-profile crunch-related disputes that already look certain to generate substantial fees (see box). Likewise, research from Navigant Consulting found that claims focused on the
John Fordham, head of litigation at Stephenson Harwood, comments: “I do not think we have ever had a [situation] like this. We have had a downturn in the economy resulting in insolvencies and fraud, but I do not remember a situation where the banks have no money — so they are trying to close or reduce their exposure in deals. This will inevitably feed through into a lot of litigation.”
James O’Brien, LPA Legal Recruitment director, agrees that conditions have changed greatly since the last slump: “When you look at the last recession, the difference between then and now is that now it looks far more widespread and is being exacerbated by a range of factors. We never saw that predicted upsurge in litigation last time. This looks like a completely different animal — many financial institutions have been seriously affected.”
But despite the more confident mood among litigators, and reports that initial instructions have increased since last summer, there is far less certainty that the levels of interest or the nervous mood among wounded financial institutions will actually convert into red meat litigation on any scale.
Freshfields Bruckhaus Deringer litigation head Ian Terry comments: “Banking litigators have been busy doing a lot of advisory work in contentious situations where institutions are seeing if they can renegotiate contractual terms and the like — advice a lawyer gives prior to something turning nasty.”
But he adds: “If there is a flood of litigation — and I am sceptical that there will be — it won’t be for a few months yet as clients are trying to work out their positions rather than flying straight into it.”
Nevertheless, there are a number of underlying reasons for believing that litigation could be about to stage a comeback.
Not only are disputes between financial institutions high on the agenda, but the contentious environment is completely different to the downturn of several years ago. For a start, the cheap debt that was a feature of Western economies as interest rates came down six years ago has been replaced by an environment in which finance is far harder to come by, in theory stoking the chances the inter-institutional wrangling and creditor/debtor disputes.
Likewise, the once-clubby atmosphere of
Bingham McCutchen’s
Quinn Emanuel’s East comments: “There are hedge funds, which is different from 10-15 years ago. As for banks, it is OK being clubby if they are not facing $1bn-$2bn losses. Big numbers will impact on the banks and put them in a position where they have no choice but to bring actions.”
As such, there is agreement that while strict bank versus bank claims will be a tiny minority, the rising influence of the alternative investment industry offers a serious prospect of generating disputes.
Freshfields’ Terry says: “There will be a reluctance for major banking institutions to take each other on, but we could see an upturn between banks and minor financial institutions, or more increased activity involving hedge funds or pension funds.”
The extent to which exotic debt instruments such as collateralised debt obligations (CDOs) and structured investment vehicles (SIVs), which are at the heart of the current credit turmoil, will generate litigation is still uncertain, but long-term trends suggest that a notable upturn in credit defaults — and therefore litigation — is highly likely.
East adds: “There is likely to be an upturn in litigation around SIVs and CDOs. With pressures on the market, no-one really knows how these products work in distress.”
And there are other forces supporting an upturn in contentious work, especially in restructuring and insolvency, which — aside from a handful of large workouts such as British Energy and TXU — failed to deliver for advisers in the last slump.
The construction and housing sector, buckling under falling prices and a collapse in house sales, is viewed as a prime target. Quoted building companies including Taylor Wimpey, Kier Residential, Barratt and Persimmon have this month announced more than 4,000 job cuts and Taylor Wimpey and Barratt are currently fighting to secure fresh finance to avoid the threat of bankruptcy.
Intense pressure on consumers in the face of rising food, utility and mortgage costs suggests retailers will also be vulnerable, although insolvency practitioners on both sides of the pond have yet to see any upturn in activity.
Another area that could generate litigation is early attempts to back and fund shareholder claims in Europe using techniques associated with
Subsequent attempts have focused on competition policy, including a $200m (£101.2m) settlement secured before the
Expectations that such claims will gain ground in
Likewise, influential investor bodies such as the National Association of Pension Funds have shown support for investor litigation in recent years. Indeed, it has been claimed that institutional investors, which have little to fear from pursuing claims against the banking community, could generate some of the most substantive post-crunch claims as they face major write-downs on their debt investments.
Expectations of such litigation were underlined by the launch in 2007 of Cohen Milstein’s
With record oil prices and a wider push on commodity prices, the likelihood of commercial disputes emerging over coveted assets in developing economies has without doubt grown considerably in recent years.
Recent examples have seen Herbert Smith set to bill approximately $100m (£51m) in fees for work representing the Tajik Aluminium Company (Talco) in an ongoing legal battle with a group of aluminium traders for more than $485m (£244m).
And this month the long-running $4bn (£2bn) dispute between two Russian businessmen for a 20% stake of aluminium giant RUSAL has just been granted permission to be heard in the UK, following an unusual ruling where Mr Justice Clarke questioned whether “justice will be done” in Russia.
Meanwhile, SJ Berwin and Lovells have just secured major instructions to act on the high-profile dispute between BP and its Russian partner over the control of the $36bn (£18bn) joint venture TNK-BP.
With the
Barlow Lyde & Gilbert has been repositioning itself beyond its core insurance business to win large commercial and financial litigation, although commercial litigators are sceptical that it can make the jump.
Other firms, among them Manches and Stephenson Harwood, have sought to position themselves to litigate against financial institutions without the conflict issues of large
Opinions remain divided on the impact of
With much apparently to play for, attempts to draft in senior litigators are likely to continue, as evidenced by Mayer Brown’s recruitment last year of a high-profile Barlows’ litigation team led by Clare Canning, and Debevoise & Plimpton’s recruitment of former attorney general Lord Goldsmith QC.
O’Brien says: “We have seen quite a bit of movement in terms of litigators and firms would be remiss not to get a few people through the door if they haven’t already, especially if they are lacking quality legal talent at associate and partner level.”
He added: “Litigators are optimistic and there is a general agreement that this could be their time.”
But then what else can a seasoned litigator hope for? If they are ever, as a breed, to regain their central place within major
Feeling the crunch: key cases
Barclays Capital vs Bear Stearns — December
Barclays Capital (BarCap) took action against Bear Stearns for two collapsed hedge funds exposed to the subprime market. BarCap alleges Bear Stearns Asset Management used the highly-leveraged funds, reportedly worth $20bn (£10.16bn) in assets before their collapse, to offload risky assets that could not be sold to other investors.
Linklaters’
HSH Nordbank vs UBS — February
First true bank-on-bank dispute to hit the
Simmons & Simmons head of finance litigation Jonathan Kelly is advising Swiss bank UBS. Quinn Emanuel Urquhart Oliver & Hedges litigation partner Peter Calamari is advising German bank HSH Nordbank.
Northern Rock shareholders vs Government (Judicial Review) — May
Northern Rock shareholders launched a judicial review for improved compensation from the Government following the bank’s nationalisation. UK Shareholders Association (UKSA) is representing approximately 150,000 private shareholders that held up to 25% of the bank’s shares. Activist hedge fund SRM Global Fund — which acquired an 11.5% stake in the bank — is joining the UKSA in calling for a review.
Edwin Coe’s head of litigation, David Greene, is advising the UKSA. SRM is being advised by White & Case litigation partner John Reynolds.
UBS vs Tank & Rast — May
UBS launched a claim in May against motorway service operator Tank & Rast for refusing to allow Ä40m (£31.7m) of debt, resulting from a refinancing, to be sold on.
Stephenson Harwood commercial litigation partner Richard Gwynne is advising UBS. Clyde & Co disputes partner Paul Friedman is advising Tank & Rast.
JPMorgan Chase vs Springwell Navigation — judgment handed down May
JPMorgan fended off a $700m (£353m) claim in the High Court in May brought by Springwell Navigation. The bank was cleared of allegations of mis-selling emerging investments to its clients. Springwell suffered substantial losses on the investments as a result of the Russian debt crisis in 1998. Although the case relates to issues more than a decade ago, it is thought the outcome will have implications in the current market and will act as a deterrent to companies looking to bring frivolous claims against banks.
Clifford Chance litigation partner Ian Moulding successfully advised JPMorgan. Reed Smith advised Springwell Navigation.
