Litigation: courting disaster?

old bailey

There is a widespread view that there will be an increase in the number of
commercial disputes in 2009 and beyond. My experience of previous recessions,
from the early 1980s onwards, is that such things become more common during and
after periods of economic malaise and instability.

Legal action may be taken for a variety of reasons including corporate
failure, allegations of breach of contract or professional negligence,
allegations of fraudulent activity, insurance disputes and post-deal warranty
claims. The recession will mean that these types of dispute will occur in
greater numbers.

I expect there to be an increase in the following: actions against companies
in distress or bankruptcy; post-deal warranty and other non-performance claims
which arise as purchasers seek to reclaim monies on investments which have not
reaped the expected rewards; and claims arising as businesses seek to walk away
from onerous contracts.

Given the nature of the problems that have recently manifested themselves
within the banking and finance system, there are also likely to be disputes
relating to losses from investment in complex financial products and
mismanagement of assets.

Whether or not there will be a raft of bank-related litigation is unclear.
Financial institutions may well be hit hard by the increase in litigation
activity, however the impact will be felt across all industry sectors. Of
course, this is not just a UK problem. The recession is worldwide and the global
nature of business means that UK firms may well end up in disputes with entities
situated overseas.

Keeping it confidential

The forum in which a dispute is resolved is often set out in the contract
between the parties. That may be in a court or increasingly, particularly where
parties are based in different countries, by way of arbitration, whereby
national jurisdictions can be avoided.

The contract will typically specify the place (or ‘seat’) of the arbitration
, the law applicable to the arbitration and may specify the body under whose
rules the arbitration will take place. The country of the seat of the
arbitration and the law of the arbitration need not be the same. So the contract
may have the seat of the arbitration as Geneva but be under English law.

Arbitration has the benefit that hearings are held in private and details of
the award by the tribunal are generally confidential.

Each country will have its own court system through which disputes will be
heard, although arbitration tends to operate in a number of particular cities
around the world.

Historically, the main arbitration centres have been London, Paris, Geneva,
Zurich and New York. These cities have suitable facilities as well as lawyers
experienced in such proceedings. Other cities, such as Singapore and Dubai, have
been developing and promoting themselves as suitable for arbitration.

There are alternative resolution processes, for example when the
determination of the dispute is to be effected through the appointment of an
independent expert, for example an independent accountant. It is difficult to
generalise in terms of which forum is cheapest and/or the most expedient.

In my experience, however, while the use of an independent expert is
generally cheaper and less time consuming than resolution through either the
courts or by an arbitrary tribunal, there are limits as to the scope of a
dispute that an independent expert can be expected to determine.

Accordingly, the use of an independent expert may not be an option in
relation to particular types of dispute.

It is common for an independent expert accountant to be appointed to
determine completion accounts disputes in connection with business sales/
purchases, valuation and shareholder disputes.

Parties often seek to settle their disputes through a mediation process
(prior to the court or arbitration hearing) and indeed this process is often
stipulated by a judge in the English courts. Views differ on the merits of
mediation but it is successful in many cases.

Looking for restitution

The key to a successful mediation is that it is conducted at the appropriate
time in the proceedings ­ if it is too early, my experience is that settlement
is less likely to happen.

One of the advantages of a settlement through mediation is that the parties
can include non-financial compensation. For example it could be agreed that one
of the parties be allowed to distribute the other party’s products in particular

There are interesting times ahead for those involved in the business of
commercial dispute resolution, as well as for those who will be parties in those

Nick Andrews, UK Head of dispute advisory services, KPMG

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