Litigation round table

Trends in international commercial litigation were to the fore in the second Legal Business round table in conjunction with McCann FitzGerald. From the globalisation of disputes to rising levels of disclosure and tougher regulators there was plenty on the agenda

There has arguably never been a better time to be a litigator. Although the much-anticipated tsunami of litigation has not hit the market, there has been a discernible rise in disputes, which more often than not require a litigator to keep them out of the courts.

There has been a shift in the role of litigators, which often amounts to less time in court and far more time spent with clients, keeping their spats away from the full glare of a judge. Increased co-operation between regulators and the rise of international disputes more generally, has added layers of complexity, which means that contentious specialists now have more in common with their colleagues in cross-border corporate and banking work.

In the second Legal Business round table in conjunction with leading Irish firm McCann FitzGerald we invited senior litigators from Allen & Overy, Freshfields Bruckhaus Deringer, Herbert Smith, Slaughter and May and Skadden, Arps, Slate, Meagher & Flom to discuss this new dynamic. From McCanns, head of litigation Helen Kilroy was on hand to provide a view of the Irish disputes practice along with John Cronin, a banking specialist, former head of the firm’s London office and, since 2008, the chairman of the firm. As one of the leading Irish practices, McCanns has referral relationships with all the firms sat around the table so has a view of more than just the Dublin market. Talk turned to the globalisation of disputes, finding a solution to the inexorable increase in levels of disclosure, the competing merits of arbitration and litigation, and the trends likely to affect litigation over the next 12 months.

Act local, think global

One of the favoured predictions after the collapse of Lehman Brothers in September 2008 was that the ensuing economic crisis would inevitably create a huge increase in litigation. While surveys have pointed to an increase in litigation (in October a Reynolds Porter Chamberlain survey found that the number of cases reaching the High Court in 2009 increased from just under 43,000 to 49,583) the anticipated tsunami has not hit.

Instead there has been a mixture of event-driven cases from the likes of the Madoff fraud and the Lehman collapse, and then underlying disputes relating to the complex financial products sold during the boom. As Tim House, global head of litigation at Allen & Overy, points out, cases arising out of the latter have been on a slower burn. ‘They are coming through as a strong second wave,’ he adds.

‘Increasingly we see the international aspect not just of commercial, business or banking law but litigation and dispute resolution matters.’
John Cronin, McCann FitzGerald

But beyond their days in court, the litigators at the round table all highlight the changed nature of a lot of their workload, which often remains out of court and is increasingly cross-border. ‘The wave of litigation has not really materialised,’ admits Deborah Finkler, a litigation partner at Slaughters. ‘Instead there’s been a huge increase in the demand for strategic advice, as opposed to pure litigation advice. The big banks do not really want to be sitting in the High Court litigating, they want to be advised on how to resolve disputes and get on with doing business,’ she adds.

To Chris Pugh, Freshfields’ global head of litigation, this changed dynamic is part of the bigger picture of regulatory and litigious threats facing many companies. The tougher financial climate combined with a much more proactive approach taken by regulators around the world, poses a far more complex set of issues for businesses. ‘Litigation, investigations and the control of risk for a client have become much more complicated,’ he comments.

Although Ireland may not see anything like the same level of international disputes as London, the cross-border nature of litigation work has had an impact in the country. ‘Increasingly we see the international aspect not just of commercial, business or banking law but litigation and dispute resolution matters,’ says Cronin. And in Ireland, at least, it has given rise to an increase in cases reaching the courts. ‘The Irish courts and particularly the Commercial Court’s activity levels have hugely increased in the last two years,’ Kilroy highlights. She cites the rise in litigation stemming from the mis-selling of financial products as one reason for the increase. ‘The activity levels have increased in large part due to banks taking necessary steps to secure monetary judgments and gain control of secured assets. The banks though are not getting a lot of value out of the activity because most defendants are not a mark and as yet there’s no market in the assets.’

Regulated industry

One area that everyone around the table was in agreement on was the increased focus of regulators on many clients around the world. ‘The financial regulator in Ireland and regulators worldwide have brought a rigour and discipline that previously was not there, which has meant that they have stood up to directors and banks for better disclosure and risk assessment,’ sums up Cronin. ‘I do think that the litigation fall-out from the financial crisis has elevated further the importance of the risk management side of a litigator’s role,’ House adds. ‘There is already evidence of far more intrusive activity from regulators – disclosure, transparency, avoidance of conflicts of interest are all central themes and will be central to future claims. For some time to come regulators will be eager to demonstrate their zeal and effectiveness, as well as play their cards well politically.’

The interplay between national regulators has been, according to Skadden arbitration partner David Kavanagh, the biggest single change in the world of corporate investigations, meaning that cases are much more multifaceted than a decade ago. ‘When an international client has a problem it is rarely a plain vanilla problem,’ he says. ‘You may have a piece of UK litigation combined with a Foreign and Corrupt Practices Act (FCPA) investigation, which may in turn give rise to problems with a joint venture agreement which is likely to have an international arbitration provision. The problem may have significant political ramifications, which may lead to a US congressional or UK parliamentary investigation.’

‘There are quite a few users of international arbitration who are starting to think of the Commercial Court as an alternative.’
Ted Greeno, Herbert Smith

That means firms have to effectively establish small crisis management teams to advise on each aspect of a case. ‘As you saw recently with Goldman Sachs, one of its biggest challenges with the recent Securities and Exchange Commission (SEC) action, was the manner in which the parallel US Congressional investigation came on so quickly. Responding to the Congressional enquiry required the same level of preparation as that needed for a major piece of litigation, but without the luxury of time. The bank needed to work with its American lawyers to develop a complete litigation, media and political strategy. Only a few firms have the resources and experience to do this.’

‘The speed with which you need to respond to a situation is phenomenal,’ Pugh adds. ‘Whether it is an incident with an aircraft engine, an oil spill in the Gulf of Mexico or a banking failure, the risks to a business if it is not able to react quickly, in terms of reputation and liquidity, are much more severe in a global market.’

In the UK the Serious Fraud Office is viewed as trying to ape the aggressive style of the Department of Justice and other US regulators. What the UK body doesn’t have, however, is the same level of resources to back its cases. ‘You have a huge tension between the speed at which things are moving in the States in particular and the pace at which the regulators are constrained – by lack of similar resources – to act here,’ Finkler asserts.

‘There is a nervous response to the present market changes from the authorities,’ insists Pugh. ‘Take the SFO for instance which does not know how far it can go in practice without judicial reverse. Clients are unsure how far to engage with some regulators in the UK because there is little track record to give comfort and certainty that solutions can be delivered.’

Not surprisingly, Kavanagh points out that as regulators look to the US for a lead, US firms have a distinct advantage. ‘The regulators in Europe do not have a ready-made template to guide them through these issues. The obvious example is what the Department of Justice and SEC in the US have been doing for the past decade.’

See you in court?

Discussion of the regulatory environment then led, somewhat tangentially, into a debate over the competing merits of litigation and arbitration. As the lone arbitrator around the table, Kavanagh summed up some of the trends in the arbitration market. ‘What has happened in arbitration is that the process has become homogenised,’ he claims. ‘If I did a London arbitration ten years ago it would be very different to an ICC Paris arbitration. Now they would be almost identical in terms of procedure. Partly this is because a pool of elite arbitrators has developed and partly because there have been important developments to standardise the approach to evidence, like the IBA rules.’ He added that the shorter timeframe of most arbitration hearings gives it another obvious edge.

It’s something that the litigation world is aware of. ‘I think that the courts are certainly pro-arbitration in terms of supporting the process, but the Commercial Court is alive to the fact that there’s a market out there and it is keen to remain attractive to users from around the world,’ Ted Greeno, a litigation partner at Herbert Smith, explains. ‘There are quite a few users of international arbitration out there who are starting to think about the Commercial Court as an alternative. I think over 70% of the cases at the moment are between parties neither of whom are English. A good number of these cases could otherwise have gone to international arbitration courts.’

‘I am not sure about that,’ Pugh interjects. ‘I still think the extent to which parties can choose between the Commercial Court and international arbitration is often overstated. Most of the time parties choose international arbitration because it is the only realistic means of resolving disputes that is acceptable to international contracting parties. The real change is that the use of arbitration as a recourse has grown as clients’ businesses have become more international.’

‘When you are trying to take an English judgment and try to enforce it outside the EU or European Fair Trade Association then arbitration scores,’ Kavanagh says. ‘Ultimately when people are deciding what to put in their agreements the ease of enforcement is a big driver.’ But it’s not a driver that works in all markets. ‘Financial institutions and some other clients are really worried that there is no sanctity of contract out there at all in a number of emerging markets,’ House remarks. The influence of governments in some of these markets means arbitration is not necessarily the answer.

Telling all

Although she admits that she often steers her clients away from arbitration, one area where Finkler admits it has the edge over traditional litigation is disclosure. ‘I think disclosure is one of the big issues the courts will have to grapple with over the next few years,’ she predicts. ‘Disclosure, as it is done in the High Court, applying a broad interpretation of the standard disclosure test, is untenable.’ With the increased focus on e-disclosure, the level of documentation has increased exponentially.

‘My point is that if you take a six-week trial, if you look at the size of the trial bundle or even the size of the core bundle and compare the number of documents that are really important with the number the parties originally disclosed, there are usually at most 100 documents that were important. Were those documents predictable and would I have known where to find them in my opponent’s disclosure? Yes, I would,’ Finkler maintains.

‘Most of the time parties choose international arbitration because it is the only realistic means of resolving disputes.’
Chris Pugh, Freshfields

But the level of detail that can now be unearthed in the piles of disclosed documents and aired in public can have a significant bearing on a case even if they are not legally relevant. ‘Part of the trouble is, over the past five years there have been some highly publicised successes, in terms of a limited number of e-mails or instant messages retrieved from deep in the depths of a business,’ House comments. ‘Then they are paraded in the press and in the pleading and even though they may be of no or little legal relevance when seen in the context`. Nonetheless they are embarrassing and therefore drive a fantastic settlement for reputational reasons. This can only encourage efforts to expand e-disclosure further and wide, with obvious cost consequences.’

According to Kavanagh arbitration is being affected by the same problem. ‘I have a European arbitration case at the moment where the scope of disclosure is much worse than I would ever get in the High Court,’ he remarks. The most drastic solution of course would be to abandon all disclosure, a scenario that Kavanagh points out works in many European jurisdictions.

However, Greeno insists that disclosure is a crucial part of the litigation process in the UK and the US. ‘You have to go right back to the system we have here and in the US,’ he says. ‘We have an adversarial system, which depends on the evidence being brought out, the cards being on the table and a very rigorous probing of the truth. An essential feature of this is cross-examination and you cannot have effective cross-examination without documentation.’

Greeno continues: ‘The reason we have a high settlement rate in London is because the process is adversarial. This means there is going to be a rigorous inquiry into the facts and the cards have to be brought out on the table in advance. It seems to me that some form of document disclosure is fundamental to the whole process, because you cannot really have cross-examination without it.’

One of the reasons business people prefer to litigate in the UK, Greeno stresses, is the greater predictability in outcome over a civil law jurisdiction.

‘What businessmen are most interested in is certainty,’ Kavanagh counters. ‘Why English law often wins out over other legal systems is because there is a degree of certainty, because we have a system of precedent and a very highly accomplished judiciary, with many years in commercial practice, who decide cases in a predictable way compared to their civil counterparts. That is what drives the advantage of the English system, not the fact that in the English courts we have disclosure and in Europe they do not.’

In an attempt to find a remedy to the mounting levels of disclosure, the Irish courts introduced categorised requests for discovery in 1999, which Kilroy admits have not worked. ‘It has actually added to costs,’ she says, pointing towards the addition of a whole new administrative burden determining which documents belong in a certain category. She also notes that in recognition of the huge costs and management burden entailed in discovery, the Commercial Court has recently adopted a practice of encouraging parties to seek interrogatories where possible in lieu of discovery.

‘The underlying point is that the technology and number of documents that are accessible in the context of a piece of litigation have increased and developed exponentially,’ Pugh summarises. ‘However the procedures that the courts have developed to allow clients to litigate disputes economically have simply not caught up.’

And at the same time the disclosure process is placing a huge strain on firms’ junior lawyers. ‘Associates have a miserable life in the big firms, compared to the life that we had at their stage,’ Finkler sighs. ‘We constantly try to find a way to make their lives better and it’s impossible if we all go along with the trend for massive disclosure exercises.’

Pugh points out that the greater use of technology may be the solution to making the process more efficient. ‘The use of search terms that are properly understood by the parties and the court will actually change this quite quickly,’ he claims.

Kavanagh agrees: ‘Chris is right. The key is to ensure that the electronic search terms are carefully formulated and then applied properly, so that millions of documents can be whittled down to say 20,000 to 30,000 documents. You can then say to the judge, “We now have a manageable number, which is more likely than not to contain the decisive documents. It’s going to take me this long to review them and we will be able to hit the trial date.”’ The increased use of technology is one way of making disclosure more efficient and keeping costs down. Another increasingly popular option, of course, is outsourcing.

‘Everybody has arrangements in place to deal flexibly with what clients request,’ Pugh comments. ‘Some clients request that their document production be done cost effectively in India, others prefer lower cost outsourcing in the UK. We need to be flexible to be able to handle document reviews and other aspects of a case from low-cost locations that suit a client’s wishes.’ Most large firms now have some experience of using an outsourcing provider, be it in Bangalore, Bristol or Belfast, but there were still some concerns from those around the table over the use of outsourcing.

House describes a test that A&O’s litigation group ran whereby they did standard disclosure on a case using a team of trainees and junior associates in London and assessed the result of that against using outsourcing. There was no difference in quality between the two. ‘I do not think outsourcers compromise on quality at all,’ House says. ‘However, I do think there are very tricky questions that are not fully bottomed out everywhere in relation to data protection and preservation of privilege, plus there are security concerns that require proper due diligence.’

Associate benefits

Picking up Finkler’s point about the lot of the modern associate, Pugh provides a different view saying that the increased complexity of cases and the greater international element has made their lives more interesting. ‘In some ways there are greater pressures on people and clients bring bigger burdens to share,’ Cronin agrees. ‘But, intellectually, it is a much more interesting time than perhaps it has been for many years.’

The typical litigator also now has a much wider role to play across departments and sectors as their colleagues turn to them to assess the litigation risks in a transaction. ‘If you are doing panel pitches, for example, the importance of the litigation offering that you have has come up the scale, not least because crisis management is now high up the agenda for corporates,’ Greeno outlines. ‘At the centre of that is having strong litigation support, from whichever firm is on the panel.’

The next step is demanding greater litigation support from firms’ overseas offices and particularly in emerging markets. ‘One interesting trend is the extent to which our litigation practices become embedded in the offices where we give business advice,’ Pugh says. ‘That is a challenge for the US firms because they have grown their international footprint on the basis of corporate and finance practices and do not have litigation practices on the ground.’

‘You have a huge tension between the speed at which things move in the States and the pace at which regulators act here.’
Deborah Finkler, Slaughter and May

Kavanagh agrees that developing on-the-ground litigation capability around the world will become vital over the next five to ten years. ‘Dispute resolution in Asia will pick up very significantly in the next five to ten years and you will need people on the ground,’ he comments.

Clients are demanding stronger litigation expertise but also that those litigators understand the sector a client operates in. ‘There is one constant refrain that seems to bounce back from clients which is that they would really love their lawyers to know their sector in some detail,’ House says.

‘It does depend on the industry,’ Greeno claims. ‘Like Chris, I have done a lot of work in the oil industry, where knowing the way things work, knowing the contracts, their history and how and why they have developed from 30 years ago, lets you add tremendous value for the clients.’

The year to come

In terms of the trends that might hit the litigation market in 2011, the attendees threw up a range of possible talking points. ‘We could be talking about the idea of daily hearing fees, which might be back on the agenda because the government is looking at other ways of making the civil courts self-funding,’ Greeno remarks.

‘Financial institutions and some other clients are really worried that there is no sanctity of contract in a number of emerging markets.’
Tim House, A&O

‘My own view is that the imposition of daily hearing fees would be a huge gift to other dispute resolution centres, and ultimately the loss to the Exchequer through the gradual moving away of cases from London would be much greater than the amount taken in fees,’ he adds. ‘It is a very short-sighted suggestion, but we might have to deal with it again.’

House highlights an element of the US market as a possible growth area. ‘Within Europe there is a move towards collective and class actions, which seems to be gathering pace, not necessarily in the UK but in some other European jurisdictions,’ he comments. ‘The recent trend in the US for the Supreme Court to narrow the long arm of their securities laws could provide further impetus for this.’

Kilroy suggests that this year will reveal a lot about the regulators in both the UK and Ireland. ‘We might by then have seen what the SFO’s and the Office of the Director of Corporate Enforcement’s mettle is like and whether there have actually been any director prosecutions arising from the recent banking sector collapse,’ she proposes. ‘I think it will be an interesting 12 months for us.’ On that point, everyone was able to agree. LB