ARTICLE
6 August 2009

Litigation & Dispute Resolution In And After The Recession: How To Avoid Or Deal With Disputes

RG
RWK Goodman

Contributor

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.
United Kingdom Litigation, Mediation & Arbitration

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.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Mondaq uses cookies on this website. By using our website you agree to our use of cookies as set out in our Privacy Policy.

Learn More