A recession is a period of economic decline during which trade and industrial activity reduces. This reduction is generally identified by a fall in Gross Domestic Product (GDP) in two successive quarters.
The impact of a recession on the economy is multifaceted. It can lead to higher unemployment rates as businesses lay off workers to cut costs, decrease consumer spending due to lower household income, and deflation in business investments as companies become wary of financial risks. Additionally, recessions can trigger a decline in the real estate market. This decline will reduce export earnings and prompt increased government intervention to stimulate the economy. Recessions can cause significant hardship for individuals and businesses, and recovery will take longer after the economy hits its low point.
This article explores the implications of a UK recession on various branches of the law, such as employment law, contract and commercial law, property law, consumer law, and regulatory law and compliance. Insolvency and restructuring will also be covered. Consider how legal professions will have to approach issues amid economic crises and explore the importance of their presence during a recession.
Insolvency and Restructuring Law
During economic downturns, it is not uncommon for companies to face financial distress as market conditions deteriorate. The effects of the COVID-19 pandemic substantially disrupted global supply chains, consumer demand, and workforce availability, leading to increased financial pressures on businesses. In the UK, the Insolvency Service reported that in December 2021, there were 1,560 company insolvencies, a 20% increase from December 2019[1]. Such economic challenges highlight that even powerful companies can experience significant financial distress during periods of recession.
During recessions, governments often reform insolvency laws and procedures to mitigate the impact on struggling businesses and the economy. For example, in response to the COVID-19 crisis, the UK government introduced the Corporate Insolvency and Governance Act 2020[2] to provide greater flexibility and breathing space for companies facing insolvency. This act includes the moratorium to give companies breathing space from creditors, the restriction on winding-up petitions, and the new restructuring plan that can bind creditors. These changes reflect an attempt to support the survival of businesses and, to a degree, the economy by providing alternatives to traditional insolvency proceedings during challenging financial times.
Economic hardship often necessitates businesses to seek legal advice on restructuring as a strategic response to financial challenges. Legal guidance is critical in navigating complex insolvency laws and deploying restructuring tools to preserve their business value and maintain operations. The Corporate Insolvency and Governance Act 2020[3] introduced a new restructuring plan that requires expert legal knowledge to effectively bind all creditors, potentially including dissenting classes, to the plan. The expertise of legal professionals is indispensable in such processes to ensure compliance with the law and maximise the chance of recovery for distressed businesses. Furthermore, restructuring often involves renegotiation of contracts, employment law considerations, and stakeholder management, all of which demand sophisticated legal advice.
Employment Law
Recessions typically lead to increased unemployment rates as businesses seek to reduce costs, often through downsizing their workforce. The International Labour Organisation (ILO) reports that economic downturns can lead to "substantial increases in unemployment" and underemployment, significantly impacting workers' livelihoods[4]. The subsequent job insecurity also tends to decrease workers' rights, with companies sometimes pressuring employees to accept reduced terms to retain their positions. During a recession, the importance of enacting and enforcing labour protection laws increases due to the need to prevent potential worker exploitation and degradation of workplace standards[5]. Furthermore, reducing employment opportunities may increase worker vulnerability, indicating the legal framework's vital role in upholding workers' rights during economic crises.
The legal issues surrounding redundancies, wage cuts, and changing work conditions emerge during these economic difficulties. Employers must develop an understanding of the Employment Rights Act 1996[6]. It provides statutory procedures for making employees redundant, ensuring fair dismissal and avoiding discrimination. Wage cuts are similarly regulated, requiring adherence to contract law principles; both parties must agree on changes to avoid breach of contract claims under the Wages Act[7]. Alterations to working conditions may also raise legal concerns under the Working Time Regulations 1998[8]. This act stipulates employees' rights regarding working hours and rest periods. Failure to comply with these statutory protections can result in legal disputes and potential liability for employers.
Legal professionals specialising in employment play a pivotal role in dispute resolution by providing expert advice on employment law, representing parties in tribunals, and navigating the complexities of government employment support schemes like the Coronavirus Job Retention Scheme ('CJRS')[9]. They ensure employers comply with their legal obligations while protecting employees' rights, often using alternative dispute resolution (ADR) to settle conflicts outside of court. Legal professionals stay knowledgeable of updates to schemes and legislation, like the Employment Rights Act[10], to offer informed guidance during times of change and uncertainty.
Contract and Commercial Law
Businesses facing economic strain confront challenges in fulfilling contractual obligations, potentially leading to regular disputes over performance, delays, or breaches. The economic downturn can impact cash flow and resource availability, hindering a company's ability to meet its contractual terms. This strain may prompt businesses to use force majeure clauses or rely on the doctrine of frustration, as established in Taylor v Caldwell[11], to mitigate liability for non-performance. Legal professionals must carefully navigate these concepts to assess their applicability and provide strategic advice to clients under financial duress.
During an economic crisis, a 'force majeure' clause and the doctrine of frustration are critical in contract law. 'Force majeure' clauses provide a contractual escape route for parties unable to fulfil their obligations as a result of extraordinary events beyond their control, tailored to the terms agreed upon in the contract[12]. Frustration, as established in the case of Davis Contractors v Fareham UDC[13], occurs when an unforeseen event causes contractual obligations to be impossible to deliver or radically changes the parties' purpose, releasing them from liability without needing a specific contractual provision. Both mechanisms are essential for businesses seeking to manage legal and financial risks during economic downturns.
Legal guidance is necessary when renegotiating contract terms during a recession to ensure clear communication, mutual agreement, and legal validity of the new terms, potentially avoiding costly and time-consuming litigation[14]. Expert legal advice helps navigate the complexities of contract law, as emphasised in Walford v Miles[15], ensuring renegotiations are conducted in good faith and without duress. This strategic approach minimises the risk of disputes escalating to litigation and supports a more cost-effective and collaborative resolution of contractual issues.
Property Law
Recessions have typically led to declining property values and residential and commercial property market investments due to reduced consumer confidence and spending power, according to a Royal Institution of Chartered Surveyors (RICS) survey[16]. Lower disposable incomes and increased unemployment rates affect demand, as supported by Ball et al. in 'The Oxford Handbook of Economics and the Law' (2012)[17]. Commercial property markets dramatically decline as businesses downsize or fail, leading to higher vacancy rates and downward rent pressure, according to Jones Lang LaSalle's Global Real Estate Transparency Index of 2020 [18]. Additionally, the inflation of interest rates is affecting the residential and commercial property market. The National Institute of Economic and Social Research discuss the impact on households, estimating “1.2 million households [will] run out of savings in 2024 as a direct consequence of rising mortgage payments”[19]. These market adjustments create a challenging environment for property owners and investors, underlining the importance of responsive real estate strategies.
Leasing agreements and mortgage obligations become legally complex due to the potential inability of tenants and borrowers to meet their financial commitments. The legal principle of frustration may become relevant in leasing contexts but is rarely successful in releasing parties from their obligations, as shown by National Carriers v Panalpina[20]. For mortgages, lenders can seek possession if borrowers default but must follow fair practices outlined by the Financial Conduct Authority[21]. Financial hardship may lead to renegotiation or forbearance measures; however, legal professionals must navigate carefully to ensure compliance with consumer protection laws, which are viable through the Consumer Credit Act [22].
Property dispute surges can often note economic uncertainty and market fluctuations. According to a RICS survey, this leads to conflicts over lease terms, rent payments, and property valuations [23]. Property solicitors have their work cut out for them as they navigate these disputes, focusing on resolving issues through alternative dispute resolution methods before proceeding to litigation, as outlined by the Civil Procedure Rules[24]. They must also keep informed if emergency legislation is rolled out, such as the Coronavirus Act 2020[25], which has temporarily altered landlords' and tenants' rights and obligations.
Consumer Law
As spending power declines during a recession, there is potential for an increase in consumer protection issues, with consumers being more vulnerable to unfair business practices. The Office of Fair Trading and Trading Standards is critical in ensuring compliance with regulations such as the Consumer Rights Act[26], which governs goods and services standards. Economic hardship often leads to a rise in predatory lending practices, misleading advertising, and the sale of sub-standard products, making vigilant consumer protection enforcement crucial - evident through the Competition and Markets Authority's Annual Plan for 2022/23[27]. Solicitors specialising in consumer law may see a rise in cases relating to breaches of consumer rights and may guide remedies available under the law.
Legal professionals can assist in navigating claims of unfair business practices by providing expert advice on the Consumer Protection from Unfair Trading Regulations 2008[28], which protects consumers from misrepresentation and aggressive sales tactics. They can help identify breaches and advise on complaint procedures through the appropriate bodies, such as the Competition and Markets Authority (CMA)[29] or assist in initiating civil litigation for compensation. Legal professionals also play a pivotal role in ensuring access to justice for consumers and small businesses affected by unfair practices, especially in times of economic challenge.
Clear legal policies are vital in establishing an environment of fairness and trust and are essential for market stability and growth. For consumers, regulations such as the Consumer Rights Act[30] provide safeguards against faulty goods, digital content, and services, giving them the confidence to transact. A rigid legal framework that includes the Companies Act 2006[31] ensures that businesses operate on a level playing field, promoting healthy competition and innovation. The predictability offered by transparent policies helps mitigate disputes. It enables efficient resolution when conflicts arise, contributing to a more resilient economy, according to a government publication, 'Enabling competition: the role of competition law'[32].
Regulatory Law and Compliance
Even amidst economic hardships, companies must adhere to regulatory requirements to maintain legal compliance and market integrity. For instance, the Financial Conduct Authority[33] maintains demanding compliance expectations for financial services firms, regardless of economic conditions. Such adherence ensures consumer protection and prevents market abuse, which could lead to further financial instability, according to their publication, 'Our Approach to Supervision'[34]. Moreover, the Companies Act 2006[35] outlines directors' duties, including the need to promote the company's success while considering the impact of their operations on the community and environment. This responsibility remains irrespective of the economic climate.
During a recession, legal professionals play a critical role in guiding companies through the dilemma of evolving regulations, ensuring continued compliance and risk management. The Solicitors Regulation Authority's Code of Conduct[36] emphasises the need for legal practitioners to maintain their knowledge of legislative changes and to proactively advise clients on adapting their business practices accordingly. Their expertise becomes crucial when governments introduce temporary measures or financial relief programs to support businesses during economic downturns, such as the Corporate Insolvency and Governance Act 2020[37]. This act introduced changes to insolvency laws during the COVID-19 pandemic.
Non-compliance during a recession poses significant risks, including hefty fines, repetitional damage, and legal action. For example, the UK's Health and Safety Executive has powers under the Health and Safety at Work Act[38] to impose sanctions for violations that can considerably impact an already financially strained company. Legal departments face an increased burden, as they must diligently monitor and implement changes in the law while advising on risk management strategies. The Institute of Risk Management underscores the importance of legal risk assessments as part of a broader risk management approach, particularly in times of economic challenge, through their publication of the Institute of Risk Management (IRM), The Association of Insurance and Risk Manager (AIRMIC) and The Public Risk Management Association (Alarm) in 2002[39].
Overall, a UK recession significantly impacts the legal industry by increasing the demand for services related to insolvency, restructuring, and employment law as businesses struggle financially and job losses occur. Legal professionals are called upon to advise on contractual issues, renegotiations, and compliance with evolving laws and regulations as companies navigate economic hardships. Additionally, there is a heightened need for consumer protection and dispute resolution expertise due to the rise in financial disputes and unfair business practices - putting pressure on legal departments to manage a rise in workload while ensuring adherence to strict regulatory standards.
Legal professionals play a pivotal role in mitigating the effects of a recession by providing critical guidance on corporate restructuring, insolvency proceedings, and employment law, protecting both business interests and workers' rights. Legal experts help firms navigate complex contractual and regulatory landscapes, ensuring compliance and reducing the risk of litigation. They also offer vital support in dispute resolution, safeguarding consumer rights, and renegotiating obligations - essential for economic stability and recovery. By upholding the rule of law and facilitating fair business practices, legal professionals act as a key buffer against the more severe consequences of a recession.
Legal professionals can mitigate the impacts of economic downturns by adopting several proactive strategies. Diversifying their practice areas can help them cater to industries that might be less affected by economic declines. Investing in technology and automation can also streamline operations and reduce costs and building a 'rainy-day' fund can give them financial flexibility during difficult periods. Lastly, focusing on networking and client relationships can ensure a stable client base and potential referrals during tough economic times. Legal professionals can withstand and potentially even thrive during economic downturns by considering these approaches early.
By helping organisations navigate legal challenges efficiently, legal professionals protect their client's interests and contribute to overall economic resilience and recovery by enabling businesses to adapt, survive, and eventually thrive.
References
[1] Insolvency Service, 'Monthly Insolvency Statistics December 2021' (Insolvency Service, 2022) https://www.gov.uk/government/statistics/monthly-insolvency-statistics-december-2021 accessed 16 February 2024
[2] Corporate Insolvency and Governance Act 2020, c. 12
[3] Corporate Insolvency and Governance Act 2020, c. 12
[4] International Labour Organisation, 'World Employment and Social Outlook – Trends 2020' https://www.ilo.org/global/research/global-reports/weso/2020/lang--en/index.htm accessed 16 February 2023.
[5] International Labour Organisation, 'COVID-19 and the world of work. Sixth edition' https://www.ilo.org/wcmsp5/groups/public/---dgreports/---dcomm/documents/briefingnote/wcms_755910.pdf accessed 16 February 2023
[6] Employment Rights Act 1996', c 18
[7] Wages Act 1986
[8] Working Time Regulations 1998, SI 1998/1883
[9] HM Treasury, 'Directions made by the Treasury in relation to the Coronavirus Job Retention Scheme' (15 April 2020)
[10] Employment Rights Act 1996', c 18
[11] Taylor v Caldwell [1863] EWHC QB J1
[12] Hugh Beale (ed), 'Chitty on Contracts', (33rd edn) para. 15-153
[13] Davis Contractors Ltd v Fareham Urban District Council [1956] AC 696
[14] Jack Beatson, Andrew Burrows, and John Cartwright, 'Anson's Law of Contract' (30th edn)
[15] Walford v Miles [1992] 2 AC 128
[16] Royal Institution of Chartered Surveyors (RICS), 'UK Residential Market Survey' (2021) https://www.rics.org/ accessed 16 February 2024
[17] Michael Ball, Colin Lizieri, Bryan MacGregor, 'The Oxford Handbook of Economics and the Law' (2012)
[18] Jones Lang LaSalle (JLL), 'Global Real Estate Transparency Index' (2020) https://www.jll.co.uk/en/trends-and-insights/research/2020-global-real-estate-transparency-index accessed 16 February 2024
[19] Rosen Chowdhury and Max Mosley, ‘Spotlight 1: The Impact of Rising Interest Rates on Housing Costs’ (2023) National Institute UK Economic Outlook https://www.niesr.ac.uk/wp-content/uploads/2023/08/JC737-NIESR-Outlook-Summer-2023-UK-Spotlight-SA.pdf?ver=iafmNo9Hldw1s5fBnFVg accessed 16 February 2024
[20] National Carriers Ltd v Panalpina (Northern) Ltd [1981] AC 675
[21] Financial Conduct Authority, 'Mortgages and Home Finance: Conduct of Business sourcebook' (MCOB) (FCA Handbook) https://www.handbook.fca.org.uk/ accessed 16 February 2024
[22] Consumer Credit Act 1974, s 140A
[23] Royal Institution of Chartered Surveyors (RICS), 'COVID-19 and the Upliftment of Property Business Disputes' (2020) https://www.rics.org/ accessed 16 February 2024
[24] Civil Procedure Rules 1998, PD Pre-Action Conduct and Protocols
[25] Coronavirus Act 2020, s 81 and schedule 29
[26] Consumer Rights Act 2015
[27] Competition and Markets Authority, 'Annual Plan' [2022/23] < https://www.gov.uk/government/publications/competition-and-markets-authority-annual-plan-2022-to-2023> accessed 16 February 2024
[28] Consumer Protection from Unfair Trading Regulations 2008, SI 2008/1277
[29] Competition and Markets Authority, 'Guidance on the CMA's approach to use of its consumer powers' [2019] < https://assets.publishing.service.gov.uk/media/5a7c7e5be5274a559005a3fe/CMA7_Consumer_Protection_guidance.pdfs>accessed 16 February 2024
[30] Consumer Rights Act 2015, c 15
[31] Companies Act 2006, c 46
[32] HM Government, 'Enabling competition: the role of competition law' [2014] < https://assets.publishing.service.gov.uk/media/5a759a6ced915d506ee80176/oft911.pdf>accessed 16 February 2024
[33] Financial Services and Markets Act 2000, c 8
[34] Financial Conduct Authority, 'Our Approach to Supervision' [2019] https://www.fca.org.uk/publication/corporate/our-approach-supervision.pdf accessed 16 February 2024
[35] Companies Act 2006, c 46, s 172
[36] Solicitors Regulation Authority, 'Code of Conduct for Solicitors, RELs and RFLs' [2019] https://www.sra.org.uk/solicitors/standards-regulations/code-conduct-solicitors/ accessed 16 February 2024
[37] Corporate Insolvency and Governance Act 2020, c 12
[38] Health and Safety at Work etc. Act 1974, c 37
[39] Institute of Risk Management, 'Risk Management Standard' [2002] < https://www.theirm.org/what-we-do/what-is-enterprise-risk-management/irms-risk-management-standard/#:~:text=The%20Risk%20Management%20Standard%20was,Risk%20Management%20Association%20(FERMA)>accessed 16 February 2024