As Legal Business publishes its second annual Disputes Yearbook, Cornerstone Research scopes the views of in-house counsel and private practitioners to shine a light on trends within the international disputes market
At Legal Business’s first International Arbitration Summit held in London this September, esteemed practitioner Sir Frank Berman KCMG QC spoke about investor-state arbitration increasingly moving into public consciousness.
Full survey results (download as .xlsx)
He said: ‘When I started out, investor-state arbitration was crawling into existence – but what led me for the first time in the direction of international arbitration was my role as legal adviser to the Foreign & Commonwealth Office during the 90s. The most distinct change in this area without a doubt is the emergence of investor-state arbitration, the ability of a private investor to bring an action as of right against a state. It’s a massive change in the international disputes system and has produced not just changes in attitude but structural change in the way you put together tribunals.’
His words signal the changing landscape of the dispute resolution market, and the widening availability of alternative mechanisms for resolving conflict. It constitutes one of a myriad of changes to take place in the sector in recent decades.
As respondent opinion within this report will demonstrate, arbitration is becoming an increasingly popular mechanism for dispute resolution while a post-crisis market has also seen increasing levels of internationally focused litigation. Another notable trend in the sector is the widening influence of the in-house community, which clearly believes there will always be room within budgets for contentious work that requires greater resource and top-level expertise, despite the overall priority to demonstrate prudence. As such, the cost and resource burden faced by in-house teams inevitably means opportunities for law firms and alternative service providers will become increasingly coveted. On these issues, and a host of other metrics, this report will provide statistical scope on private practice and in-house opinion on current and future trends in the dispute resolution sector, looking at challenges faced by both and trends to watch for the future.
The Consumer Rights Act
The Consumer Rights Act, which comes into force in the UK in October, introduces an opt-out regime, so that claims for redress can be brought on behalf of groups of individuals without the need to identify all the claimants. Cases will be brought in the Competition Appeal Tribunal. The US Chamber of Commerce has lobbied hard to prevent US-style class actions being brought in the UK courts as litigation funding expands to promote consumer rights.
Cornerstone Research has worked on several antitrust class actions across regions, involving allegations of demand and price inflation that plaintiffs have argued caused class-wide impact, even for consumers who were not exposed to or influenced by the challenged conduct. Jamie Meehan, Senior Vice President of the London office of Cornerstone Research, believes that we could see similar arguments being put forward by claimants under the new opt-out regime in the UK.
‘Class certification in these cases frequently turns on the particulars of the challenged conduct, the overall structure of the industry and the market, and the individual transactions. The overarching question is whether common evidence should be used to prove that the challenged conduct shifted demand and, if so, whether such a demand shift caused all the prices paid by the proposed class members to increase. This survey shows that there is a low awareness of the new opt-out regime in the UK and respondents believe that it will have little impact on them. We expect in-house counsel and their advisers may well have to grapple with similar arguments we see being advanced in US antitrust cases under the new Consumer Rights Act.’
Robert Bell, head of the EU Competition team at Bryan Cave, goes further: ‘The new provisions in the Consumer Rights Act 2015 which promote collective proceedings on behalf of claimants are likely to have a significant effect on the UK litigation landscape. Cases brought under these rules could give rise to substantial damages awards, the levels of which have not hitherto been seen in this country for breach of competition law. Companies ignore these reforms at their peril.’
Into the spotlight
Arbitration has come under the spotlight as a means to resolve international commercial disputes, with increasing support of arbitration by courts in most states and investment in private practice. One of its major benefits is confidentiality, making it popular with parties keen to shield their actions from international scrutiny. Our statistics state that 46% of in-house respondents have used arbitration in the last two years. Notably, a good proportion of private practitioner respondents (58%) expect to be more engaged in settling disputes through arbitration over the next two years. Nearly 70% of in-house, however, believe that the proportion of commercial disputes settled by arbitration in the next two years will remain the same, which perhaps alludes to oft-cited concerns by the profession over costs and delays in proceedings.
The global financial crisis of 2008 generated disputes predominantly in the field of financial, securities and insolvency litigation. In our report, litigation was the most widely cited mechanism used as a form of dispute resolution among in-house, according to 90% of respondents. For 47% of private practice respondents, the main advantage of litigation is that it offers a ‘clear solution to the dispute’ and 17% responded that the mechanism is particularly well suited to the type of dispute faced by the client. Other factors included litigation being ‘more cost effective than alternatives’ and being particularly ‘well suited to the industry’ (9%) the client operates in. Despite recent gloomy market conditions, around 40% of in-house respondents say they will ‘always’ seek the expertise of outside counsel, experts, or other specialist assistance, while 36% say they will do this ‘often’ and 23% ‘occasionally’.
In an increasingly robust regulatory environment and clients anticipating greater risk in their commercial disputes portfolios, having specialised experience and a star reputation in the disputes market will continue to be crucial components to retaining coveted mandates. Ronnie Barnes, Principal in the London office of Cornerstone Research, says: ‘In both the areas of cross border litigation and international arbitration, the demand for expert assessments of financial, economic and business matters have become increasingly important. In the case of international arbitration, for example, we are increasingly dealing with issues around quantum by carefully analysing whether market distortions in input and output prices, interest rates or exchange rates are appropriately reflected in damages calculations.’
Signature Litigation founding partner Graham Huntley adds: ‘It’s no surprise that there is a lot of growth in high-end work in the global and niche firms. The trend will continue with increasing regulation and investigative work, while the niche market grows its focussed offering. Whatever happens, clients will always want a “special commitment” from their litigators.’
Hogan Lovells’ head of litigation and arbitration Michael Davison says litigation has become ‘a critical tool in the armoury of business’. He adds: ‘How companies deploy that armoury is changing incredibly quickly. Clients rightly expect their lawyers to operate round the clock, in every jurisdiction knowing exactly what is happening on the ground, taking advantage both of cutting edge technology and innovative project management. There has never been a more exciting and challenging time to be a litigator.’
Signalling the evolving strategy of law firms to capture a share of the growing market in cross-border disputes and provide that ‘special commitment’ Huntley refers to, our research showed that firms now handle commercial disputes throughout domestic and international markets quite evenly, with 55% and 45% respectively. Further, 90% of respondents said their commercial disputes work has become more international, while 63% referenced Europe as the region where the firm handled the greatest number of disputes over the last two years.
Against a positive sway towards litigation, another notable trend from in-house respondents is the general reluctance to initiate a dispute in the first place. Nearly two thirds (59%) listed the time taken to resolve proceedings as an affecting factor, and more than half (55%) cited risk of reputational damage. Many in-house respondents will also consider managing a problem internally before proceeding to litigation, with 76% viewing direct negotiation between management teams as their second preference. This preference for direct negotiation between management teams is understandable; 65% of in-house respondents stated they do not have a dedicated disputes department.
Should they proceed, more than two thirds of general counsel (74%) view past experience of working in similar matters as the most important metric for choosing outside counsel, while other factors include: expertise (58%); reputation in handling contested matters (53%); the ability to help manage the dispute process (35%); a recommendation from a third party (21%); involvement of the firm; lawyer or expert in drafting the original commercial contract (19%); and directory rankings (12%).
Delving into the thinking behind in-house counsel decisions to delegate the work, the most common reason for clients to use external counsel for proceedings is to recover financial loss (61%), while protecting the organisation’s reputation and its revenue streams took an even vote with 18% respectively. No respondents cited opportunity for financial gain. The statistics largely match the view of private practitioners, of which 81% said the cost involved is the most common reason for clients’ reluctance to initiate proceedings, correlating with the in-house respondents’ vote at 76%.
An example of cost control taking priority for general counsel in recent months has been witnessed in the financial industry, with the Royal Bank of Scotland this summer demanding that law firms freeze their fees as it undertakes a review of its near 60-strong legal panel. The bank is currently embroiled in a highly complex dispute following its £20bn government bailout in 2008, as investors seek to recoup their losses following its nationalisation.
Looking ahead to potential commercial disputes in the next two years (valued at over £5m), respondents in private practice cited breach of contract as the most likely reason a conflict will arise (89%) while shareholder action (59%) and issues relating to M&A, intellectual property and antitrust/competition law each stood at 38%.
More than half of private practitioners (56%) also anticipate greater activism from company shareholders and 61% believe that, compared to the present time, the number of regulatory proceedings against clients will increase in the next two years. Weil, Gotshal & Manges London disputes head Juliet Blanch says: ‘As corporates wrestle with reforming their approach to anti-bribery and other regulatory and compliance issues, whether as a result of self-directed internal, or regulator directed investigations, the knock-on effects are being felt in the disputes market. The widespread reviews taking place of historic transactions and relationships in this context are providing fertile ground for litigators in advising corporates as to how best to resolve situations that have been tainted with wrongdoing and forward-looking advice on how new agreements might be negotiated to protect clients.’
Of the in-house respondents, opinion is generally divided over whether counsel expect to be involved in commercial disputes, with 46% believing they will be involved in a similar number of large commercial disputes while 41% believe they will be involved in fewer.
Other predictions include growing disaggregation in legal services and a rising pressure on law firms to bifurcate business lines and price, with 53% of private practice respondents ‘often’ and 43% ‘occasionally’ engaging with outside experts or other specialist services to assist in handling a dispute. The most cited reasons sourcing outside assistance valuation metrics (47%); data collection (41%); sourcing and preparing experts (34%); discovery review (29%); and research and analysis (28%).
Nearly half (45%) of in-house counsel further predicted that there will be more risk in their commercial disputes portfolio in the next two years. In terms of the measures used to mitigate against the risk of bribery and corruption, 81% of in-house respondents cite an ‘internal audit of company practices’, while 53% use ‘anti-corruption and anti-bribery tool kits’, 50% ‘appoint specialist anti-corruption officials’, a further 47% cited ‘facilitating whistle-blowers though mechanisms including confidential hotlines and e-mail boxes’ and 38% ‘conduct compliance stress tests’.
Covington & Burling partner Jeremy Wilson says in-house counsel are becoming increasingly sophisticated at managing the operational and logistical issues behind complex international litigation and arbitration. ‘They understand their needs and requirements and are more discerning as purchasers of legal services today than ten years ago. As a result, the relationship between in-house and outside counsel is much more collaborative and integrated. While this can enable law firms to provide a more effective service, the challenge is to continue to meet growing client demands on increasingly tight legal budgets. To accomplish this, in-house and outside counsel must be creative in allocating risk and reward, and this often means a departure from the traditional hourly rate model.’
A changing landscape
One respondent cites changes to the UK’s court system as having a knock-on effect for litigators: ‘The court fee changes will result in significantly less access to local civil courts, so lower value disputes will become more expensive and demand more time to attend courts further away from our offices. Also, the use of eBay law and online hearings would be beneficial, but I do not believe the Ministry of Justice is capable of successfully leading large IT projects of that kind based on experience of the last 15 years.’
UK lawyers specialised in commercial litigation are facing a changing landscape, as the Ministry of Justice’s cost-cutting agenda in relation to court fees has proposed introducing or increasing fees for tribunals, including the property, tax and general regulatory chambers; a general 10% rise to a wide range of fees in civil proceedings including for divorce and possession claims; plus an increase in the maximum fee for money claims from £10,000 to at least £20,000, which will affect claims worth £200,000 or more. Justice Secretary Michael Gove, who said this summer that the current system ‘restricts access to high-quality resolution of disputes by being too complex, too bureaucratic and too slow’, also indicated that the judiciary’s reform programme has already committed to invest in the technology which will underpin it.
Domestic issues aside, litigation is expected to remain the preferred method of dispute resolution. Stewarts Law partner Clive Zietman says the financial crisis of 2008 will continue to bear fruit for litigators based in western economies. ‘Investigations by regulators, criminal authorities and antitrust bodies continue to unearth fertile ground for commercial disputes. The growth of litigation funding and the steady increase in contingent fees has added a new dimension to the process. Although most institutional clients are keen to avoid litigation, in particular trials with wider implications, much of the big ticket litigation often involves a war of attrition with mediation and settlement not occurring at an early stage.’
Respondent data – methodology
Research conducted by Legal Business for this report involved surveying the views of 302 participants via an online questionnaire, of which 64% were private practice (192) and the remaining 36% were in-house counsel (110).
In private practice, 65% of respondents were partners, 16% were associates, and the remaining came under team head (6%), senior partner (4%), managing partner (2%) and chairman (1%). 43% of respondents in-house were general counsel, and 47% were director of legal.
Just over half of respondents from private practice were based in Europe (51%) while 35% were located in the UK and the remaining in the US (8%), Asia (2%) and other locations (4%). Nearly all (91%) of respondents in private practice specialise in dispute resolution and most (92%) act for both claimants and defendants.
In-house had similar geographical results with 51% from Europe and 23% from the UK, with the remaining located in Russia (3%), Asia (2%) and other locations (2%), while respondents’ industry specialisation included financial services (20%), transport (9%), automotive (9%), retail and consumer services (7%), healthcare and construction respectively with 5%, and the remaining included media, entertainment and sport (4%), oil and gas (4%), mining (4%), utilities (4%), leisure and hotels (4%), telecoms (2%), and other (15%).
Nearly 70% of in-house respondents have roughly zero to five disputes ongoing at the present time, while 13% have five to ten, and 5% have ten to 20. The total value of nearly half of disputes for respondents in-house ranges between £5m to £10m, while 8% of disputes range between £10m to £50m and 5% between £50m to £100m and £100m to £250m respectively. The survey showed 8% of disputes for respondents stood at over £1bn.
Notably, when private practice respondents were asked about whether new specialist dispute resolution forums such as the Panel of Recognised International Market Experts in Finance (PRIME) or the Singapore International Commercial Court (SICC) will become more popular choices for those involved in a dispute in the next two years, 58% of respondents said no. What was also noticeable was 70% of respondents had ‘no knowledge’ of such specialist dispute forums. In-house respondents were even less aware of both forums (94%). This is all the more surprising as 90% of private practice respondents had at least some focus on arbitration.
It is arguable that two years is not much time to market alternative forums to a profession that holds old established venues like London, New York and Paris in traditionally high regard. But as Jayne Bentham, a partner at Simmons & Simmons, says: ‘It’s certainly the case that the local and regional institutions in Africa are struggling to break through into the international market. It takes time for new arbitral institutions, whether it’s an organisation such as PRIME Finance in The Hague or less well-developed jurisdictions in Africa, to filter through new cases. I am confident, however, that the use of local/regional institutions will grow. But time alone will not produce a change of this nature – it is up to the profession to lobby this cause.’
In any event, a greater proportion of private practice respondents (62%) believe Europe will handle the greatest number of disputes over the next two years, with the UK coming second (27%), the US and Canada in third (6%) and Asia-Pacific last (5%).
Where our research showed that breach of contract is the most likely cause of a dispute, current low interest rates will stoke further conflict amongst parties, particularly in the financial services industry, as financial institutions seek to remove themselves from undesirable terms in contracts drafted prior to the 2008 crisis. Major high-profile disputes involving lenders and ongoing regulatory investigations will inevitably generate interest from potential groups of claimants, of which we are already seeing a US-style ‘class-action’ environment in the UK from the RBS and Lloyds Banking Group litigations.
Arbitration is easily predicted to continue to see an uptick in popularity as cross-border investment returns to pre-crisis levels and the political climate in relation to investment treaty arbitration becomes more nuanced, particularly in developing economies, which will further draw parties to consider handling conflict outside the traditional domains of Western Europe and the US.
With such favourable market conditions those lawyers specialising in commercial dispute resolution should expect the various strands of the market to remain in rude health for the foreseeable future.
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