This article by Markus Kokko was originally published in International Litigation Newsletter, April 2009, and is reproduced here with the kind permission of the International Bar Association, London, UK ©
The global financial crisis, which started in the United States, spread to Europe during summer and autumn 2008 and finally to Finland in the late autumn.
Although the Finnish economy is not at this stage in a depression but merely in a recession, the impacts of the global financial crisis can already quite clearly be perceived in advocacy assignments concerning dispute resolution in Finland.
As a general remark related to the crisis, one can note that the controversies and the willingness to litigate have clearly increased in the commercial world, and the common opinion is that they will continue to increase in the near future as well. For the moment, companies are seemingly more actively defending and claiming their rights with their contracting parties. Outstanding accounts are being collected through legal proceedings at an earlier stage and the use of one week payment requests threatened with bankruptcy proceedings against trading debtors have increased.
It has also been noted that the susceptibility of contracting parties to make reclamations and notices of defects is fairly low. Furthermore, debtors are more emphatically than earlier disputing debts of even relatively small amounts.
Parties positions harden in litigation
Due to the financial crisis, the positions parties adopt during the course of proceedings have to some extent hardened. In order to minimise the risk of loss of assets and the possible weak financial standing of the counterparty, courts are, to an increasing extent, being requested for different precautionary measures in disputes. These are often requested to be ordered as interim measures without hearing the counterparty. In some cases, precautionary measures are merely used for tactical reasons in litigation with the purpose of commencing the proceeding more aggressively. This is likely to be due to the quite low requirements for receiving a precautionary measure or a provisory regulation in relation to the protection of a claim. In Finland, a precautionary measure has to be granted if the applicant's right cannot be considered evidently ungrounded, and if there is a danger that the counterparty will act in an endangering way towards the applicant's right. The applicant of a precautionary measure is obliged to show some sort of evidence to prove the existence of his right, however, normally a mere allegation of the existence of the adverse party's endangering activity is enough.
The actual enforcement of a precautionary measure against the adverse party requires in practice, without exception, that the security fixed by the applicant sufficiently proves the possible damage caused by the precautionary measure to the counterparty. According to Finnish law, a person who applies for a precautionary measure without good grounds is strictly liable for possible damages caused by the measure, which in some cases can be significant. For example, in the current economic situation the value of seized shares, other investment instruments or fixed assets, owned by the counterparty, may decrease significantly, whereupon the risk for damage caused by the groundless precautionary measure is clearly larger than in a so called stable economic situation.
In Finland, it is not the court that decides upon the amount of the security, but the execution officer who enforces the precautionary measure. The execution officer has exclusive power to decide the acceptable amount and quality of the security. It is presumable that the execution officers will demand a higher security for precautionary measures compared to before, at least if the value of the property subject to the precautionary measure can be considered sensitive to changes in market prices. Thereby the use of precautionary measures in litigation may cause the applicant higher expenses than before. Normally a bank guarantee is used as a security in Finland.
We have also seen recently that there has been a slight increase in the amount of reports of criminal offences and other reports of administrative character due to contracting parties' actions or negligence in Finland. Previously these kinds of reports were not made very often, and commercial disputes were being settled through civil proceedings. However, by making an investigation request, more evidence against the adverse party may be sought in a possible civil or criminal trial. For the requesting party it is also cost-effective to use the public authorities, since the investigation is conducted by the authorities and financed by the State. It is nevertheless punishable to make an unfounded denunciation or investigation request in Finland.
Types of disputes that are expected to increase
Prior to the break out of the financial crisis in Finland, an economic boom prevailed steadily for several years. During this period, many national and international M&A-arrangements as well as investments in real estate were carried out. In the new financial situation some buyers are attempting to avoid the arrangements completely at negotiation stage or in situations where the arrangement has not yet been enforced. Furthermore, some buyers aspire to challenge already conlcuded agreements and obligations related to them, especially if the period for claims is still open, if the purchase price has not been paid or if the purchase price is tied to future profit and cash flow originating from the target of the agreement. Mostly disputes over M&A agreements are taken to the court on basis that the seller is alleged to have broken seller's representations and warranties concerning the object of purchase. In the new financial situation it is also possible that claims related to the reasonableness of the arrangement may come up, since there may have been dramatic changes in the financial standing or other circumstances of the parties.
Although disputes regarding M&A arrangements are mostly handled in arbitration, they have also been dealt with in public courts in the absence of arbitration clauses. It may be challenging to litigate M&A related disputes in a Finnish public court since public courts in Finland do not have extensive experience concerning market practice and the due-diligence process and its legal significance when considering an asserted defect in the object of purchase regarding M&A arrangements. An appeal against a public court's decision may be lodged to the Court of Appeal, where the matter in most cases will be reheard in it's entirety. In addition it is possible that the Supreme Court of Finland, which gives preliminary rulings, may grant leave to appeal Court of Appeal's decision at third instance, since the public legal practice in disputes in M&A related disputes is insignificant. Therefore receiving a non-appealable decision in an M&A related dispute from public courts may take several years.
Recently the financial crisis has lead to many employees being given notice or being temporarily dismissed in Finland. Especially employees in industrial and trade branches have been affected. The termination of employment based on individual grounds is particularly difficult in Finland, and extremely weighty reasons are required. Even temporary dismissal and terminations based on notice on economic and production related reasons require weighty reasons in accordance with the Employment Contracts Act. When a company is in a fragile financial situation, the existence of weighty reasons is usually fulfilled, but some employers may in fact try to use the situation and evade the strict regulations for protection of the employees. Thus it must be assumed, that the reduction of workforce seen recently will lead to legal proceedings. In Finland, the employer has the burden of proof when it comes to presenting sufficient grounds for terminating the employment. Dismissal without good cause may lead to the employer being obliged to pay compensation corresponding to no less than the amount of two years wages to the employee.
So far the financial crisis has not lead to notable legal proceedings against banks in Finland. Trials against banks are expected, since some banks unilaterally have raised the interest margin on business loans, apparently in accordance with the contractual terms. If the general interest levels continue to descend, the threshold to commencing this kind of proceedings is probable to be fairly high.
Due to the economic situation, banks have extorted the terms and security requirements when granting new commercial credits. Obviously companies with a light-weighted balance, have a hard, close to impossible, time to gain complimentary financing to their activities from banks and financial institutions in the current situation. In some cases, banks and financial institutions may even refuse to pay credits which they have earlier committed to. It is possible that these types of situations may lead to claims of compensation for damages against banks.
Legal proceedings concerning crimes in security markets have increased substantially during the last few years in Finland. The reason for this is probably the Financial Inspection's intensified market supervision and increased resources. The trials have mainly concerned information crimes concerning security fraud and misuse of inside information, but in some cases also manipulation of share price.
Legal proceedings concerning crimes in security markets have gained plenty of publicity in Finland. The cases have required extensive and significant resources of police, prosecutors and attorneys. A significant part of the charges have been dismissed, but in certain cases the Court of Appeal seem to have adopted a stricter way of interpreting the essential elements of security market related crimes. Based on the current legal practice one may state that members of the board of directors and people in the highest management of listed companies should trade with company's securities and derivative instruments with exceptional care and caution.
Impacts on enforcement
The Economic Crisis has lead to litigation being interrupted, since the respondent, against who the action is conducted, has been declared bankrupt.
Furthermore, when enforcing court decisions one has to resort to the help of the execution authority earlier, since the counterparty is not following the given orders as voluntarily as before. Especially outside Finland the voluntary enforcement of court rulings has become more difficult recently.
Conclusions
The actual impact of the financial crisis on litigation is quite difficult to predict, though it is clear that the amount of legal proceedings will increase in one way or another in the near future. Law firms have prepared for this and some of the larger Finnish law firms have expanded and strengthened their dispute resolution and insolvency practices.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
