Litigation 2016: Trends
The world of commercial litigation is currently going through an uncertain period. The legal market itself is fluctuating, with boutique firms continuing to thrive and put pressure on larger firms’ practices. In addition, it is unclear how events such as Brexit may impact the sector, both in Europe and globally, with practitioners split as to whether it will generate activity in the sector or cause a downturn. While arbitration remains an attractive alternative for clients as a method to resolve their disputes, the litigation sector will “continue to be squeezed”. Yet despite such pressures, practitioners are still positive about the future of their practices.
Undeniably one of the most significant events for commercial litigation in Europe this year has been the result of the UK’s referendum on its membership with the EU. The full implications of Brexit will depend on the precise deal negotiated by the UK government, but commentators expect it to have “a wide-ranging impact on dispute resolution”. When the United Kingdom leaves the EU, it will no longer be subject to the current regulations concerning jurisdiction and conflict of laws in international disputes. While it is doubtful that there will be any immediate changes made to applicable legislation, there is a “significant amount of uncertainty” as to which legislation may continue to be relevant in the future. Equally, if Brexit causes, for example, different tariffs to be applied to cross-border sales, parties may wish to exit their agreements completely as “contracts may not make commercial or practical sense in a post-Brexit world”. Additionally, where businesses have contracted on the basis of an EU which included the UK, it may now be uncertain how contractual wording will be interpreted after Brexit. As one practitioner put it, “Today, the uncertainty is itself the problem.” Furthermore, while it is still unclear what arrangement the UK government will reach with the rest of the EU, it “is very difficult to advise clients on what their strategies or future litigation options will be in the next two years or so”. It is generally considered that leaving the EU will take the UK longer than the two years allowed for by law, and so there may well be ambiguity regarding the implications of Brexit on dispute resolution for some time. As a result, in the short term, most practitioners expect Brexit to generate an uptick in litigation across industry sectors, as parties “who may have hesitated to file claims, wish to do so now in an environment where they know which laws are applicable to them” and “can predict the outcome to some degree”. Longer-term, if the UK government imposes restrictions on the free movement of goods and people, as part of its exit from the EU, this is expected to lead to arguments regarding force majeure and the frustration of contracts between parties, which “could result in an enormous amount of litigation” for law firms. As a result “the future looks particularly bright” for litigation firms handling disputes across the EU.
Rise in alternative dispute resolution
Conversely, one of the possible effects of Brexit is that there may be a slowdown in litigation, with more parties instead selecting arbitration as their preferred method for the resolution of disputes. Arbitration clauses are already common in cross-border contracts, and include advantageous characteristics such as confidentiality, procedural flexibility and neutrality, as well as worldwide recognition and enforcement through the New York Convention (with 156 states as contracting parties including the UK). International companies looking to operate across Europe as part of their global strategy, as well as businesses based in Europe, will see this “tried and trusted enforcement regime” as “more and more attractive, the longer Brexit uncertainty persists”, when compared with litigation. Longer-term, post-Brexit English and Welsh courts will, in principle, have more scope to issue an anti-suit injunction to stop a party continuing with litigation if there is the presence of an arbitration clause in the contract. While this power is currently restricted by the Brussels Regulation, commentators expect this to change following Brexit, providing “a further weapon in the armoury of parties in a London-seated arbitration when faced with parallel proceedings elsewhere”. As such, arbitration is anticipated to pick up significantly, not only in a pre-Brexit but also a post-Brexit Europe, as well as globally, as businesses look to continue trading across Europe and the UK as part of international operations. Lawyers who practise in both arbitration and litigation are therefore expected to find themselves particularly well placed, able to follow the market and meet the increasing demand for legal services for both methods of dispute resolution. Law firms may do well to consider expanding their dispute resolution capabilities to take advantage of this ensuing demand, and hedge themselves against any downturn that occurs in litigation.
The legal landscape
Sources also commented that Brexit could significantly impact the legal market in other ways. Once the UK has left the EU, major European cities could be seen as more attractive options than London as locations for international firms to have offices. Cities such as Brussels, Berlin, Paris and Rome could foreseeably experience an influx of large international firms, “particularly from the US”, who are looking to expand their presence in Europe but no longer see London as such an appealing base.
In particular, firms in Dublin are expecting to see an increased interest in their city, due to both its proximity to London and membership of the EU. Already, Pinsent Masons and Eversheds Consulting are both looking to open their doors in Dublin, and BLM has announced plans to expand the size of its existing office by up to 60 per cent. International firms with offices in London considering the possibility of relocating after Brexit may see Dublin as a particularly attractive English-speaking option, and a means of retaining their expertise if staff want to personally preserve close links with London. As a result, commentators are predicting that Dublin may “develop into a legal hub over the next few years”, and is “a city to watch” for law firms considering their future strategic development.
Further afield practitioners from across the world reported that the current trend in the rise of litigation boutiques is continuing, making the legal market more “competitive across the board”. The last two to four years in particular have seen a “significant increase” in the number of boutique dispute resolution firms being established. Such firms are run by lawyers who have been trained at major international law firms, and so provide “a comparable, very high level of expertise and service” to clients, yet are able to charge lower legal fees. Indeed, sources commented on the sophistication of such firms, who “now don’t just receive matters in the instance of a conflict” but are “instead engaged by major companies for their substantial disputes from the start”. While boutiques are small “they are becoming increasingly focused and sufficiently muscular” to handle significant global disputes, and are “often more nimble and flexible then a larger law firm”. As a result, the market is “feeling the pressure on prices”, with clients asking for “more for less” from firms. Indeed, figures show that spending in the UK on, for example, commercial litigation has fallen dramatically over the past few years. In 2015, the number of UK corporate counsel spending below US$500,000 on litigation rose to a staggering 41 per cent of companies, compared with just 21 per cent for 2012. This near-doubling of companies who are no longer willing to spend as much on litigation is causing significant pressure on larger law firms to reduce the cost of litigation for their clients. The recent crash in oil and commodity prices has added to this, creating “a cautious atmosphere among clients considering litigation”. While businesses still want to pursue their disputes, “they are extremely cost-conscious and strategic in terms of the timings of the disputes”. All this is producing an exceptionally competitive legal market for litigation departments. As one practitioner put it, “There are lots of disputes out there, but more firms in the market vying for those matters.” Consequently there is “a lot of emphasis on providing a good quality and efficient service, because if you don’t, then someone else will”.
Thus the commercial litigation legal sector is experiencing some difficult times. Over the past few years, firms have had to adapt and respond to “all kinds of challenges and opportunities globally” and therefore “are adept at coping with the challenges facing this sector”. One source commented that “what’s important is that disputes will continue to arise”, and events such as Brexit will be a “generator of disputes”. So long as contracts continue to be contested, “commercial litigation will thrive” as a sector, and as a profitable area for law firms.