After the storm

Businesses on both sides of the Atlantic are expecting a marked U-turn in litigation as they attempt to ride out the turmoil in the economic markets.

Inevitably, organisations within the financial services sector are particularly concerned about an increased threat of litigation. This concern is amplified among the larger financial services companies where one in two expects greater numbers of claims in the coming year.

Almost one-quarter of businesses in the financial sector anticipate that they will involved in sub-prime related litigation, for example. In addition to exposure to the increased risk of litigation, UK businesses have also been subject to greater regulatory supervision and enforcement from UK regulators, such as the office of fair trade and the FSA, and increasingly from overseas regulators such as the Securities and Exchange Commission, the US Department of Justice and the EU Commission.

While litigation activity in 2007 benefited from relatively calm economic conditions, the end of the prolonged period of prosperity and the start of a period of economic challenge is likely to fuel litigation over who is to blame and who should pay for the consequences. In essence, UK business is at something of a tipping point and in-house counsel are now bracing themselves for the worst, as one in three businesses anticipate an increase in the number of legal disputes (including 43 per cent of large businesses). Only 1 in 12 expects a decrease.

In a period of economic uncertainty and problems in the financial markets, businesses in the financial services sector are feeling most vulnerable in expecting increased litigation. However, this apprehension spreads to all sectors and significant numbers in the healthcare, retail/wholesale and insurance industries share those fears.

Interestingly, the much anticipated tidal wave of sub-prime related litigation has yet to arrive. However, experience to date demonstrates that financial institutions have been keen to engage in work-out activity and behind-the-scenes discussions to unravel and settle complex transactions and disputes.

These institutions, now subject to closer scrutiny from the government, media and the public, are understandably hesitant to deal with any disputes in the public arena of court litigation. The potential reputational fallout from court action remains something that financial institutions would prefer to avoid. That said, as potential losses mount up and tough economic conditions prevail it remains to be seen how sustainable this approach will prove to be.

The turbulence in the financial markets has already led to a significant number of job losses. Perhaps as a corollary, a significant proportion of in-house counsel also expect employment cases to rise. Businesses should take specialist advice prior to proposing any changes to employment rights or before announcing a redundancy programme. Two-thirds of UK businesses also expect greater numbers of disputes arising out of contractual agreements. Accordingly, businesses will be well-served to monitor closely their contractual requirements.