LITIGATION & DISPUTE RESOLUTION
IN AND AFTER THE RECESSION
Economic downturns breed disputes and the outcome of such disputes can have
a much greater impact upon individuals and businesses than in better times.
Litigation and dispute resolution therefore has a crucial role to play during a
recession and, with the emphasis on resolution, that role can be a positive one.
Whether the current economic cycle turns out to be V, U, W or L shaped, the
likelihood is that when the recession itself recedes, the numbers of claims being
actively pursued will increase, rather than decrease. Downturns tend to
produce a pipeline or long tail of claims. Once the worst is over, claimants
become more confident and willing to invest in litigation, defendants who have
survived have the means to meet claims and the holes in the “deep pockets”,
which are often the target of claims, have been mended.
Advance planning can avoid disputes or enable them to be handled more
effectively if they do arise.
The types of claims and disputes that are spawned by a recession include:
- Insolvencies, bankruptcies and related claims by administrators, liquidators
or trustees in bankruptcy to try to recoup money for creditors.
- Banking claims, such as recovery of defaulting commercial loans and realisation
of security.
- Property repossessions.
- Investment disputes, such as claims against investment managers for not
adopting an appropriate risk profile or inadequate due diligence.
- Consumer investment claims for mis-selling, breach of financial services
legislation and negligent investment advice.
| London Evening
Standard financial
columnist, Anthony
Hilton, recently
suggested that there
was “an
unprecedented wave
of litigation… building up” amongst investors
who have lost
money in the market
turmoil of recent
months. |
- Company disputes: e.g. between shareholders or
claims against directors for negligence.
- Fraud claims, with people and even businesses
resorting to unlawful means to cope with the
economic pressure. Recessions also reveal the
fraud that has been going on in the good times. Criminal investigations and civil fraud claims often
run in parallel. Asset recovery claims may be made
against the alleged perpetrator, with damages claims against third parties such as financial
institutions which may be alleged to have allowed
frauds to happen.
| The City of
London Police
recently stated
that fraud is
soaring in the
recession, with
a 64% increase
in the number of
reported frauds
in the past
financial year. |
- Insurance and re-insurance disputes, including
defence of claims against insured clients (perhaps
insolvent ones) and policy coverage disputes with
clients or other insurers/reinsurers.
- Contract disputes: whereas in good times it may be
better to do tomorrow’s deal than to litigate over
yesterday’s problem, in leaner times tomorrow’s deal
may not be there to be done and it may be
commercially worthwhile, or necessary, to seek
financial redress for the deal that has gone wrong.
- Claims of professional negligence against accountants,
financial advisers, lawyers, surveyors (e.g. for overvaluation
of secured properties) and others.
- Employment claims, such as unfair selection for
redundancy or boardroom disputes.
- Tax disputes and investigations, as the burden of
taxation rises and taxpayers seek ways to reduce their
liability.
- Matrimonial disputes, as financial pressures take their
toll on personal relationships.
- Trust and probate disputes: when money is in short
supply, there is an incentive to raise matters which,
in better times, might have been left unchallenged.
SOME POSITIVE IDEAS FOR NEGATIVE TIMES
Avoiding disputes:
- Well crafted terms and conditions of business can have
an impact in avoiding disputes (or increasing the
chances of winning disputes if they arise). Now may be
the time to review yours.
- Ensure that your terms and
conditions are the ones that apply,
rather than the other party’s.
- When “cash is king”, good credit
control is vital and will avoid
disputes.
- If you are the seller of goods or services, payment
terms should be clear and, where possible, exclude any
right of the other party to withhold payment (e.g. on
the ground of set-off).
| “Well crafted
terms and
conditions of
business can
have an
impact in
avoiding
disputes …” |
- A retention of title clause may provide protection in
the event of a purchaser becoming insolvent, by
allowing the seller to reclaim the goods. A similar
effect may be achieved in the case of intangible
property by providing for a licence to terminate or for
intellectual property rights to re-vest in the event of
non-payment or insolvency.
- Avoid “false economies”: when cash is tight, it is
tempting to avoid professional fees, but self-help has
its limits and, if you go too far outside your skill set,
you can end up paying more if a dispute arises.
However, ensure that you receive a cost effective
service. Estimates are useful for budgeting.
- Many disputes are caused by poor communication.
Ensure communications are clear between you and
those with whom you do business, both externally and
internally. Make sure that important oral
communications are documented.
THE 1990s LLOYD’S INSURANCE CRISIS: AN
EXAMPLE OF LITIGATION DRIVEN RESOLUTION
In the first half of the 1990s, much of the Lloyd’s of
London insurance market was effectively bust. In some
ways its problems and their causes were similar to the “credit crunch”: greed, incompetence, poor regulation
and the assumption of risks which no-one had any real
means of assessing. The majority of those in the
market were innocent, but were still struck by disaster.
Most of the investors in the market were then
individuals (“Names”), organised in syndicates, who
took on unlimited liability. In the good times, many of
them had received healthy returns, but when the
market was hit by a series of massive claims, it buckled
and many Names lost all they had, including, in the
case of some, their lives, as there were suicides.
Initially, there was reluctance to litigate, partly because
there was a tradition of the market sorting out its own
problems. But the problems were too big for that and
the first trickle of claims turned to a flood. “Names” organised themselves into action groups, electing
committees which funded litigation with subscriptions.
Any thought that the English Courts might be reluctant
to find against what might have been seen as the “establishment” soon disappeared as decisions came
out in favour of claimants. It became clear that a
solution had to be found if the market was to survive.
The solution that was arrived at was a brilliant one. A
new vehicle, “Equitas”, was created to take on the “toxic” liabilities, funded by defendants and others. This
and the Lloyd’s business model, under which each
insurance syndicate accepted business for only one
year, meant that the problems of the past were isolated
and did not infect the future. There was reform within
the market and most insurance capacity is now
provided by corporate entities, rather than individual
Names. Equitas is being taken over by Warren Buffett’s
group.
The Lloyd’s catastrophe of the 1990s seems to
hold some lessons for the present, including that
litigation and dispute resolution can play an
important, positive role not only in obtaining
redress, or at least closure, for the victims of
business disasters, but also in enabling
businesses to survive and regenerate. |
- The largest claims can be caused by the smallest
mistakes. Ensure that lines of authority are clear
within your business or organisation and that there is
adequate oversight. If there is only you, check you
understand the extent of any obligations before you
take them on.
- Carry out regular risk analysis. This can be done by
using sophisticated software or by a chat over a coffee,
depending on the complexity of your business. The
areas of highest risk may well be the ones where the
most serious disputes could arise: are you exposed to
any political or currency risk, are you over reliant on
any one client/customer or supplier, is any part of your
business overstretching your working capital?
| “Many disputes
are caused by
poor
communication
… The largest
claims can be
caused by the
smallest
mistakes… Carry out
regular risk
analysis” |
- Do you fully understand every area
of business for which you are
responsible? If not, you may not
realise that you are heading for a
dispute until it is too late. There
may be a tendency in the recession
to take on work in new areas, but
do you have the skills to do it?
- If you are a director of a company
or the member of a limited liability
partnership, ensure that you are
aware of the financial position of
the business. If it trades whilst insolvent and goes
under, you could be the subject of a claim from a
liquidator to make good its losses from your own
pocket. However, by taking advice as soon as any
financial difficulty arises, you should be able to avoid
this and to obtain a better outcome for the business
and its creditors.
Planning for and dealing with disputes:
- Planning ahead should pay dividends if a dispute arises.
- Back to those terms and conditions: do they contain
adequate dispute resolution provisions which best suit
you? Have you included a mediation clause? Would
arbitration be better than court litigation?
- A standard dispute resolution clause is a “one size fits
all”, but in some cases a clause needs to be tailored to
the particular situation. It is much easier for parties to
agree on what dispute resolution procedures to follow
before a dispute arises, than after it has arisen.
- If you are dealing with overseas parties or transactions,
it is wise to include provisions in your contract for the
choice of law and jurisdiction. Otherwise, you could
find that any dispute is dealt with in a foreign court
and/or under a foreign law, which you might not have
chosen had you made a choice. If there is concern
about any country’s courts protecting the “home
team” in recessionary times, arbitration may be the
better option.
- Exclusion or limitation of liability clauses can be
helpful if you are the subject of a claim, but they need
to be carefully drafted. Equally, they can be a
hindrance if you are the claimant.
- Do you have adequate insurance cover in respect of
claims and disputes which might be made against you
or your business? Cover can also be sought for claims
that you might wish to bring.
- Ensure that you make full disclosure to the insurer,
before taking out the policy, of all matters which could
affect its decision whether to insure you. You have an
obligation of full disclosure, whether or not the insurer
asks you questions. Failure to comply with this could
mean that the policy is invalid.
- If a claim or dispute arises, consider whether any of
your existing insurance could provide relevant cover,
whether you are claimant or defendant. If so, check
the policy at once and consider making an immediate
notification to the insurer: failure to do so could result
in the insurer refusing cover.
- Ensure that you have an effective system for
preserving and archiving correspondence and
documents, including emails and other electronic
documents. Claims can be brought several years after
the event and if any documents have been lost in the
meanwhile, it could damage your claim or defence.
| “If a dispute
arises, take
early legal
advice.
Some rights
can be lost
if you delay
exercising
them …” |
- If a dispute arises, take early legal advice. Some rights
can be lost if you delay exercising them, but you need
to know which they are and how to preserve them. For
instance, if the other party to a contract commits a
breach which is serious enough to amount to a “repudiation” of the contract, you
have a limited time in which to
exercise an option whether to treat
your obligation of further
performance of the contract as
ended or whether to affirm the
contract. Your decision could affect
the amount of damages you can
recover.
- The English courts expect parties to take reasonable steps to settle their
differences before issuing court proceedings, whether by simple negotiation
or more structured “alternative dispute resolution” such as mediation. As a
result, an increasing number of disputes are resolved at an early stage, at less
legal cost than if court action had to be taken. However, parties will still
usually find it helpful to retain a lawyer to provide initial advice on the strength
of their case, to guide them through the pre-action procedures, to safeguard
against doing anything which could harm their case if a settlement is not
reached and to ensure that any settlement reached is final and binding.
| “ … an increasing number of disputes are resolved at an early stage …” |
- Recent years have seen more flexibility by the English courts
as to costs orders in litigation. Whilst the general approach is
still that the loser pays a substantial part of the winner’s legal
bill, the courts have discretion to vary that, for example
where the victor has lost on a discrete issue or refused to
mediate the dispute. Parties should therefore adopt a
reasonable and proportionate approach towards litigation: if
they don’t, the courts may penalise them when it comes to
awarding costs.
- There have been developments in the funding of litigation and more
proposals are expected before the end of the year, when a committee
chaired by Lord Justice Jackson delivers its final report. Clients and their
lawyers may already enter into conditional fee agreements (“no win, no fee” or “no win, low fee”). “After the Event” insurance can be obtained to cover
against losing and having to pay the other side’s costs and may extend to
some of your own legal costs. Litigation funders may be willing to underwrite
litigation costs in return for a share of any compensation recovered.
- London offers an array of litigation and dispute resolution options, enabling
a wide range of disputes to be handled, from small consumer claims to
complex multi-national disputes. There are specialist courts, such as the
Commercial, Mercantile and Technology & Construction Courts. London is an
established centre for international arbitration and a growing number of
panels offer the services of experienced mediators.
Altogether, the nine strong Goodman Derrick litigation and dispute resolution
team has over 150 years experience of litigating and resolving disputes,
including that gained in previous economic downturns. That enables us not only
to help you to manage and resolve disputes that arise, according to your needs
and budget, but also to assist you to avoid disputes or to be better prepared if
they do arise.
For more information, please contact Jonathan Haydn-Williams on 0207 421 7936 or jhw@gdlaw.co.uk,
This guide is for general
information and interest
only and should not be
relied upon as providing
specific legal advice. |
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