After The International Financial Crisis – The Litigator’s Role In A Normal World

Liam Kennedy of A&L Goodbody explores the implications of economic recovery on the role of litigators:

"The contribution of a litigator is likely to extend far beyond prosecuting or defending claims in court – the strategic litigator will give greater value by helping the client understand manage and control legal and commercial risk."

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Litigation, particularly insolvency-related litigation, is often seen as countercyclical, with parties less likely to sue in good times but trigger-happy when times are lean. However, litigators were scarcely idle even before the crisis. There was plenty of litigation in many jurisdictions. The Madoff litigation (in the US and other jurisdictions including Ireland) is a good example of the international litigation flows that pre-dated, and were independent of, the financial crisis. Nevertheless, in good times, many parties overlook or settle disputes that might lead to litigation in a different environment. A quick, commercial solution often appears pragmatic, particularly where there is an ongoing relationship, or where litigation would distract from profitable workstreams. The rise of mediation was also a factor.

Predictably, the global financial crisis in 2008–2009 led to a surge in litigation, especially insolvency-related litigation, but the pattern in Ireland – and elsewhere – differed from previous recessionary environments. Traditionally, a downturn would spark a wave of litigation, frequently the “can’t pay, won’t pay variety”, with parties using litigation to delay the day of reckoning as they hoped for better times. Such strategies have not entirely disappeared, but more effective court procedures in many jurisdictions (such as the Commercial Court in Ireland) make it harder now for a business to use litigation as a delaying tactic.

In Ireland the crisis led to numerous recovery or enforcement actions, many substantial claims over failed developments and a wave of professional negligence actions. However, more significant litigation workstreams following the financial crisis involved large restructuring assignments, along with big-ticket litigation work driven by the financial crisis. Such cases involved financial services litigation in particular, including multiparty misselling and mispricing claims in the banking sector. 

One standout international trend from the crisis is that regulatory enforcement emerged as a key business risk. In many jurisdictions, including Ireland, regulators became far more active after the crisis, with a surge in the number of investigation or enforcement proceedings, a massive jump in the level of sanctions imposed, and an exponential increase in the financial and reputational exposure for the financial services sector.

The US has been the most aggressive jurisdiction on the enforcement front. The Obama Administration has recovered circa US$125 billion in fines imposed on the financial services sector since the banking crisis, the most recent being the €16.65 billion settlement agreed with Bank of America in respect of lending practices prior to the crisis. (Bank of America’s share price rose on news of the payout.) In Ireland and in many other jurisdictions, there has also been a large number of enforcement actions, and an increase in the level of penalties. Even though the levels of penalties are considerably lower in countries other than the US, businesses in other jurisdictions now face a significant financial and reputational exposure as a result of such enforcement actions. There have been – and continue to be – significant differences in approaches to enforcement and prosecution adopted by regulators in different jurisdictions such as, for example, Ireland, the UK and the US. However, generally speaking, the international trend is towards greater enforcement rigour and tougher penalties.

Apart from regulatory enforcement action, a great deal of large-scale international litigation and regulation and investigations work was sparked by the global financial crisis, the IBRC liquidation in Ireland and the Lehman liquidation being examples in this regard. Civil disputes that gave rise to protracted large-scale litigation tended to be high value, with significant financial and reputational consequences for the parties. Such insolvency and litigation work tended to require a greater level of expertise than might have been the case in dealing with disputes in previous downturns. Full-service firms’ litigation expertise was crucial because of the complexity of the disputes – major cases required other expertise from banking, property or competition lawyers, etc. In many jurisdictions, not least in Ireland, the pace of economic activity had been so frenetic, and the outlook so optimistic prior to 2008, that many businesses were caught up in the deal fever, with insufficient focus on legal and commercial risk. After the global financial crisis, lawyers played a key role in helping to resolve such issues. This was not simply a matter of litigating disputes but of combining expertise from many different areas – litigation, banking, regulatory, competition law and property law. 

In contrast with the jump in large-scale insolvency and litigation work, in Ireland as in other jurisdictions there appeared to be fewer small or mid-level disputes going to court even after the onset of the financial crisis. Even when such disputes did result in litigation, they were more likely to be resolved at a relatively early stage. This change in litigation patterns may be attributable to various factors, not least the cost of large-scale litigation coupled with the commercial reality that many targets were not worth suing. 

At this stage, there appear to be signs of a (fragile) international recovery, which offers the prospect of a return to growth in several economies. The question arises as to what implications any such recovery might have for litigators around the world.

Firstly, new streams of major commercial litigation will be sparked by increased economic activity. The M&A litigation in Dublin and New York in 2013 in which Elan successfully resisted a €6.8 billion hostile takeover (paving the way for a higher value transaction with another party) is an example of such litigation resulting from economic activity. A&L Goodbody acted for Elan in its successful defence of the takeover. Large securities transactions tend to beget large securities disputes and such cases are likely to occur in a growth period where the number of corporate transactions increases.

Secondly, some workstreams are arguably independent of macroeconomic development. Product liability claims will inevitably continue, as will claims arising from accidents and catastrophes, class action or collective redress claims and normal contractual and tortious claims. The extent to which class action or similar procedures are available in different jurisdictions, and the applicable cost and punitive damage regimes may be key drivers that determine the proliferation of such claims. 

It also appears likely that other litigation workstreams will continue to flourish in many jurisdictions – financial services disputes, pension disputes, intellectual property litigation, competition litigation and securities/M&A litigation. A feature of such cases is that they tend to be high value, with significant commercial and reputational exposures for the business concerned. By contrast, smaller commercial and contractual disputes will continue to be frequently resolved by negotiation or mediation.

While a reduction in insolvency-related litigation activity is normal in prosperous times, it seems probable that there will be a significant tailing-off of this type of litigation in the foreseeable future.

Recourse to international arbitration appears likely to continue, albeit predominantly in particular sectors – as Mark Twain might say, “rumours of international litigation’s demise in favour of international arbitration appear greatly exaggerated.”

 What then is the role of the leading litigation practice?

Key litigation counsel will increasingly be called on to respond to three key client concerns. Just as educators once spoke about promoting the “three Rs”, there are three Rs for clients and their litigation advisers – namely Risk, Regulation and Reputation. The lessons of the global crisis have underscored the importance and interrelationship of these three concerns for business and the lawyers’ role in helping clients address them.

For example, it appears that even if their level of activity diminished, there will still be much greater activity on the part of regulators around the world. They will be more willing to investigate, have more resources to do so and will be more rigorous in their enforcement, more ready to take action and they will impose greater penalties. Accordingly, businesses will continue to face a significantly increased financial and reputational exposure if they fail to meet applicable regulatory requirements. That fact, coupled with experience of recent events, should encourage businesses to remain more focused on commercial, legal and regulatory risk than they were before the global financial crisis. It will also require (in-house and external) counsel to play a more central role in helping corporations identify and manage the legal and other risks inherent in business models, structures, transactions. The lawyers’ role in such circumstances is a sophisticated one, helping the client to carry on business effectively while meeting its legal obligations – ensuring an appropriate balance between legal, commercial, regulatory and reputational concerns.

In the light of the lessons of 2008, businesses may be expected to adopt a more rigorous approach to corporate governance business risk, including legal risk. The lawyer serving such businesses will play a key role in helping them meet their legal and regulatory obligations and minimise their legal exposure. The contribution of a litigator is likely to extend far beyond prosecuting or defending claims in court – the strategic litigator will give greater value by helping the client understand manage and control legal and commercial risk. At the same time, litigators will need to guide clients through the regulatory minefield – helping them achieve their business objectives while complying with regulatory obligations and avoiding business-critical financial and reputational regulatory hazards.

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