In dispute over extent of credit crunch boost to litigation

Published on Sunday 30 August 2009 21:15

IF CONVENTIONAL wisdom is to be believed, litigation rates rise in a recession, as insolvencies mount and commercial deals turn sour. Many disputes that might, in the good times, not be worth fighting, suddenly become strategically important to companies and individuals seeking to protect the assets they have.

Being a defensive discipline, the litigation departments of many firms have become increasingly important to them as transactional work has dried up. Some have re-deployed lawyers from real estate or commercial property teams in an attempt to shore up their fee base until confidence returns.

But is this wisdom proving true in the current economic storm? With many facets of the recession proving to be utterly unpredictable, can we rely on this conventional analysis?

Rod McKenzie, head of litigation at Harper Macleod, says the upturn in insolvencies during a recession makes an overall increase in litigation inevitable: "We always tend to be quite busy because people are always falling out," he says. "But people fall out more when there is less money about."

He reports a noticeable increase in large commercial disputes: "There are a lot less deals going about and people are not generating the profit from those deals.

"They look at the deals ongoing or from the past and say 'I didn't get from that what I should have'. There is also more time – a lot more navel gazing if you like."

Although seeing a noticeable upturn in work, Elaine Motion, head of litigation at Balfour Manson, says the picture she has is not quite the litigation boom that some may have predicted: "Some of the litigations are in upturn, but others not quite so," she says.

"I suspect that in your big commercial disputes you are not getting a big upturn, but you are getting lots of employment matters and insolvency matters. For contractual matters, for smaller things, people are digging their heels in a bit more."

Her cautious view is echoed by David Armstrong, the head of litigation at Brodies. He too senses an upturn in certain areas of litigation work: "But it's not nearly as big an increase as people expect, even as the lawyers expected," he says.

"That is because this credit crisis is one where, in certain instances there is not an awful lot of money about."

He continues: "Even the commercial entities that are still alive and kicking, they will have tightened budgets for litigation.

"In our commercial litigation department, we won't see a massive explosion of instructions. Indeed, while clients will come to us and ask us for strategic advice, they won't necessarily come back and say 'throw the book at them and here is as much money as you need to do it'. It is a reasonably cautious approach."

This caution is, he explains, borne out of an acute awareness of the increasing number of firms going bust: "Any client that is going after another client must be concerned about whether that other party is going to be solvent at the end of litigation," he says.

According to Mr Armstrong, the worry of insolvency may be more likely to make clients settle a case than they would otherwise be. "If there is an offer on the table, and there is any concern about that party you will probably be more cautious than in good times," he adds. This view is countered by Richard Keen, the dean of the Faculty of Advocates.

He reports a "material increase" in litigation work, as well as a big increase in advisory and opinion work, but says the recession may make clients more bullish about cases.

He says: "It makes people less inclined to contemplate settlement, adjudication or mediation. They are not looking for a compromise. Solvency is an issue, but I don't think that is as big an issue. There is always that risk."

Mr Keen believes the instances of litigation and other forms of dispute resolution will increase yet further, in line with the experience of previous recessions.

He says: "Generally speaking, companies and banks have more time to consider litigation because they are not as busy making money on new transactions.

"Secondly, people become anxious, if not slightly desperate in some circumstances, about commercial transactions that in another environment would proceed, even if they had qualms about them."

And litigation could increase again, even when the country pulls out of recession. Because cases take time to proceed, the sector can be considered as a lag indicator.

"I suspect when we begin to see an improvement in the market generally, and there is a bit more money, you may find people have budgets for litigation," says Mr Armstrong. "Various disputes that are currently on hold may get up and running. There is obviously a lot of litigation to come out of this crisis, but I expect, rather than it exploding in the future there will be a gradual step up over the next two or three years. I suspect litigators in all areas will be relatively busy without there being a major explosion."

Mr McKenzie is more specific about likely growth areas. He says: "We have seen very, very clearly, an increase in professional negligence claims. Claims against lawyers, accountants, surveyors. That is all about deal volumes. If there is a mistake made in relation to a property transaction in the good times, that mistake tends to have a value effect but that is wiped out if values are going up. Quite often, mistakes are washed out of the system."

He has a warning for the professions as the repercussions of the recession begin to be felt: "The institutions – the banks – are looking very clearly at surveyor negligence, at surveyor fraud cases.

"Because they are repossessing properties and discovering them to be worth a lot less than they thought. In the boom time, there is evidence, on quite a large scale, of over valuation on mortgages. That is now coming out in the wash."

Mr Keen agrees: "If you look at it in the context of banks experiencing difficulty over retail mortgage lending, they are bound to discover, particularly in buy-to-let, that there has been extensive fraud.

"You are seeing this emerge already and that will bring into the gun sights, anybody who has an insurance policy. It is the surveyors who value, and the lawyers who act – so there is bound to be an attempt, by these institutions, where they have lent wildly, particularly in the buy-to-let market, to try and pin the blame on others.

"If you go back to the 1991 period, that is exactly what happened."