The collapse of Lehman Brothers in an already struggling world economy will trigger an explosion of “mega litigation” according to the former Lord Chancellor, Lord Falconer of Thoroton.

The failure of the world’s fourth-largest investment bank - “the largest insolvency in the history of capitalism” - will be a turning point in credit-crunch related litigation, Lord Falconer told the Legal Week Litigation Conference in London yesterday.

“I believe we are on the verge of a series of mega disputes, arising in part out of the commercial activity in the former Soviet Union but mainly out of the huge mess which is being left by the fall-out from the credit crunch," he said.

Lord Falconer, a consultant at US law firm Gibson, Dunn & Crutcher, predicted the Lehman litigation would follow three stages. The first disputes will be to determine the exact nature of the bank’s $600 billion of liabilities followed by a series of fights to determine how Lehman’s remaining assets should be distributed.

Finally, creditors will look for institutions, advisors or regulators to blame for their losses and seek compensation from them.

The former barrister, who spent 10 years in Government, said the wave of ensuing UK litigation would be on the scale of previous mega disputes including those arising from Barings, BCCI and Lloyds of London litigation in the 1990s.

Other factors that would boost the level of lawsuits in the UK courts included their increased use to settle commercial disputes arising from the former Soviet Union and the increased aggression of competition regulators, Lord Falconer said.

Sonya Leydecker, head of dispute resolution at Herbert Smith, was one of several lawyers who agreed with the prognosis.

“The credit crunch has not yet resulted in a surge in litigation in England, though the market has been anticipating just that. Key players have been waiting and watching and were not inclined to invite certainty in the form of court decisions. Recent events have changed that. Insolvency crystallises losses and major insolvencies always result in significant litigation.”

John Fordham, head of commercial litigation at Stephenson Harwood, was more cautious.

“The Lehman collapse will create work for specialist banking litigators, initially advisory work with litigation to follow. The liquidators may well have claims to bring against other parties, but this is unlikely to be on the same scale as, for example, Maxwell or BCCI in the 1990's, where there was extensive fraud,” Mr Fordham said.

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