The commercial year 2012-13

Having an amazing ability to analyse pure theoretical law is all well and good, but you also need to appreciate the commercial context within which your clients are operating. Courtesy of just published Best in Law, this feature looks at some of the key themes in the commercial world in 2012-13 and gives you some pointers on how they are relevant to lawyers.

For today's aspiring lawyers, commercial awareness is less optional extra than vital necessity. Clients expect their counsel to be business savvy and practical in their guidance; this in turn means that law firms need their newest recruits to hit the ground running when it comes to understanding the broader commercial background to any matter. This may sound intimidating, but at this stage it is mostly a case of dipping into the business pages and getting used to shouting at the radio when the Today Programme comes on. To start you off, we highlight some of the biggest stories of the last 12 months and explain why they should be of particular interest to up-and-coming legal eaglets.

Banking: the story so far

It is now six years since the onset of the credit crunch and five years since the banking implosion of September 2008 - and while there are finally some promising signs of recovery, it is still far from clear whether we are out of the woods.

The commonly agreed starting point was the US sub-prime mortgage bubble of 2007 - itself the product of an economic boom which made banks and investors hungry for new business. In a misguided bid to tap a previously overlooked market, US banks began offering mortgages to those with less than gold-plated credit ratings, tempting non-traditional buyers with low interest rates and minimal or, in some cases, zero deposits. The banks then packaged these debts up as complicated financial instruments - so complicated, it turned out, that no one really understood what was going on at all - and sold them on. Their thinking was that bundling them up in this way would eliminate risk altogether.

How wrong they were. As over-stretched mortgage holders began to default on their loans, the housing market nosedived (the received wisdom previously being that this could never happen). This in turn left financial institutions short of ready cash, deeply nervous about the full extent of their exposure to sub-prime debt and unwilling to lend to one another; and lo, the credit crunch was born. First to go under were small businesses; a year later, the Wall Street front row faced the chop.

In under a week in September 2008, the mighty - and supposedly invulnerable - global banking system was brought to its knees. Lehman Brothers filed for bankruptcy protection, stockbroker Merrill Lynch was taken over by Bank of America, while the US government had to ride to the rescue of insurance giant AIG. Over on this side of the pond, the UK government helped to bail out HBOS after rumours that the owner of mortgage lender Halifax was in trouble.

Today we are in a situation where many banks are nationally owned and governments are still struggling under the burden of these toxic assets. This in turn has raised questions over sovereign debt - see the section on the Eurozone below. Meanwhile, banks are still reluctant to lend, increasing the pressure on small and medium-sized enterprises and forcing many otherwise healthy businesses into bankruptcy. It is a sad and sorry tale - and one that is still unfolding. No one will expect you to be able to name every financial institution that hit the rocks, but it is important to understand how the current situation arose and how a disaster in one part of the economy can quickly spread to others.

The never-ending Eurozone crisis

The Eurozone crisis is another consequence of the credit crunch that, once again, seems like it is still a long way from resolution. Its origins are worth recounting to illustrate why 'contagion' has become one of the buzzwords of 21st century business.

The boom times of the early 2000s encouraged reckless lending and borrowing. In particular, many governments opted to securitise future revenues in order to reduce current debts and deficits. Or, as your granny might put it, they spent their money before they had earned it. She might also go on to point out that this never ends well.

This practice was particularly attractive for EU member states, as it allowed them to stay within the letter, if not the spirit, of the Maastricht Treaty. Things came to a head in 2009, in the wake of the 2008 financial crash. Investors were growing increasingly uneasy about the spectre of a sovereign debt crisis; ironically, their very unease proved a self-fulfilling prophecy. Greece was first to face the music. After months of speculation and fears of default, in April 2010 Standard & Poor downgraded the country's sovereign debt status to 'junk'. The government secured a €110 billion loan  designed to dig it out of trouble and announced a raft of harsh austerity measures to curb spending on public sector wages and pensions and bring the debt under control. However, these sparked widespread social unrest and protests by a people who felt that they were being sold out and were paying the price for others' misdeeds. While the bailout has been enough to stop the country defaulting, the accompanying austerity measures have pushed Greece deeper into recession and sent unemployment soaring.

The next head on the chopping block was Ireland's - though this was less as a result of public overspending than of the government taking the hit and bailing out six national banks following the collapse of the property bubble. Different reasons, same result: a bailout from the European Union and the International Monetary Fund in November 2010, with - you guessed it - severe austerity measures. Portugal, Spain and Cyprus have all since hit the rocks to greater or lesser degrees, and even the United Kingdom has lost its coveted triple A credit rating.

Many suggest that the best option for a country such as Greece would be an orderly default, which would allow it to leave the Eurozone and begin to rebuild its economy. However, the political and financial consequences of this could devastate the whole European Union.

In the meantime, opinion is divided on the effectiveness of austerity measures. Proponents insist that the only thing to do in the face of rising debt is to increase taxes and slash public spending. However, the awkward truth is that this strategy just does not seem to be working. Several leading economists have instead suggested that governments should increase their deficits in order to reinvigorate their struggling economies. The truth is that nobody knows for sure. All we do know is that this in today's interconnected world, the bad flows as freely as the good. Oh, and if you have the kind of granny who gives you sensible economic advice about looking after the pennies and saving for a rainy day - she's probably right.

A new world order for banks?

If reckless lending and over-complex financial instruments got us into this mess, you might expect that the banks - suitably chastened - would have locked down a whole new set of rules to stop this ever happening again. Well, up to a point, Lord Copper…

The attempts by various governments around the world to prevent such a devastating financial crash from reoccurring represent a useful case study on the difficulty of regulating any industry - especially such a powerful one as banking. Public debacles invite proper intervention and oversight, and suddenly everyone is an expert. Representatives from the industry in question may have very definite ideas about how they do - and do not - wish to be governed; but are they the best people to judge?

In the United Kingdom, matters have been compounded by the added outrage of the LIBOR scandal. In June 2012 Barclays finally admitted misconduct over its attempts to manipulate the LIBOR - the London Interbank Offered Rate. It was fined a total of £290 million: £59.5 million by the UK Financial Services Authority and £102 million and £128 million by the US Department of Justice and the Commodity Futures Trading Commission, respectively. The fallout prompted the departures of chief executive Bob Diamond and chairman Marcus Agius, and damaged public confidence in the banks even further (which some cynics had doubted was even possible.

The Parliamentary Commission on Banking Standards has now published a plan to "strengthen standards in banking" by ramping up corporate governance, making bosses more accountable, introducing tough new standards for all staff and - most controversially - working with regulators to ensure that bankers' pay tallies with their performance and that bonuses can be clawed back if financial institutions end up needing government aid. However, the government's formal response to the report has come under fire for fudging crucial issues such as changes to how the Bank of England is to be managed and the remit of the new regulator, the Financial Conduct Authority.

For legal counsel, the area is likely to remain a potential minefield for a long while yet. Even once the full extent of regulatory changes becomes clear, it could take several years and a few test cases before things settle down. Even then, it is impossible to say whether the reforms will prevent similar disasters in future - given the ferocity with which the banks are resisting all attempts at further regulation, it is doubtful whether any lasting lessons have been learned.

Tax doesn't have to be…

With austerity biting hard, businesses going under and pretty much everyone feeling the pinch, the news that several high-profile individuals - we're looking at you, Jimmy Carr - were using creative accounting to minimise their UK tax bill went down like the proverbial lead balloon. Even more poorly received were revelations that a number of multinationals - notably Amazon, Google and Starbucks - had been skimping on corporation tax.

Starbucks reportedly paid a mere £8.6 million in corporation tax over the last 14 years and nothing at all in the last four, despite sales of over £400 million in 2012. It managed this by paying licensing fees to a Dutch sister company, buying its coffee beans from Switzerland and 'borrowing' from other parts of its own business at steep interest rates. Multinationals are allowed to use the internationally established arm's-length principle to treat their own subsidiaries in different countries as different entities, paying tax on these accordingly. The result is the kind of pic'n'mix that allows Amazon to claim that all sales on its UK website are actually made by its Luxembourg-based European business (which employs 500 people), rather than its UK business (which employs 15,000) - with the latter acting as a mere 'service provider'.

However, despite the media outcry, the political bandwagonning and the public opprobrium, it is worth remembering that these multinationals did nothing illegal. This is tax avoidance, not evasion. It has been described as aggressive, unfair and even immoral, but it is not against the law. Google's Matt Brittin even insisted that the company has a duty to shareholders to minimise its costs.

That being the case, it is unclear whether there is much that national governments can do about it. While the French government has hit Amazon with a $252 million claim for unpaid taxes, interest and penalties, the online shopping giant has said that it will "vigorously contest" the assessment.

Instead, it appears that the court of public opinion might be more successful in achieving concrete results. This June, Starbucks announced that it had begun the process of paying £20 million over a two-year period - the first tax it has paid in the UK since 2008. So there is something to be said for grassroots activism - even if Starbucks' concession did carry the disturbing implication that the coffee behemoth considers paying tax an optional gesture of goodwill. International cooperation seems the only way to stop this kind of behaviour, which is likely to become increasingly common as more corporations go multinational. Yet if individual governments are finding it close to impossible to impose meaningful regulations on the banks, then what are the chances of reaching the necessary consensus on this issue?

Jobs ain't what they used to be

Employment figures are another key indicator of economic health. While these have been looking surprisingly robust of late, critics allege that they conceal a woeful tale of eroding job security and a very real crisis in youth employment. The government has been trying to intervene to improve the situation, but so far its efforts appear to have fallen wide of the mark.

In February this year a three-judge panel at the Royal Courts of Justice found that Work and Pensions Secretary Iain Duncan Smith had failed to give jobseekers sufficient information about their rights to appeal against being made to work for up to 780 hours unpaid. Under the deeply controversial work experience programme, young jobseekers are exempted from national minimum wage laws for up to eight weeks while working on placements for big high-street names including Tesco, Poundland and Argos. The Department of Work and Pensions has described the scheme as a way for young people to get valuable experience on the shop floor. However, some participants claim that it amounts to forced labour, while critics point out that it effectively means that taxpayers are paying people to work in big corporations for free. Even worse, there are fears that the scheme could have a negative impact on the hours available for paid part-time workers. Confusion has surrounded the scheme's opt-out provisions - the department has said that if jobseekers "express an interest" in a work experience offer, they must continue in the scheme, without pay, after a one-week cooling-off period or face losing their benefits. And there is no guarantee of a job at the end of it.

The ruling was largely a technical victory for opponents of the programme. However, the case drew unwelcome media attention for the companies involved - several, including Waterstones, have since dropped out in response to headlines describing the scheme as 'forced labour'.

So-called 'zero-hours' contracts have also come under scrutiny in recent months. Under these arrangements, employees are expected to be available at short notice, but are not guaranteed work and are paid only for actual hours worked. While these contracts are great for employers - allowing them to slash overheads by staffing only the precise manpower that they need - they leave employees with no job security and precious little protection.

There is also the wider question of whether it is a good idea to rely on a workforce that has been pared down to the bone. Remember the debacle of G4 and the Olympics? The security behemoth was unable to fulfil its contract because of an insufficient, unprepared workforce. Result: the army had to be drafted in at the last minute. Anyone fancy trying to tell the armed forces that they are on zero hours? More seriously, while these initiatives  were intended to free up employers and boost the economy, the long-term effect has been reduced job security and a so-called 'climate of fear' - which is unlikely to inspire consumer confidence.

Employment law is a maze at the best of times. Now, with companies trying to rip up the rule book and the Department of Work and Pensions pushing new initiatives through as fast as it can dream them up - not to mention an ideological backlash from the unions and certain factions of the media - this is likely to remain a richly muddled area for some time to come.

To frack or not to frack

Fracking - yet another addition to the modern lexicon and another deeply divisive issue - is either the key to energy security and economic prosperity or another step towards eco-pocalypse, depending on who you believe. At the time of writing, there is still a stand-off between Cuadrilla - the company that has bought exploratory licences to drill in the United Kingdom - and an unlikely but dedicated coalition of protesters, comprising die-hard environmentalists and locals anxious to protect the value of their property.

The story offers some useful tips for any would-be lawyer; but first, a few technical terms. Fracking involves pumping water, sand and chemicals underground to release shale gas. Proponents - of which the government is one - say that fracking in the United Kingdom could usher in a new era of cheap fuel and drive down heating bills. Critics point to horror stories in the United States of contaminated water supplies, methane leaks and even earthquakes. The truth is that no one is really sure, and both sides are guilty of peddling misinformation. Estimates about the UK's shale gas reserves are essentially meaningless without knowing how accessible those deposits are and the environmental cost of extraction. On the other hand, Balcombe, the main focus of protests, is not even a fracking site at all: Cuadrilla's plan is to extract oil by conventional methods, if possible.

Caroline Lucas - MP and former leader of the Green Party - is the latest high-profile arrestee, among accusations of heavy-handed policing. Talk about a perfect media storm; this one combines property rights, the right to protest and the cold, hard facts of UK energy needs. The coalition government has gone from promising full support for renewables to announcing a tax-break bonanza for companies engaged in fracking. The stories are contradictory and there is as much misinformation and propaganda as solid evidence.

However, at the heart of it, this is what being a lawyer is all about - sifting through all available information to advise your client as best you can and offer them as much supporting evidence as possible. As our commercial year round-up illustrates, the origins of most headline stories stretch back several years and there are often significant connections between different areas. Staying commercially savvy means not only being aware of major developments as they happen, but also understanding that nothing happens in isolation.