Thriving in adversity

With clashes predicted relating to the Lisbon Treaty, heightened regulation and banks calling in debt, litigators will be rolling up their sleeves in 2012

Ben Knowles
Ben Knowles

What are the implications for UK companies of David Cameron’s veto of the Lisbon Treaty revisions? Could this give rise to litigation?

Nicola Williams, partner, Eversheds: Yes, this is ultimately likely to give rise to litigation. The UK’s ­refusal to agree the proposal made by France and Germany at the crisis meeting of the European Council in Brussels on 9 December 2011 made clear that there would be no ­engagement with any revision of the Lisbon Treaty at the expense of UK economic sovereignty.

The failure to reach a consensus among all 27 EU states is likely to mean greater division between the 17 member states within the eurozone and the 10, including the UK, that sit outside.

The real challenge will come, ­however, in the event that one or more states are forced to leave the ­eurozone, or choose to do so. In ­addition to the likely political and economic fallout that would result from this, considerable attention is already being paid to the effects of one or more member states’ withdrawal from the eurozone on cross-border contracts, particularly supply contracts for manufacturing industries, as well as financial instruments such as derivative contracts.

Lawson Caisley, partner, Hogan Lovells: In the absence of any detail on how the other nations might enter an agreement excluding the UK in order to push through their proposals to save the euro, it is impossible to predict the implications.

However, if such an agreement is concluded there are likely to be some difficult areas that could give rise to significant disputes and potential ­litigation between the UK and the rest of Europe.

One particular area of concern will be how the implementation and ­administration of proposals under any such agreement will be funded and the role of the European institutions in this process, as the UK will not want to pay for, or be subject to, measures it has not signed up for.

Further down the line there may also be the creation of a eurozone (or eurozone-plus) bloc that starts making policy and regulations on its own, and that could have an impact on member states, such as the UK, that are outside the bloc. The resultant trade inequalities and potential ­internal market barriers may well lead to litigation by UK companies.

Ben Knowles, partner, Clyde & Co: It is still too early to ascertain what litigation might arise from the veto. However, indirectly, there is an area of concern on which we have been contacted by clients: what would happen to contracts if a particular country leaves the euro?

For example, if a client has a contract with a Greek company, priced in euros, what happens if that country leaves the euro? Does the contract have to be performed in euros or a new Greek currency? Is there an ­excuse not to perform? What if the new currency is massively devalued?

Will Robinson, partner, Freshfields Bruckhaus Deringer: The impact of the veto lies in the broader issues of the economics and ­governance of the euro and the ­politics of decision-making within EU institutions.

The draft treaty may give rise to ­litigation. Legal challenges could be brought at the national level in ­acceding states to its ratification and to the constitutional amendments it requires to cement the so-called ’balanced budget rule’ into national law.

Also, the European Court of Justice (ECJ) has been given jurisdiction to hear inter-state disputes on one ­aspect of the treaty. While inter-state disputes are highly unusual in the EU system, the wording of the draft treaty may encourage new cases.

Most significantly for UK businesses, the veto of the treaty is logically ­separate from any proposal for a ­financial transaction tax, or ’Tobin’ tax, in the EU.

Do you expect the Optional Common European Sales Law (CESL) for a unified European contract law to be enforceable across the EU?

Williams: Yes, in the event it is ever brought into force. The proposed CESL is intended to be a self-­standing set of contract law rules applying across the EU member states, including rules for the protection of consumers.

One of the proposed benefits would be the reduction of transaction costs arising from differing ­national laws on contract issues, thereby removing a barrier to the free market between member states. Neither businesses nor consumers would be obliged to use the proposed CESL, however, since under the proposals a seller could offer a contract under this law or under existing ­national contract law.

On 8 December 2011 the House of Commons notified the Council of the EU that it considered that the ­proposed CESL failed the principle of non-subsidiarity under the EU Treaty. The House of Commons ­committee has concluded that the proposed sales law would not necessarily be more effective than national laws, and that in fact it might ­increase rather than decrease the complexity of the legal position in ­relation to sales contracts.

The number of exceptions in the proposed law, combined with the fact that it is optional and unlikely to be interpreted uniformly throughout member states, does suggest that this would add significantly to the complexity.

Caisley: When it is introduced the CESL will be enforceable throughout the EU, just like any national law ­chosen by parties to govern their ­contract. The main difference is that the CESL, like the Vienna Convention on the international sale of goods, has a limited scope, so parties would be well-advised to choose a background law as well to cater for legal issues not covered by the CESL – for example capacity and illegality.

Whether parties will want to choose the CESL is another matter, though. It may prove popular with small and medium-sized enterprises, particularly if the UK allows it to be chosen for domestic contracts as well as cross-border ones. However, ­consumer groups throughout the EU have generally been unenthusiastic about the new law and many English lawyers will be put off by its lack of transparency and alien legal ­concepts. So it is too early to say what effect the CESL will have in practice.

Tim House, global head of litigation, Allen & Overy: The prospects for the CESL in 2012 are unclear. The European Commission and Parliament remain very much in favour of the initiative. Viviane Reding, vice-president of the Commission, has vigorously championed the project.

At member state level the position is mixed. The UK has made clear its opposition and in December the House of Commons issued a ­reasoned opinion challenging the proposal on the grounds that it does not comply with EU principles of subsidiarity and proportionality. The influential German Bundestag has done the same. There are also ­questions about the legal basis on which the Commission has made the proposal.

John Milligan, partner, Clyde & Co: As things stand, we would not. The Commission issued a proposal for a regulation in October 2011. It is not certain how discussions will ­conclude, but at the moment an optional instrument seems most likely. If this is how matters finish, this would not result in a unified European ­contract enforceable across the EU.

Andrew Austin, partner, Freshfields Bruckhaus Deringer: If it is adopted, yes. The CESL is set out in a regulation that will automatically form part of each member state’s laws. So if parties choose the CESL to govern a cross-border contract they can enforce breaches in their ­national courts as they would any other ­agreement. It is just that the court will need to apply the CESL rather than ­either party’s national law.

The bigger question is whether anyone will choose to use it. There is a lack of legal certainty around some of its key concepts and it will take years of references by national courts to the ECJ to sort that out.

Also, some of its provisions, such as those on the rejection of faulty goods, are skewed in favour of consumers, which may deter business-to-consumer traders from signing up – unless the EU decides in future to make it mandatory, of course.

What are the challenges facing the European Court of Justice in 2012?

Williams: The main challenge ­facing the ECJ in 2012 is the pressure of work due to the expansion of its ­jurisdiction with the coming into force of the Lisbon Treaty and the ­increase in membership to 27 states within the EU.

A House of Lords report in 2011 found that there was a crisis in the ECJ’s workload that could only be ­addressed with the appointment of further judges and advocates general.

In addition, there has been ­discussion about the potential for the ECJ to fulfil a role in policing state budgets within the eurozone. Disputes concerning compliance with state budget requirements and other objectives could already be considered by the ECJ if the parties agreed to this.

Caisley: The biggest challenge for the ECJ will be to cope with the ever-expanding workload of the three ­jurisdictions – the Court of Justice ­itself, the General Court and the Civil Service Tribunal – while ensuring high quality and the delivery of ­substantive justice to those affected by EU law.

The principal backlogs are in the General Court, which deals with ­actions against the Commission and other EU institutions. Competition cases are on average taking just under four years, which is a long time.

House: Commercial parties and practitioners remain concerned about the speed at which litigation progresses. In particular, the time it takes for proceedings to be determined by the General Court needs to be addressed. It takes far longer than the ECJ does to determine cases.

As for the ECJ, we anticipate a ­significant increase in the number of preliminary references under the emergency procedure that was put in place two and a half years ago. Given the circumstances in which emergency relief is sought, the timely ­resolution of these references will be key.

There has also been criticism of the General Court about the perceived harshness of certain judgments
in ­relation to the 2006 fining ­guidelines. The court will need to consider whether the fines imp-osed under these guidelines meet the principle of proportionality.

Milligan: The first is getting to grips with new areas of law brought within the court’s jurisdiction by the Lisbon Treaty: justice and home affairs; the Charter of Fundamental Rights; the accession of the EU to the ECHR ­[European Convention on Human Rights] and increases in the courts’ caseload caused by these; and of course, the increased size of the EU.

The second is cutting the waiting time for competition and state aid cases in the General Court, which has been caused by the increasing workload and ever-growing delays.

Robinson: Both the ECJ and the General Court have had more cases lodged with them in the past year than ever before: 682 cases in the ECJ and 660 cases in the General Court. The courts are at the mercy of litigants, as they have no meaningful docket control and the trend is in one direction.

It is essential for the consistency of EU law and trust in the legal system that judgments are not only delivered within a reasonable time, but also that they command the intellectual respect of their users. A fundamental, albeit timeless, challenge is how to increase productivity and quality. The recent work product indicates that the emphasis has perhaps been weighted excessively towards speed.

How can these challenges be resolved?

Caisley: There is an intense debate over whether problems of delay are best solved by removing actions against the EU trademark office from the General Court and creating a new specialised court to deal with them, or whether it is best simply to ­increase the number of judges in the General Court.

The preference of the ECJ is the ­latter, and it is likely that member states will agree to this in 2012. Of course, it will take some time before those new judges will be able to eat away at the backlog.

House: Improved lead times for the determination of cases. There have also been continuing (and compelling) calls from practitioners for a specialist commercial bench to be formed at the ECJ.

Milligan: The Commission has ­suggested increasing the number of judges in the General Court to 39, having proposed the appointment of a further 12 judges, as well as for the creation of at least two specialised chambers, including one for competition cases.

A controversial issue will be the ­nationality of judges and reconciling the conflicting demands of having equal representation of member states with having the judges who are of the highest quality. The latter would surely be preferable.

Without naming names, we have had the occasional bad experience with judges from recently joined member states. This will be ­addressed, and hopefully resolved, this year.

Robinson: Reform of the ECJ has been discussed, almost continuously, for more than 10 years. While a case can be made for specialist courts – notably for trademark and competition cases – the political will does not appear to exist at present.
The House of Lords has instead recommended increasing the ­number of judges and advocates ­general. This would do the minimum by ­increasing the courts’ capacity.

If combined with the creation of specialist chambers within the ­General Court, progress could ­effectively be made towards greater speed and quality.

What trends in litigation do you anticipate in 2012?

Williams: We have generally ­witnessed a significant upturn in ­litigation advice since the start of the recession, with many businesses looking for a quick fix to disputes where the solvency of the counterparty may be in doubt, or the ­commercial priorities mean there is an unwillingness to be distracted by litigation. The renewed focus on managing the costs of litigation as a result of Lord Jackson’s recommendations on costs will mean a continuing focus on alternative dispute resolution, while the proposed reforms to conditional fee arrangements mean that greater financial risk will now sit with the successful claimant, restoring some of the balance of the risk of litigation for defendants.

Regulatory disputes and public law litigation seem likely to continue to increase in 2012, despite the avowed focus of several regulatory bodies on a ’risk-based’ approach to regulation.

Caisley: Clearly, if a ’super-­catastrophe’, such as the collapse of the euro, comes to pass it will give rise to a rush of urgent litigation, particularly applications for injunctions and declarations as to the legal position under all sorts of contracts.

Leaving that possibility aside, I would not expect to see a massive rise in the amount of litigation next year, although I would expect the cases that are around to be fought hard. Given the difficult economic circumstances, litigants now tend to think carefully before committing money to potentially expensive litigation, and this should result in fewer speculative claims being commenced.

House: We expect a continuation of many of the trends that characterised 2011 – regulators will become more, not less, interventionist, continuing their aggressive enforcement tactics.

We have seen greater collaboration between regulators at an international level and that will only ­increase over time. And there is a continuing trend for regulators to use criminal prosecution powers rather than civil enforcement measures where possible.

In Europe we expect a continued focus on market abuse and insider dealing. Antitrust enforcement will involve the courts to a greater extent, while anti-corruption investigation and enforcement will continue to be a major theme.

The inability of EU governments to find a lasting solution to the eurozone sovereign debt crisis heightens the risk of a disorderly exit by one or more members of the eurozone. Should that happen it will bring with it difficult issues relating to the ­impact of redenomination, exchange controls and emergency domestic or EU legislation. It is impossible to ­predict at the moment the extent to which that will result in widespread litigation.

As far as the banks are concerned, regulators in the EU and elsewhere are requiring detailed scenario planning, but a disorderly exit obviously entails a heightened risk of bank ­failure and a repeat of the complex close-out issues seen previously with Lehman Brothers and the Icelandic banks, among others.

We will see more disputes arising from increased activity in high-growth economies such as China, India or Latin America. In particular, Chinese banks that have become more active internationally and Chinese companies that have listed on US markets will become embroiled in more US litigation.

Arbitration will continue to be a popular means of dispute resolution, with the financial sector in particular increasingly choosing to arbitrate rather than litigate in some parts of the world. Given the growth of ­arbitration, we will see a steady stream of arbitration-related appeals being brought in the Commercial Court in London.

Knowles: Since the start of the credit crisis there has perhaps not been as much growth in litigation as might have been expected. This might be because the banks have been in crisis and have been inclined to prop up ailing companies rather than take bad debts on their books.

Now that many bad loans have been written down, we expect that there will be a litigation surge as the banks decline to prop up ailing ­companies any further, leading to company collapses and the litigation that inevitably ensues.

Robinson: Litigation trends in 2012 before the ECJ will reflect regulatory trends in the EU – broader and deeper.

Although the number of competition decisions was down in 2011, and so will result in fewer competition appeals in 2012, the EU continues to regulate economic activity more broadly and deeply, giving rise to ever more issues.

Also, we will see new subject matters and new parties/referring courts. The EU’s competencies – and the ­jurisdiction of the ECJ – have been enlarged under the Lisbon Treaty and these areas will generate cases in often novel areas for the ECJ.

Finally, there will be new challenges. The ECJ will face a number of important challenges in 2012 that may give rise to new or more intense lines of cases. The EU is likely to ­adhere to the ECHR, the scope of the standing rules on individual actions against regulatory acts will be worked out and EU law issues ­relating to the eurozone crisis may ­arrive urgently at the ECJ.

Shaking all over

The crisis in the eurozone, coupled with the ongoing focus on regulation around the world, is likely to lead to more litigation. However, uncertainty abounds, with much yet to be decided by regulators and governments in the coming months and years.