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Avoid Litigation in the New Recession – Lessons Learned from the 2008 Financial Crisis

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Written by:

Charlotte Dawes

Associate

Ince (Cardiff)


As a result of the global pandemic and its disastrous effect on the economy, Britain has unsurprisingly entered into its first recession since the 2008-09 financial crisis (“the 2008 Crisis”).

With economic decline comes an increase in the likelihood of a business dispute; whether that be a supplier inflating prices without prior agreement or a customer refusing to pay.

Whilst we cannot predict the future, we can examine the effects of the last UK recession and prepare our businesses as best we can for the uncertain times ahead.

Secure your business

Businesses that found themselves in significant difficulties after the 2008 crisis were generally those that had not formalised their Terms and Conditions to provide effective and robust debt recovery.

Cash flow is imperative to the survival of any business. Investing time in recovery of outstanding invoices and aged debt at an early juncture can not only increase your cash flow, but also avoids having to engage in litigation to recover these monies via, in the worst-case scenario, insolvency proceedings. However, if you are an unsecured creditor you are likely to be bottom of the creditor list if a company is later subject to insolvency proceedings.

To aid this process, setting out clear-cut Terms of Business, with a payment timetable and associated late payment charges and interest will put you in good stead to encourage early payment and/or pursue any outstanding amounts on a contractual basis.

Prepare for the unknown

The years that followed the 2008 crisis saw the sad demise of long-standing British companies. If the onset of Covid-19 has taught us anything, it is that businesses should always try to be prepared for unprecedented and unpredictable events such as a pandemic – and ensure that their business models will hold up in the face of adversity.

In a test case brought by the Financial Conduct Authority (FCA) regarding business interruption insurance in the context of Covid-19, the High Court handed down its judgment on 15 September 2020, finding that the majority of businesses who held business interruption insurance and were forced to close due to the pandemic are entitled to be indemnified by their insurers. As a result, it has been estimated by the FCA that over 370,000 policy holders will be affected by the outcome of the case.

In the same vein, some businesses have had to utilise a force majeure clause in contracts which allows a party to be absolved from a liability or obligation when extraordinary events or circumstances beyond the control of the parties (such as war, strike or, in this case, a pandemic) takes place.

In circumstances where businesses have been forced to shut or severely scale back their operations to adhere to Government imposed guidelines, these type of clauses may seek to avoid the need to engage in costly negotiations or breach of contract proceedings.

Stay ahead of the curve

With the increased use of technology, businesses that have quickly adapted to the new way of working – from taking contactless payments via QR code, to switching from face-to-face services to remote services – have seen less disruption.

Nevertheless, the increased use of technology creates new opportunities for cybercrime and fraud as well as potential GDPR issues, which is another reason to update your Terms of Business.

Take a commercial approach 

Whilst several parallels can be drawn between the 2008 crisis and the current recession, it is clear that a pandemic adds additional extraordinary elements to business management.

Creative resolutions may be necessary to bring contentious matters to a prompt conclusion. Therefore, initiating communication with a customer, client, supplier or debtor should not be underestimated.

Initiating litigation should be a last resort – and we are encouraged by the Court and the Pre-Action protocol to consider whether negotiation or some other form of Alternative Dispute Resolution (ADR) might enable parties to settle their dispute without commencing proceedings.

We strongly recommend that business owners act now to protect themselves and put necessary measures in place to weather the uncertain times ahead. The future is unknown but it is certainly not all doom and gloom. After a rapid decline of 19.8% in GDP in the second quarter, things are looking up; with economists and the Bank of England predicting a continuing recovery in the third and fourth quarters of the financial year.


The information above is not and should not be taken to be legal advice. You should not take action or omit to take action based on this information.

Ince can assist you in safeguarding your business and dealing effectively with Dispute Resolution and Litigation in unprecedented circumstances.

If you require any help on the issues raised above please contact:

Charlotte Dawes, Associate, Ince (Cardiff)
T: +44 (0) 29 2055 7259
E: [email protected]