Legal Village

Goldsmith on 'credit crunch plus' litigation

Posted 7/10/2008 by Legal Week

Lord Goldsmith, the former Attorney General, was due to deliver the keynote address at last month's Legal Week Litigation Forum in London. In the event, Debevoise & Plimpton's European head of litigation was called away on international business. But he subsequently recorded his reflections on litigation post-credit crunch in Legal Week's Soho recording studios. Here's an edited extract of his speech:

"We already have been living for over a year with the subprime crisis.  This was particularly characterised by the massive write downs by the leading financial institutions.  Yet there was surprisingly little evidence of litigation emerging from these events.  There were some cases of contracts which were affected by the credit crisis where litigation was threatened or talked about – we in my firm indeed were involved with some.  But, despite the anecdotal stories, very little seemed actually to turn into active litigation and certainly not the explosion of litigation some UK practitioners might have envisaged.

"Sure, in addition to the Barclays/Bear Stearns case we have seen a limited number of bank-on-bank disputes and claims brought both by banks against third parties and vice versa, while several judicial review claims have been launched by Northern Rock shareholders regarding the compensation procedure brought into effect when Northern Rock went into public ownership. But these claims have perhaps fallen short of the upsurge of contentious work anticipated by some. This lack of enthusiasm for litigation may be attributable to a desire on the part of most financial institutions to try to manage their issues in the market place rather than in court, and perhaps more than a dose for some of “There but for the Grace of God go I”.

"One aspect of that period which it is worth noting at this point are the dynamics of corporate and litigation practice in this field.  

"The top law firms in the City will always have as part of their thinking their relationship with the major banks which find themselves so embroiled in the current liquidity crisis. A City practice will not want to be blacklisted for transactional work by a bank for taking on a contentious instruction against it, and indeed a number of the banks will have a strict policy of prohibiting law firms on their panel from acting in any litigation against them.

"This results in a very delicate dynamic between a firm’s litigation department and its corporate and banking colleagues, as the top City firms will not want to jeopardise their place on the panel of a bank by adopting what they will see as the short-sighted approach of taking on a litigation matter against that bank.

"There have been some relatively high profile instructions (or, on occasion, declining of instructions) involving some of the top City firms as a consequence. When Clifford Chance last year politely turned down a prospective instruction from British Energy and referred it to Barlow Lyde & Gilbert, it was reported that its decision to decline the instruction was because Credit Suisse, one of Clifford Chance’s most prominent banking clients, was the respondent; in contrast, the legal press reported in June this year that Linklaters had lost its place at the table of preferred advisers for JP Morgan as punishment for its role in suing Bear Stearns (now owned by JP Morgan) on behalf of Barclays Bank.

"While the top end of the City legal market will be particularly sensitive to the various banks on whose panels they sit, that creates opportunities for other firms. Two “types” of firm spring to mind here:
1. US law firms with London bases (which have seen a significant recent push in this country from several prominent US litigation practices) often tend to benefit from having greater freedom in the market, as they are not constrained by being entrenched in relationships with all of the key banks and financial institutions, meaning that they can be less hesitant to take on contentious instructions in the UK against such outfits; and
2. UK firms outside the top tier which are not tied to the banks and which have aligned themselves to see out the credit crunch over the next few years through, amongst other sources of work, a core banking litigation practice.

"So what now? I do not believe that this limited litigation atmosphere is going to survive into the new era.

"First there is an urgency about some of the issues which means that litigation is inevitable.  That is true for example for those cases where assets have been frozen in places such as with Lehman Brothers.  The people who deposited those securities including hedge funds and other fund managers need those assets back as a matter of urgency and will not stop until every litigation angle has been explored.  The first wave of 'credit crisis plus' litigation – as I would term it - is likely to be in this field – indeed it has already started with a first insurance decision by Mr Justice Morgan in one case already delivered.

"Second, there is now too much money at stake for people not to want to recover losses – indeed they need to recover losses. 

"Thirdly, the control of litigation in a number of cases may move to the hands of more professional litigators – where administrators and liquidators are appointed to troubled or bankrupt firms and want to look to maximise recoveries.  This was the pattern with some of recent big ticket UK litigation following for example from the collapse of BCCI.  Shareholders action groups will also be formed – and their principal aim will be to get recoveries from government or culpable parties.  And we are likely too to see vulture funds buying up distressed stock debt and claims with a view to pursuing possible routes of recovery aggressively. 

"So I foresee a storm of litigation, starting with claims to resolve insolvency and bankruptcy issues as people jostle for position in the queue for the assets of the failed entities and moving quite quickly to the search for defendants with insurance or deep pockets able to pick up the loss.

"I expect that the London legal market will be able to cope with the demands of these claims.  I am less sure about the ability of the court system.  If, as I predict, there is this avalanche of litigation the challenge will be to find the judges and the courts to deal with it all, especially in the timescales that may be required. Just to have a court room in which parties in the double figures may be present with their representatives is a great challenge."