FTAdviser.com

Advertising

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.

While 'class actions' in the UK remain rare, businesses should note that recent proposals from the Civil Justice Council to reform the class actions system in England and Wales may lead to fundamental change in the class action landscape, particularly where consumer rights are at issue. The development of the litigation funding industry in the UK may also contribute to the number of significant class actions.

The results point to a recent decreasing spend on litigation, excluding costs of settlement and judgment, together with a slight declining trend in the total yearly costs and expenses of outside counsel in relation to litigious matters. However, the expenditure on litigation remains significant. For example, the number of companies spending US$1m or more on litigation increased amongst both US and UK businesses. This is not limited to the larger businesses - among smaller companies, the percentage spending US$1m or more tripled from last year and increased by half among mid-sized companies.

UK businesses are also facing a large number of claims of significant value, with one in six having had at least one lawsuit commenced against them claiming more than US$20m. UK businesses are also having to juggle a number of claims - a tenth of UK businesses have faced more than 20 cases against them in the last year.

Similarly, in the US there are still plenty of disputes to go around, with 79 per cent of companies facing at least one new action. Larger companies are a particularly vulnerable to claims, with their deep pockets meaning that almost 1 in 3 billion-dollar firms were served with more than 50 new lawsuits in 2007/2008.

However, businesses are becoming less likely, it seems, to issue claims. The number of claims filed by respondents during the past three years has fallen. In a return to 2005 levels, almost one-half of businesses stated that they had not filed any court actions. The fall also applies in respect of large value claims - only one in ten of the claims initiated were valued at US$20m or more, compared to almost one quarter of claims filed in 2007. The most aggressive claimants are in the financial services sector, followed by retail/wholesale and technology/communications industries.

Regulatory investigations

UK businesses also have significant concerns over the increasing numbers and costs of regulatory investigations. Public companies are at risk, in particular. Interestingly, large numbers of UK companies are being subjected to investigations by the US authorities and the European Commission. US firms also report increased numbers of enquiries into their businesses originating from the European authorities. Due to the increasingly transnational nature of the regulatory environment, and the associated costs, UK businesses are encouraged to consider carefully their internal risk-management policies in the UK and overseas. The governments and their regulatory agencies are proposing to conduct stricter supervision and greater enforcement against regulated firms to ensure that the mistakes and outcomes of the credit crunch are not repeated. On that basis, as anticipated by corporate counsel, one can expect increasing numbers and scope of regulatory investigations. Business would be well-served to seek specialist advice to deal with these investigations.

Internal investigations

Businesses are also carrying out increased numbers of internal investigations. Two in five businesses, both UK and US, sought assistance from outside counsel with internal investigations in the past year. As the need for these investigations inevitably increases in line with the current downturn in the economy, and the closer scrutiny from government and their regulators, businesses should prepare strategic policies for carrying out this type of investigation, including having in place the appropriate financial and management resources to limit the impact on their day-to-day business.

Conclusion

The calm economic waters of 2007 have been replaced by the storm of 2008 that shows little sign of blowing over just yet. Consequently, sharp increases in litigation are yet to be seen. However, leading corporate counsel on both sides of the Atlantic expect marked changes in the number of actions their businesses will face over the next year.

The fallout from unprecedented events such as the sub-prime collapse, the insolvency of Lehman Brothers, the turmoil of the Icelandic banks and the part-nationalisation of leading banks means that the financial services sector is likely to experience the greatest impact, in volume of disputes and more intense regulatory interest from the UK and overseas.

Chris Warren-Smith is a partner and co-chair of Fulbright & Jaworski International LLP's global litigation practice and Ian Pegram is a professional support lawyer in the disputes practice for the same firm