Andrew Shaw and Sean Upson, partners, Stewarts Law
Opinion: Litigation is a byproduct of the economic crisis
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This time last year leading economists started voicing their opinions that the worst effects of the 2008 credit crunch were over and that a fragile recovery was beginning to take root. That optimism now seems to have been misplaced.
Not only have we seen further bank bailouts, but fear now stalks the markets about any institution exposed to Greek, Italian or Spanish sovereign debt. The economic gloom is far from over.
But what have the events of 2008 led to in terms of emerging litigation and what is likely to transpire in the near future? Aside from the large pieces of ’super-litigation’, such as those relating to Madoff or Lehman Brothers, a new breed of recession-related disputes has appeared out of the ashes.
First, a growing number of misselling cases has sprung up, such as this month’s $70m (£43.75m) claim in Zaki and Others v Credit Suisse (UK).
Second, litigation has arisen from the forced close out of trading accounts. Marex Financial Ltd v Fluxo-Cane (2010) and the forced closure of sugar options is one example. The downturn threw such trading positions into default and led to their forced closure. Needless to say, disenchantment led to litigation.
Third, many cases have cropped up based on regulatory breaches, especially fallouts involving the suitability of investments for particular clients and compliance by banks with the requisite FSA rules. The Rubenstein v HSBC (2011) decision is a case in point.
Finally, we saw and continue to see a multitude of banks calling in commercial loans to improve their balance sheets and the consequent borrower litigation. Often the banks have taken action on extremely technical grounds as they clamour for cash, leading borrowers to fight back.
So what’s next? Because there is so much economic uncertainty, the only thing that is certain about the legal environment is that nothing is certain. That said, a few trends are becoming clear. There are likely to be more misselling cases, although many will fall by the wayside as we have seen the courts upholding exclusion clauses. It is possible that we will see a shift as claimants focus their attention on government-backed instruments sold as ’safe’ investments.
We are also likely to see more cases arising from forced closures of trading accounts. On 9 October, the Financial Times reported that hedge funds have suffered their worst quarter since October 2008 and one can only imagine that more forced close outs will follow.
There has been much speculation about investor unhappiness regarding the misselling of shares in what are now effectively nationalised banks. Claims are possible under various provisions of the Financial Services and Markets Act 2000, although any action will require both the money and political muscle of weighty institutional investors if such cases are to be advanced in any meaningful way.
Depending on how the ongoing crisis unfolds, we may see more of the Lehman-style litigation. If we see more big corporate failures, bad things will inevitably crawl out from under the rocks as the finances are turned over by liquidators and receivers.
Economic woe will continue to lead to employee dissatisfaction and it is not hard to imagine that disputes about redundancy, unpaid bonuses and the like are more likely than not to proliferate.
What is clear is that economic instability and volatility creates litigation, often in unexpected ways. The curtailing of legal budgets may lead to litigation-avoidance measures and alternative dispute resolution, but in general, especially where disputes are of the ’bet-the-ranch’ kind, the current market conditions are likely to generate more litigation.