Financial disputes are starting to dominate the English courts as the long-awaited fallout from the downturn finally comes to town
Q: Has the post-credit crunch financial litigation boom arrived in London?
Simon Hart, partner, RPC: Yes. It’s not been the tsunami that was predicted in 2008, perhaps because the recession has been more protracted than expected, with the litigating of financial disputes spread out over a number of years. However, there’s no doubt the number of disputes has been building quickly in the past two to three years. We expect that to continue.
The nature of disputes has changed between 2008 and 2013. In the immediate aftermath of the Lehman collapse there were many disputes concerning complex financial products engineered in the boom years. Now we see disputes being caused simply by the lack of liquidity in the financial markets.
The investment banks’ lack of appetite for refinancing maturing facilities is giving rise to a number of disputes, often in the context of restructurings. Client attitudes to the investment banking sector have changed and hardened. More clients are willing to – or have to – fight.
The exception is litigation arising out of insolvencies. There have simply not been as many insolvencies as in previous recessions. One need look no further than recent commentary about the prevalence of zombie companies for the explanation. If the investment banks are forced to face up to unrecognised losses, we expect more litigation in this field.
Tim Strong, partner, Taylor Wessing: It’s true to say the credit crunch has led to an increase in financial litigation in London that would not otherwise have occurred – for example, the Italian and Norwegian swaps cases, the litigation arising out of the Lehman collapse and a whole series of cases about how to divide up the spoils of funds and repay noteholders once default or insolvency has occurred.
However, the credit crunch has not led to the wave of financial litigation many predicted. A lot of advice has been sought about crunch-related issues, but this has not resulted in litigation. Also, one of the biggest categories of these cases involves swaps mis-selling to small and medium-sized enterprises that lost out when interest rates collapsed. Most of those will be either caught by the FSA’s redress scheme or be before courts outside London.
The crunch appears to have produced much more litigation in the US. Part of the reason for this is their class action regime and because they have additional and more aggressive regulators and enforcement authorities.
Matthew Allen, London head of financial services disputes, Eversheds: Back in 2008 many commentators were predicting a storm of credit crunch-related work. This has indeed started to arrive, albeit not in the form many first thought. Yes, there has been a recent uptick in crunch-related litigation, but the vast majority of such disputes are resolved behind closed doors. This typically takes the form of positioning for the purposes of leveraging advantage in a restructuring or close-out scenarios under ISDAs.
There has also been a notable rise in ad hoc arbitration in the sector. However, the real action in crunch-related work has been, and will continue to be, in regulatory investigations. Regulators are acting sooner and more aggressively, and are more interventionist than before. This new norm has created huge opportunities for financial services disputes lawyers and will continue to do so.
Q: To what extent is it, or should it be, the policy of the English courts to support financial market stability?
Hart: The courts have a history of supporting commerce and ensuring a level playing field for business. There’s nothing wrong with that principle and the stability it brings, whether in the financial services industry or any other sector is valuable. So, to some extent, policy considerations have been in play for many years.
However, if judicial decisions are to be made with a view to supporting market stability, the courts need to consider what caused the instability of the crunch and earlier crises and what will stop it arising again. If the courts’ decisions allow to go unpunished behaviours that posed the challenge to stability in the first place, we need to stop and pause.
It can’t be right if, in accordance with a perception of maintaining financial market stability, the courts hand down an ever-lengthening list of judgments that favour the investment banking sector to save it from its own excesses. That’s not going to maintain stability. In fact, it’s sowing the seeds of the next crisis. Market stability is much more likely if there is confidence that investment banks will be held liable for their excesses.
It’s worth noting that England is increasingly seen as a bank-friendly jurisdiction for disputes, which has allowed the approach to investment banking that played a large part in causing the crisis to go unpunished. In the longer term, this perception, whether right or wrong, could pose a threat to London’s reputation as a fair place for dispute resolution in the financial sector.
Strong: There’s certainly a perception, reinforced by a number of cases in the past few years, for example Springwell Navigation Corporation v JP Morgan Chase Bank & Ors (2010), that English law is bank-friendly. However, those cases are in reality no more than a reflection of the documentation that was in place for the deals in question, which led to clear allocation of risk between the parties. They do not in my view reflect a policy on the part of the courts to hand down decisions that assist in achieving banking stability.
Although there are not many examples, the English courts have shown themselves willing to cut across established market practice when they feel that is what the law requires. An example of this can be seen with the Assénagon Asset Management v Irish Bank Resolution Corp case on ‘cramming down’ minority bondholders from last summer, but still subject to appeal.
There’s also the FSA/PPI decision, which many in the financial world believe failed to reflect the realities of market practice at the relevant time. The court gave short shrift to that argument and the financial consequence for the banks have been in the billions.
Allen: The English courts have an important role to play in ensuring financial stability. However, this is not through the exercise of policy as such, but in continuing to adhere to the principles established in more than 200 years of mercantile practice whereby parties are held to their commercial bargain.
The central tenets of English court practice – certainty of contract and a fair, cards-on-the-table hearing – can and should continue to give the financial community confidence to transact their way out of the present gloom. While light-touch English financial services regulation was never a great international export, English law has been, and will remain so.
Q: To what extent should the courts be taking this into account, for example, in considering whether to set aside swaps in cases such as Barclays v Guardian Care Homes?
Hart: The refrain from politicians in the past four years has been that investment banks should never again be ‘too big to fail’. Legislation and regulation has been brought forward to try to turn that refrain into reality.
While in theory it should not matter, in practice the prospect of serious collateral damage to Barclays through a wave of subsequent legal proceedings as a consequence of adverse findings on Libor issues in Guardian, and the setting aside of the swaps as a result, will no doubt weigh heavily in the court’s thinking. In practical terms, we think the court will be alive to the potential consequences of setting aside swaps.
If Barclays fails in that case, the prospects for UBS and potentially other investment banks implicated in Libor manipulation would, quite frankly, be grim. It would appear on the regulatory findings to date that UBS’ misdemeanours were far more serious and the financial impact of their Libor manipulation more quantifiable, removing some of the causation problems faced by litigants in potential claims against Barclays.
While we see the huge practical implications of setting aside the swaps, this should make the courts more open to awarding appropriate damages and to resisting the “no loss” arguments the investment banks are all running.
If the courts find in favour of the investment banks or that these are wrongs without quantifiable consequences to keep the legal floodgates closed, such a stance would fly in the face of the ‘too big to fail’ mantra. The courts would find themselves saving the investment banks from their excesses. That is not consistent with the desire to see the investment banks face the consequences of their actions and raises serious risks that the same mistakes will be repeated.
Strong: That case will turn on its own particular facts, but I do not believe that simply because a particular bank engaged in untoward conduct in relation to Libor there’s a claim in respect of every contract with that bank that was linked to Libor. Such an approach clearly would have serious negative consequences for financial markets. English law is much more sophisticated than that in its approach to deciding the extent of contractual and tortious responsibility, and to causation and loss.
At the same time, there’s obviously a much better understanding now than five years ago of the potential impact on the UK of a major banking collapse. Markets, governments and regulators also appreciate that there is some way to go before a global bank could fail ‘safely’.
We perhaps ought to hope that the English courts would have an eye on consequences of this nature when deciding financial cases. The occasions when the courts rely on such policy reasons, however, ought to be rare and involve genuinely catastrophic threats to markets.