The wave of lawsuits arising from the credit crunch will be worse than the fallout from the Enron scandal or the dot-com collapse, lawyers close to the industry predicted – but this time investment banks are set to fight all the way.

"In terms of the potential numbers of lawsuits, the sub-crime crisis could be bigger than Enron,” Tim House, a banking litigation partner at Allen & Overy, said. "But this time we can expect banks to be much less willing to simply settle quickly.”

During other financial crises, banks readily settled major claims in order to avoid costly and lengthy legal action. Lawyers believe this policy has led to a perception that the banks are “easy targets”, which could exacerbate the tide of sub-prime-related law suits.

But tougher market conditions this time will make the banks inclined to defend most claims aggressively rather than settle.

Calum Burnett, a litigation partner at Allen & Overy, said: “There is a feeling that banks probably overpaid to settle litigation following the big corporate collapses, such as Enron.”

But the banks are now keen to rid themselves of any suggestion that they are soft in defending litigation.

“In a rising market there is a rational business argument to settle cases in order to put the matter behind you and move on and focus your resources elsewhere,” Mr Burnett said. “But with general economic prospects the way they are, that incentive may disappear.”

There have been signs recently that claims arising from the credit crunch will not be limited to class actions, filed on behalf of small investors. They will also include major financial institutions taking each other on.

Barclays, the UK bank, has already filed a lawsuit in New York accusing Bear Stearns of fraud, conspiracy and breach of fiduciary duty in relation to the way it managed a failed hedge fund invested in sub-prime mortgages.

According to Mr House: "A lot of banks believed they would be shielded from litigation because they sold complex products to sophisticated institutional investors who knew what they were getting into and could not claim to have been misled. They are, nonetheless, beginning to see claims from investors seeking to recoup losses."

Citigroup, Merrill Lynch and UBS have all been hit with US class-action lawsuits relating to sub-prime losses.

Claimant lawyers, who typically act for small investors seeking compensation, predict this is just the beginning.

Fred Fox, a partner at Kaplan Fox, a securities law firm in New York, said: “This [the credit crunch] is a big deal. We are looking at all sorts of possible cases. We are examining them from various different angles and some could potentially result in payouts of billions and billions of dollars.”

In the UK, where it is much harder for investors to recoup losses via litigation, lawyers said that banks have been put on the back foot by a recent court ruling relating to the legal validity of sales pitches.

Traditionally, an investment bank selling a complex financial instrument to a sophisticated investor will include a non-reliance clause in any deal, which says the investor can only rely on the information given in the final contract rather than anything said during the sales process.

This has led to accusations that commission-based sales staff have exaggerated the safety or suitability of products, safe in the knowledge that their employers cannot be held liable for what they have said.

But in a recent landmark case, a judge ruled that the institution selling a financial product can invoke a non-reliance clause only if it can prove the buyer did not rely on anything said by sales staff up to the point it signed the contract.

Lawyers believe the case — Quest 4 Finance Limited v John Maxfield and Others — has opened up a new front for investors to sue banks that could leave the banks facing vast losses.

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