Nearly two years since the credit crunch began, lawyers are still divided over whether a surge in disputes is coming. But, finds Alex Aldridge, many firms see opportunity

Over the last few months, international law firms have been gearing up for the long-awaited upturn in litigation, with a string of office openings and major hires. With the London Court of International Arbitration (LCIA) gaining in popularity in recent years, it is no surprise that the UK capital has been at the forefront of the action, alongside other major arbitration centres like New York and Paris. There have also been moves to bulk up on dispute resolution expertise in Asia and the Middle East.

The re-positioning got underway last year with the London office launch of California-based litigation boutique Quinn Emanuel Urquhart Oliver & Hedges in May. The practice is led by former Essex Court barrister Sue Prevezer QC, who joined the firm from Bingham McCutchen, alongside commercial litigation partners Richard East and Marc Becker, the latter previously of Munger Tolles & Olson in Los Angeles. Alongside the three partners, the practice contains four associates, with the ultimate goal to reach around 25 fee earners.

Meanwhile, several US firms already present in London have made moves to strengthen their litigation arms. In March this year, Skadden Arps Slate Meagher & Flom brought in arbitration partner David Kavanagh from O'Melveny & Myers. Kavanagh, whose practice centres on advising investment banks and hedge funds as well as energy clients, joins along with a team of three associates, becoming the fourth partner in the firm's London arbitration group.

April saw Milbank Tweed Hadley & McCloy get in on the act, the firm's London office bringing in well regarded litigation partner Julian Stait from DLA Piper. Stait has broad experience of business and regulatory disputes, with a particular focus on communications, technology and outsourcing, as well as finance.

The hires continued into May, with Covington & Burling bolstering its City arm with the recruitment of international arbitration partner Gaetan Verhoosel from Debevoise & Plimpton. Verhoosel specialises in large commercial and investment treaty arbitrations across the oil and gas, energy and infrastructure industries. The move follows Covington's recent hire of former White & Case co-head of international arbitration Stephen Bond.

Elsewhere, US firms King & Spalding and Willkie Farr & Gallagher and Lovells have taken steps to reinforce their international dispute presences in Paris, while Skadden has just launched an Asian international litigation practice in Hong Kong, and is one of a number of US firms to have added litigators to its New York office.

Litigation upturn?

Although a slight increase in contentious work has been noted of late, the sharp upturn in financial services-related disputes predicted by many commentators still has not arrived – with some suggesting that those expecting a litigation boom are set to be disappointed.

"There are credible views that we are about to see something of an upswing in litigation," says Lovells financial disputes partner Graham Huntley, "but not in the volume or character that some are expecting."

Part of the basis of such reasoning is a belief that the wave of bank versus bank cases predicted by many at the onset of the financial crisis will not materialise.

"There are too many structural, cultural and financial reasons why banks do not have the appetite to sue each other," says Huntley. "At the same time, most banks are doing enough work to ensure that they are not desperate enough to resort to something they would be loathe to do." Instead, Huntley predicts a moderate increase in cases involving banks and other parties viewed as responsible for their losses. He believes these will be on the rise from 2010.

Others, however, suggest that there will be a significant upturn in litigation – and that banks will, in fact, not shy away from litigating against each other.

"Sure, we'll see banks suing other banks," says Cravath Swaine & Moore litigation partner John Beerbower. "And do I think the upturn in litigation is likely to be strong? Yes."

Those in the strong upturn camp point to the fact that 2008 already saw proceedings issued in two major credit crunch-related inter-bank disputes – with German Bank HSH Nordbank and Swiss bank UBS initiating claims against each other in March 2008, and Barclays Capital entering into litigation with US investment bank Bear Stearns a few months earlier.

These cases, they suggest, hint at more to come. Indeed, some believe we may already be seeing the beginning of the flood. A senior clerk at a leading commercial chambers commented: "We have just received two banking matters where the value of the claims are potentially worth over half-a-billion pounds in each matter. But on the whole people are still planning and contemplating. We will probably start to see more claims issued and court activity in the third or fourth quarters of this year."

Recent Skadden hire David Kavanagh has a similar outlook: "In the last month or so since the economy has stabilised a bit, there has been a real upswing, with some substantial arbitration instructions coming in." Kavanagh adds that he is currently involved in a dispute between two European banks fighting over a default arising out of the credit crisis.

A significant number of cases involving hedge funds are also said to be in the pipeline, but the funds' sensitivity about publicity means firms are reluctant to disclose information about the identity of the parties involved.

Breaking the taboo

One key issue that is likely to affect how much financial services-related litigation actually happens is the ability of wronged parties to find law firms that are willing to accept instructions to sue investment banks. Magic circle firms are famously reluctant to take on such work, either because the banks are existing clients or because they hold hopes that they may be instructed by them in the future.

Allen & Overy has said that it would litigate against a bank in certain circumstances. However, Freshfields Bruckhaus Deringer is thought to oppose acting on such disputes.

The prevailing sentiment on the subject is summed up by Fox Williams head of dispute resolution, Tom Custance, in a post on the legalweek.com story about Linklaters' decision to act in the Barclays Capital-Bear Stearns dispute: "The issue is predominantly a financial one. It will be rare for a major law firm to jeopardise its banking client relationships by agreeing to sue a bank, which has the potential to give it tens of millions of pounds/dollars in fees over several years, for the sake of a piece of litigation which by its nature is likely to be one-off and of indeterminate duration (and hence fees) because it could settle at any stage. So this Links case is likely to be rare."

If, as appears likely, magic circle firms do hold off getting involved in such work on a large scale, there will be a window of opportunity for London-based

US and second-tier UK firms that are willing to gamble on losing out on a few future investment bank transactional mandates. And for top-level litigation boutiques and leading barristers' chambers without any such mandates to lose, the situation looks win-win.

This logic explains Quinn Emanuel's London strategy. And evidently the firm is already reaping the benefits, with a role as conflicts counsel to the official creditors committee on the Lehman Brothers bankruptcy, as well as work on both the UK and US ends of HSH Nordbank's dispute with UBS. (Although last week the Court of Appeal ruled that the substantive elements of the case should not be heard in the UK.) Quinn Emanuel is also acting for Greek bank Proton in another dispute involving UBS, following the issuing of proceedings by the Swiss investment bank in March this year. Prevezer is leading both teams. Acting for UBS in the

UK proceedings of the Nordbank case is Simmons & Simmons, with head of finance litigation Jonathan Kelly leading the team. Linklaters, led by banking litigation partner Michael Bennett, is representing UBS in the Proton case.

Simmons, meanwhile, is representing German bank Westdeutsche Landesbank in a dispute with Anglo Irish Bank over a $55m (£37.9m) derivatives investment. A preliminary pre-action disclosure judgment was issued in February. Stephenson Harwood is acting for Anglo Irish.

While nobody can be sure whether the upturn in litigation will be substantive, what looks certain is that it will take place in a highly cost-conscious environment. Expect the disputes of the next few years to have a different flavour.

"Clients are going to be much more focused on costs, as will judges in the wake of the Jackson review," says chairman of the Commercial Bar Association Ali Malek QC of 3 Verulam Buildings.

"As a result, we're going to have to see people showing imagination, tighter case management, smaller teams of lawyers, costs caps, fees earned approximating closely to budget forecasts and more conditional fee arrangements.

"The work will be there, but there will be real constraints on the amount of money that lawyers make."

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Russia on the up

As banking disputes lawyers have been twiddling their thumbs waiting for the upturn in financial services litigation, those with a specialisation in offshore contentious work have found themselves busy of late.

Lovells commercial disputes partner Chris Hardman commented: "One of the few groups to have been litigating over the last 12 months are the Russians. As most significant Russian assets are held offshore – a consequence of the 1998 crash – the majority of these cases are being conducted in locations like the British Virgin Islands (BVI) and the Isle of Man."

Anecdotally, it is estimated that the number of Russian cases is such that they represent around half of the business going through BVI courts.

Several major Russian disputes have involved London-based legal teams. These include a fight for control of the oil joint venture TNK-BP, with Lovells and SJ Berwin acting for TNK and Linklaters representing BP, and a battle over the ownership and control of Russian aluminium giant Rusal in which Dechert, Herbert Smith and Brian Cave all acted.

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KEY CREDIT CRUNCH CASES TO DATE

• Anglo Irish Bank v Westdeutsche Landesbank – proceedings still not issued

Dispute over a $55m (£37.9) derivatives investment. A preliminary pre-action disclosure judgment was issued in February following an application by Anglo Irish for disclosure of documents by German bank Westdeutsche Landesbank. The dispute relates to the sale of credit bank notes which Anglo Irish alleged were mis-sold. Stephenson Harwood is representing Anglo Irish, with finance litigation partner Sue Millar leading the team. Simmons & Simmons, led by Christopher Braithwaite, is acting for Westdeutsche Landesbank.

• UBS v Proton Bank – commenced March 2009

UBS issued proceedings in March this year over the enforceability of a transaction it had entered into with Proton Bank. Linklaters, led by banking litigation partner Michael Bennett, is representing UBS. Quinn Emanuel is acting for Greek bank Proton, with Sue Prevezer QC heading the team.

• HSH Nordbank v UBS (New York) / UBS v HSH Nordbank (London) – commenced March 2008

First major inter-bank dispute to hit the UK as a result of the credit crunch. HSH Nordbank is trying to recover losses on a $500m (£252m) portfolio of collateralised debt obligations (CDOs) linked to the US mortgage market, which were structured and sold by UBS. A claim was filed in February worth $275m (£138m). The London claim by UBS was issued on the same day. In the London leg of the proceedings, Simmons & Simmons head of finance litigation Jonathan Kelly is advising Swiss bank UBS. Quinn Emanuel Urquhart Oliver & Hedges litigation partner Sue Prevezer QC is advising German bank HSH Nordbank. Jonathan Sumption QC was instructed by the US litigation boutique to handle the recent Court of Appeal case deciding jurisdiction.

• Barclays Capital v Bear Stearns – commenced December 2007, halted early 2009

Barclays Capital took action against Bear Stearns for two collapsed hedge funds exposed to the subprime market. Barclays Capital alleged Bear Stearns Asset Management used the highly-leveraged funds, reportedly worth $20bn (£10.16bn) in assets before their collapse, to offload risky assets that could not be sold to other investors. Linklaters' New York co-managing partner Lawrence Byrne was advising Barclays Capital. Wilmer Cutler Pickering Hale and Dorr was defending Bear Stearns.