City trends
Date: 30 October 2009
Authors: Jonathan Pratt
Issue: Vol 159, Issue 7391
Categories: Features, Commercial, Company
Every year, the Ministry of Justice publishes statistics on judicial and court activity. This year’s stats are analysed in this article which:
Reviews the figures for the past decade and considers the impact of the Woolf Reforms on litigation in the City of London.
Focuses on the statistics for 2008, which were published last month, to see whether the credit crunch has resulted in a rise in litigation.
Considers the figures for the now defunct Appellate Committee of the House of Lords in an attempt to to identify any trends that will be relevant to the newly created UK Supreme Court.
The impact of Woolf
Figure 1 below shows that the aftermath of the Woolf Reforms and the introduction of the Civil Procedure Rules (CPR) saw a significant reduction in claims issued in the Royal Courts of Justice (from 30,251 in 1999 to 22,634 in 2002).
The decline was most striking in the Queen’s Bench Division, where the number of claims issued went down from 10,317 in 1999 to 4,394 in 2002. With the exception of 2003, the number of claims issued in the High Court continued to decline every year between 2002 and 2007, but at a slower pace.
The CPR, which were introduced in April 1999, are often cited as the reason for this fall off in litigation. However, there were a number of other contributing factors. The High Court and County Courts Jurisdiction (Amendment) Order 1999 (SI 1999/1014) imposed a minimum value of £15,000 in the High Court (which was raised to £25,000 from April 2009). Therefore, part of the reduction in High Court litigation was due to a reallocation of claims to the county courts rather than an overall reduction in litigation.
The CPR and, in particular, pre-action protocols have promoted the “front loading” of litigation whereby parties exchange information and engage in negotiations before proceedings are issued. This can result in an early settlement and avoid the need for court proceedings. However, the pre-action protocols sometimes result in parties incurring costs at the outset which, under the old rules, would have been incurred at a later stage and avoided by an early settlement.
In his preliminary report into the costs of civil litigation, Lord Justice Jackson said that, in the case of Chancery litigation, there was anecdotal evidence that even £5,000 to £10,000 for solicitors’ costs will often be an inadequate sum to allow a claim of any complexity to be presented in a pre-action letter. The position is much the same in other divisions of the High Court.
The ADR option
The past 10 years have seen a significant rise in the popularity of alternative dispute resolution which has also contributed to the reduction in formal litigation. For example, mediation has become an increasingly established means of dispute resolution. This development has been encouraged by the CPR and judges, in the form of costs sanctions against parties who unreasonably refuse to mediate. As a result, disputes are often resolved by mediation before proceedings are issued.
Arbitration is also becoming increasingly popular and is diverting an ever larger number of disputes away from the High Court. As it is a private and confidential process, it is difficult to ascertain exactly how much arbitration is taking place but it is the author’s experience that an increasing number of disputes are being resolved by arbitration. Parties are attracted by the privacy and flexibility of the arbitral process, as well as the relative ease of enforcing awards.
The credit crunch
Another possible explanation for the decline in litigation between 1999 and 2007 is the fact that this was a period of relatively stable economic growth. Recessions tend to see higher levels of litigation than booms. In times of economic difficulty it is less likely that commercial arrangements will turn out as the parties intended.
Failed deals are a much greater source of litigation than successful ones as parties seek to enforce their strict contractual rights. Furthermore, in the absence of other profit-making opportunities, parties are usually prepared to commit more management time to disputes.
Companies may also resort to court action to bolster their balance sheets. In other cases, particularly those involving fraud, it may not be apparent that a party has a claim until recession strikes—a classic example being Bernie Madoff’s Ponzi scheme. Despite the onset of the credit crunch in 2007, there was a further decrease in the number of claims issued in that year. This reflected the fact that it takes time for disputes to crystallise and for pre-action procedures to be followed before proceedings are eventually issued.
Litigation city
In 2008 there was a marked increase in the amount of litigation in the City. Claims issued in the Queen’s Bench Division of the Royal Courts of Justice reached a seven year high (up from 4794 in 2007 to 5173 in 2008), although this is to be contrasted with the number of claims issued in Queen’s Bench District Registries which was lower than 2007. The number of claims issued in the Commercial Court jumped from 839 to 1003. Claims issued in the Chancery Division of the Royal Courts of Justice increased from 3534 in 2007 to 3779 in 2008 (see Figure 2).
In 2008, there was a 27% increase in proceedings issued in the Companies Court. The Companies Court deals predominantly with the insolvency of companies, other types of corporate insolvency procedures and disputes arising out of the insolvency of companies. The increase in number of Companies Court claims is, therefore, a striking reflection of the current economic climate. Applications filed at the Bankruptcy court increased in 2008 by 7% to 22,166 from 20,740 in 2007.
Recessions also tend to result in an increased number of professional negligence claims. Professional advisers are an obvious target for those looking for a scapegoat for their financial difficulties. There is also a greater chance that poor advice will result in a loss and 2008 was no exception to the general rule, with the number of professional negligence claims in the Chancery Division of the High Court increasing by more than double, to 147 from 67 (which was, in itself, a significant increase from the 2007 figure of 42).
The House of Lords
The Appellate Committee of the House of Lords heard its last cases in July 2009 and, on 1 October 2009, the new Supreme Court of the United Kingdom opened for business.
However, it will be two years before it will be possible to detect whether the cases heard by the Supreme Court are significantly different in number or type from those heard by its predecessor. Statistics for the House of Lords’ final year will be produced next autumn and figures for the Supreme Court will not appear until September/October 2011.
The main justification for the creation of the Supreme Court is the need for a proper separation of the judiciary from the legislature. This is most important where the courts are required to review the powers of central and local government. In that context, it is interesting that the number of judicial review proceedings before the House of Lords increased to 13 in 2008, up from one in 2007 (and three in 2006).
Figure 3 sets out the number of appeals allowed and dismissed by the House of Lords over the past 10 years. With the exceptions of 2002 and 2007, the House of Lords has consistently granted more appeals than it has refused. This is in contrast with the Court of Appeal which has dismissed more civil appeals than it has allowed every year for the past decade. The difficulty in the House of Lords is being granted permission to appeal. In 2008 only 53 out of 207 petitions for leave to appeal were allowed.
The future
Disputes caused by the credit crunch will continue to keep the courts busy. In some cases, parties will be waiting for their finances to improve so that they can fund litigation. Cost will be a key consideration for potential claimants. It will, therefore, be interesting to see whether Lord Justice Jackson recommends any drastic changes when he produces his final report in December this year and, if necessary, whether this, or the next government finds time for any legislation necessary to implement the reforms.
Jonathan Pratt is a professional support lawyer in Macfarlanes LLP’s litigation & dispute resolution department.
Email: jonathan.pratt@macfarlanes.com
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