The Conditions are Right for a Litigation Surge

We are reminded almost on a daily basis that the prospects for growth in the UK economy for 2011 are inconsistent at best. Some sectors are clearly outperforming others. One of the likely star performers for the next 12 months is litigation. The new year has been accompanied by the usual crop of column inches in the legal press highlighting the major cases coming to trial in 2011. In addition to those cases we are aware of, it is safe to predict a material uptake in new disputes. The growth will be reflected not only in the number of cases being pursued by litigants, but also the size of the sums in dispute. A number of factors are driving the litigation market.

Predictably, the shockwaves from the recent economic turbulence are responsible for much of the activity. The economic factors are exacerbated by recent developments in the courts and changes to the way that the litigation market is funded. The surge in litigation following the fallout from the credit crunch is likely to follow the pattern established in previous downturns. It is to be expected that there is a significant time delay following the economic downturn before the dust settles, revealing who is left standing. This is particularly acute in the property sector. More often than not, the primary borrower will have become insolvent early in the piece. The lender then looks to other entities from whom they can recoup their losses. This is often the professional advisors, be they surveyors, lawyers or others.

Another factor contributing to the delay between the losses arising and litigation commencing is adherence to the professional negligence pre-action protocol. The requirement to provide a detailed letter of claim, coupled with the generous time limits for acknowledgment and response, mean that many months will pass before the parties are even in a position to contemplate commencing proceedings. However, we are now seeing evidence of a considerable upturn in professional negligence claims and this pattern is set to continue.

It is also a fact of litigation life that where there are professional negligence claims, you will also find a coverage dispute. Underwriters will be closely reviewing their claims with an eye to any excludable losses; fraudulent or dishonest acts being the most likely candidates.

The increase in post credit crunch litigation has been compounded by a recent decision of the US Supreme Court which is likely to ensure that much of that litigation will largely take place in the jurisdiction in which the losses were incurred. Whilst this does not sound revolutionary, nevertheless it does mark a departure from previous practice. The verdict in June 2010 in Morrison v National Australia Bank puts an end to the longstanding practice of foreign investors who purchase shares of a foreign company on a foreign exchange pursuing their losses in the US courts.

In Morrison, The US Supreme Court ruled that only securities listed on US exchanges fell within the jurisdiction of the US courts. This is a blow to potential litigants for a number of reasons. Litigating in the US is attractive because of the absence of costs-shifting (invariably the parties bear their own costs, whatever the outcome) and because of the easy availability of no-win-no-fee arrangements. Whilst some jurisdictions in the EU share some of those characteristics, there is no doubt that the US represents an easier entry to prospective litigants of this nature.

The effect of the Morrison decision will inevitably be that cases that otherwise would have been conducted in the US will have to be conducted in the same courts as the relevant securities exchanges where the cause of action arose. One of the most anticipated examples is the much commented-upon claim by the North Yorkshire and Merseyside Local Authority Pension Schemes against Royal Bank of Scotland in connection with the bank's rights issue in 2008.

Another significant driver of prospective litigation is the increasing availability of third-party funding. This is a new factor in the litigation market and its full impact has yet to be felt. Speculative funders are being tempted by the prospect of high returns in a new and exciting investment opportunity. What is certain is that substantial further funds are entering the market on a regular basis. The focus is inevitably on high-value litigation which in many cases would not otherwise get off the ground. It is the view of more than a handful of commentators that the availability of cash may yet cause some cases to see the light of day that would not have done so if the connection between funder and litigant had been more direct.

In a similar vein, the use of conditional fee agreements (CFAs) continues to rise. When CFAs were introduced they were heralded as a device to level the playing field, reduce the impact of disappearing legal aid and help those without the resources to go to law. However, they have long since ceased to be the option of last resort for impecunious litigants who would otherwise be unable to pursue their claim. Increasingly, sophisticated clients expect their legal advisors to share in the risk and CFAs achieve that goal. There is no better example than the proceedings in the High Court in London between Boris Berezovsky and Roman Abramovich, due to go to trial in October of this year. Mr Berezovsky's solicitors, Addleshaw Goddard LLP, are acting on a CFA. Expect this trend to continue and gain momentum in 2011.

It remains to be seen what, if any, effect the recent decision of the European Court of Human Rights in Naomi Campbell v Mirror Group Newspapers will have on the operation of CFAs. On 18 January, the ECHR ruled that the £1 million costs that the Mirror Newspaper was ordered to pay to Ms Campbell following her successful claim for breach of privacy were disproportionate and it violated the newspaper's right to freedom of expression. It is worth noting that the judgment was against the UK, not Ms Campbell's solicitors, Schillings. Solicitors will no doubt be wary of entering into new CFAs but many are already in the system. Many more column inches will be occupied considering the fallout of that decision before the position is clarified.

The combination of these contributory factors amounts to a strong reason to litigate set against an environment which significantly reduces the potential downside risk for doing so. Time will tell how much enthusiasm there is to take advantage of these factors. Perhaps the optimists' view will prevail; that it is better to devote limited funds and energy to embarking on new projects rather than to fight over the diminished assets available to satisfy old disputes.

 This article was re-published with the permission of CDR.