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Research: Trends & Conclusions

The sharp uptick in contentious work in the financial industry that we highlighted last year has been gaining increasing momentum. The deluge of regulation that has fallen on the sector has in turn led to a huge amount of work for litigation practitioners and this is showing no signs of diminishing in the near future.

The increase in corporate activity is slowly feeding through into disputes. Litigation is said to be counter cyclical, and so with many jurisdictions just coming out of the effects of the crisis, there is a “very buoyant” litigation market. Many are now seeing the tail end of the 2008 crisis work. As we noted in our previous edition, the wave of litigation predicted following the crisis did not appear immediately, but there has been a sharp increase in contentious work over the past two or three years. This sentiment is reiterated this year, with practitioners noting that those clients who did not want to spend money in the direct aftermath of the crisis now have steadily increasing litigation budgets.

Practitioners also suggest that this increase in corporate activity will have an effect on the legal marketplace. The afore-mentioned rise in regulatory investigations work has led to renewed focus on the investigations arena by the larger firms. As one lawyer stated, “the real money for the magic circle is in investigations. Litigation becomes the poor relation, and that is why we are starting to see the breakaways.” 

CROSS-BORDER LITIGATION AND TRENDS

Practitioners from around the globe confirm an increase in cross-border litigation, particularly in the financial services industry. A number of sources exclaimed their surprise at the “seemingly exponential growth” in this type of litigation – as one lawyer put it: “five years ago we hadn’t really heard of mortgage-backed securities and Libor, but now they are on everybody’s lips”. The increasing number of cross-border transactions will serve to supplement this trend as a greater number of financial systems come into play. This will “inevitably bring problems of cohesion” in the deals being made, thus necessitating the involvement of litigation practitioners who will need to have greater awareness of the different international arrangements.

All the lawyers we spoke to expect the number of multi-jurisdictional disputes to rise. But some question whether it will be a rise solely on the litigation front, or whether this might also lead to an increase in arbitral proceedings. In particular US-based practitioners suggest that American firms and clients may become more embroiled in arbitration – something that has not yet happened owing to their well-defined court system. It will be interesting to see how the firms adapt their dispute resolution practices to meet this potential development.

Various other industry sectors have seen significant activity over the past year. In the US practitioners note the increasing work in the antitrust area. The west coast continues to be a “hotbed” for consumer litigation and intellectual property (IP) issues. In these areas lawyers also highlight the increasingly international nature of disputes as China in particular enters the global IP market. According to our West Coast practitioners, Silicon Valley is now being supplemented by Silicon Beach and several law firms are moving into the area as the amount of tech-related activity increases. This “tremendous uptick” looks set to continue as the value of intellectual property “rises almost daily”. Sources in jurisdictions ranging from Australia to Finland also highlight IP as a key area of growth this year.

Contentious regulatory work has continued to surge in the past 12 months; unsurprisingly this has also been focused on the financial sector. In the banking space, “everyone is struggling with regulatory issues.” As regulators around the world are not only getting tougher and expanding their remit but also starting to cooperate with their foreign counterparts, lawyers and clients alike are having a busy time keeping up to date with developments and ensuring they stay on top of the situation. While many agree that increased regulation was inevitable and necessary, the impact of political and social pressure has led to some predicting a negative consequence further down the line. The involvement of politicians has not necessarily been seen as a useful addition to a regulatory regime that “already has a good structure in place”. In the US this trend has been seen through growing numbers of both Foreign Corrupt Practices Act (FCPA) and Securities and Exchange Commission (SEC) investigations. This is also having an impact on the legal marketplace. Sources state that the huge amount of work that the regulatory development is creating is in turn leading to a consolidation of the trend noted last year, with the rise of niche firms that are primed to take on more of the work as they are free from conflict.

Group litigation has been making larger ripples outside the US according to our research, with greater interest being shown in countries such as the UK and the Netherlands. At the beginning of 2012 the Amsterdam Court of Appeal declared a securities-based international collective settlement binding in a case where only a small number of potential claimants were actually domiciled in the Netherlands. Basing its decision on the Collective Settlement of Mass Claims legislation, which has been in force since 2005, this ruling marked a clear willingness by the Dutch judiciary to further embrace collective litigation. Previously the method of choice for personal injury claims, the turning point for this trend in the UK is said to have been the high-profile RBS case. With more than 20,000 claimants, this novel case arising out of the 2008 banking crisis could potentially change the landscape of collective litigation in the UK. All of the London-based nominees that we spoke to made reference to this seminal case, unusual thanks to its class action nature despite being a financial case. In August 2014 it was reported that a second potential class action case was currently awaiting approval against the Lloyds Banking Group. There has been a reluctance policy-wise to become more like the US in this sphere, but the salient problems in the banking space have led to a more welcoming atmosphere. It is anticipated that third-party funding and contingency fee arrangements will also play their part in creating a better infrastructure for these types of cases, thus enabling lawyers to present a greater array of options to their clients. Many will be watching the development and conclusion of these cases with interest.

By contrast, the tide appears to be turning in the US, with lawyers noting increasing hostility to class actions from the courts. This is particularly the case with regards to securities class actions, where the Supreme Court decision in Halliburton took another step towards making it more difficult for individuals to act collectively in suits alleging securities fraud. The court’s ruling that companies are now able to present evidence earlier in proposed suits has led to practitioners starting to see a greater inclination to settle as early as possible. That said, this step was more modest than many had hoped, and so dramatic change as a result of the decision is not anticipated.

INTERNATIONAL LEGAL HUBS

London-based practitioners are continuing to see a large portion of work coming from Russia, thus affirming that London remains their centre of choice. However, some question whether this influx is nearing its pinnacle. If so, there are differing views as to what may take its place. A number of lawyers suggest Middle Eastern clients as a possible new source of work, as individuals from jurisdictions such as Qatar or Saudi Arabia continue to buy UK assets. China is another suggestion, as its own court systems are increasingly “under strain”. At the UK bar, advocates also highlight banking and Russian litigation as the key features in the commercial court. One barrister described the court as “completely jam-packed” and this is unlikely to change in the near future. Branching out from Russian work, UK barristers are expecting to see greater activity from the former CIS and potentially from Middle Eastern investment funds.

However, recent initiatives have put a question mark over these potential new sources of work; indicating a growing desire to have cases heard domestically. There has been a drive across Asia to increase its popularity as a strong dispute resolution hub. In recent times this has largely been focused on arbitration, with arenas such as the Singapore International Arbitration Centre and the Dubai International Financial Centre courts providing the scope for dispute resolution in the Middle and Far East. Locations such as Kuala Lumpur, Hong Kong and Seoul were also highlighted as jurisdictions currently attempting to rejuvenate their activities. Of these centres Singapore has been the most successful, largely thanks to its proximity to the English legal system, according to our sources. Another recent development to have come out of Singapore is the creation of the International Commercial Court. Following a consultation from December 2013 to January 2014, the Ministry of Law agreed to introduce the court as a means to further Singapore as a go-to neutral third-party venue. This marks a clear move towards promoting Singapore as not only a centre for arbitration but also for litigation (and potentially mediation if the introduction of the independently run Singapore International Mediation Centre is successfully launched in late 2014). Until now, where the dispute has been entirely domestic, the matter will usually end up in the courts. But if there is any kind of international “flavour”, it is most likely to end up in arbitration. It is hoped that with the creation of an international court, those international cases will choose the litigation path, although this anticipated development will take some time to come through. As well as potentially attracting those already on the arbitration scene, one of the stated aims of the Chief Justice is to attract litigation that wouldn’t necessarily have come to Singapore in the first place. While the confidential aspect of arbitration is seen as an advantage by many, it causes concern among the legal profession as it makes it impossible to build up a body of jurisprudence. Therefore it is hoped the promotion of a commercial court will alleviate this problem and create an alternative for international commercial clients. These developments have resulted in moves by both law firms and chambers to either set up a base in the Far East or ensure they have some kind of presence in order to build their international reputation, particularly given the increasing globalisation of disputes. That being said, there is no danger as yet to the dominance of London, and other emerging jurisdictions are unlikely to pose a threat in the short-term future given its popularity as a “transparent, fair and sophisticated legal centre”.

ATTRACTION OF ALTERNATIVE DISPUTE RESOLUTION

The popularity of alternative dispute resolution (ADR) is another development carried over from last year. With some jurisdictions implementing penalties for those who do not consider alternative methods, and others with existing penalty procedures applying the rules more strictly, lawyers note an increasing appreciation for ADR’s advantages. While arbitration has always been a popular option, particularly for cross-border transactions where arbitral clauses will be written into the contract, several lawyers highlight a growing awareness of mediation. There is now a “much earlier examination of potential mediation routes”, and while it is not always a feasible choice, with clients ever more aware of brand management and reputation protection, the cost saving afforded by a mediation alternative makes it increasingly popular. This is leading to a change in the legal marketplace as “the resolution of disputes is now being done in different ways outside the standard courtroom”, and lawyers will need to adapt to these changes to the legal landscape.

At the bar, practitioners also note that the use of arbitration has grown to an “unprecedented level”. The confidentiality advantage found in using English arbitration clauses in contracts is likely to remain popular for certain clients, particularly following the conclusion of the Berezovsky litigation, with a few sources predicting a “growing disenchantment” with litigation as a result.

A QUESTION OF FINANCING

As has been the case across a range of practice areas, costs remain a determining factor for clients. Alternative fee structures have made a similar impact in the litigation field as they have elsewhere, as whereas “15 years ago it was almost unheard of to have a litigation budget or firm estimates”, clients are now increasingly cost conscious and sensitive. According to our sources, firms will need to “start looking at their pricing models from afresh” to remain competitive. A number of those we spoke to in the UK believe that the end is near for the more traditional hourly rate structure, and with the market moving, law firms will need to ensure that they also move with the times. Firms will have to be more “flexible” in their own arrangements in order to provide greater certainty for clients who have an increasing desire for the law firms to share the risks. This sentiment is likewise reiterated across the globe, with one US lawyer stating that “we all need to recognise the pressure that clients are now under and adjust our arrangements accordingly”.

Because of the still limited budgets, clients are also being selective about those cases they decide to take on. Practitioners note that the “filler-in cases are disappearing” and as a result they are lurching from big case to big case, as clients do not want to spend the money on medium-sized cases. The costs of disclosure are becoming more worrisome and lawyers anticipate an even greater focus on this for the year ahead. As one lawyer stated, “one of the big question marks is at what point costs will become a more significant factor for where to send work”. With this in mind, interest in third-party funding is also on the rise. Clients both large and small are more interested and happier to use it, according to our sources, and “lawyers will just have to get used to it”.

LEGAL MARKETPLACE

Several practitioners made reference to the fact that commercial litigation is one of only a few areas in which niche firms can fully compete with larger full-service outfits. This has been demonstrated by a number of departures over the past few years of top litigators to boutique firms or setting up independently. Participants believe this to be “the way of the future”, with many anticipating an increasing stratification in the legal market. This development will cause the most problems for those mid-sized firms who may struggle to maintain their position in the market as larger firms continue to be retained by key clients and litigation boutiques continue to be used by those welcoming their specialisation, cost advantage and freedom from conflict. This is the story in several jurisdictions, with regional firms across the globe “starting to feel the pressure”. Lawyers note the number of mergers of mid-sized firms in recent years, and see this as a trend for survival of those that would otherwise sink.

 

 

 

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Looking to the future, our sources predict a bulking-up of litigation practices, specifically with contentious regulatory specialists, in order to meet the growing demand. Our research once again recognises an increase in the number of lawyers and firms featured, suggesting that the area is growing and that breakaways are indeed occurring. Mid-tier firms are likely to struggle with the progressive globalisation of disputes and popularity of alternative resolution procedures. They will need to “get creative” to remain in the market for the next year and beyond. Although all lawyers will have to stay savvy regarding inventive fee structures and value-added services, there is currently a “peaceful co-existence” between larger firms and boutiques that are not “competing for the same work”, and thus are expecting a positive year ahead.

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