Tip:
Highlight text to annotate it
X
Michael Luckman: Unfortunately, litigation is never far away from us in our day to day jobs as lawyers, and our main concern is often how we're going to fund it.
Our commercial litigation partner James Gordon explores some of the options.
So James, I understand that litigation funding rules changes last year. Can clients still do no win, no fee?
James Gordon: Yes they can. The rules changed in April of 2013 and it is still possible to do no win, no fee or conditional fee agreements,
but what has changed is it's no longer possible to pass the success fee on to the losing party,
so we've done quite a lot of either full CFAs - 100% no win, no fee - and also we've done some partial ones,
where we'll charge clients 50% of fees as we go, but we'll put 50% of our fees at risk.
Now what's changed is it used to be the case of if we won, we'd recover our normal basic fee plus our success fee off the losing party and that's what's changed.
That means that CFAs are now a lot less attractive than they used to be, and that rule also applies to after the event insurance products.
So it used to be the case that if you did a CFA that would be we the lawyers sharing the risk with the client and saying, you know what, we'll back our judgment.
If we win this case then great, we can get a double fee off the losing party, but if we don't win we won't get paid.
That didn't deal with the downside risk in case we lost, where the client would be liable for the other side's fees, so a market developed for after the event insurance,
whereby you could get a premium which was recoverable from the losing party and that meant that you could actually insure for the risk of covering off the other side's costs should the worst happen and should we lose.
Now both of those things have changed. It's no longer possible to recover the success fee or the premium from the other side.
You still can do no win, no fee agreements, you still can get after the event insurance, but the problem is now that the success fee and the premium have to come out of your own winnings,
so if you win the case you're going to have substantially less than you would have done previously.
Michael: And what is the latest position on contingency fees then?
James: When the government changed the rules in April last year, they saw that actually by taking away this recoverability on success fees and premiums on ATE insurance,
claimants were going to have restricted options, so what they did was they changed the law so that for the first time in the UK we could do contingency fees, which of course had been in the States for a long time.
You know, you've got a claim for £10 million and I as your lawyer will agree that I get 30% of those damages if I win. Very typical in the US.
The problem came when the ministry of justice came to draft it, because they did two things which means that most law firms are not taking on what are called damages-based agreements,
or as one lawyer has called them "don't bother agreements", because it's not possible for the lawyers to do a partial DBA, a partial contingency fee.
So I can't charge a client 50% of our fees on a normal basis and have 50% at risk. It has to be all or nothing.
But the bigger problem is that the way that the rules are being drafted, it means that the law firm could be liable for the other side's fees should we lose.
Now that wasn't the intention of the drafting and at one point the ministry of justice did say they were going to change the drafting, but have now confirmed that they have not.
So where does that leave contingency fees?
There are very, very few law firms doing contingency fees at all, and so as a funding option that's not really available,
so actually what's happened is the government has taken contingency options off the table and hasn't actually put one back on.
Michael: We'd heard a lot in the market about third party funding of litigation. Is that still viable?
James: Well partly as a consequence that law firms aren't taking on contingency fees, clients have got to look for some other alternative.
Third party funders have been coming into the litigation scene for about 10-15 years, but particularly since the law changed last year, you've got a lot of funders entering into the market.
Now the problem with the funders is they're not regulated and you need to be very, very careful.
There are some horror stories and some very high profile horror stories, for example the Clifford Chance case, the Excalibur case, whereby there were three funders funding a piece of litigation.
The fees ran up to £20 million, they lost and one of the funders collapsed, and so the solvency of your funder is a big issue.
There have also been some cases, again quite high profile, whereby third party funders are saying to clients, do you know what, you may have lost, you may be looking to me to pick up the tab,
but you didn't tell me the full story, client, and so I'm not going to pay out.
So there are some real issues around the identity of your funder, the solvency of your funder, and are they actually going to pay out at the end of the day?
There is, in the UK, the Association of Litigation Funders, whereby eight of the UK funders have imposed a self-imposed code of conduct,
but even then they're only talking about a capital requirement of £2 million, so it really isn't that substantial.
So, third party funding is an option. It tends to be for bigger cases, so a lot of the funders will only look at a case worth £3 million damages plus,
and their reason for that is the funders are looking for quite a significant return - two or three times their investment - in order to fund the case.
Well, you need a fairly big pot of damages for the economics of that to make sense.
Michael: So, if you are general counsel, what are your litigation funding options?
James: We are sadly back to the old hourly rate, so most of the litigation that's being conducted in commercial law firms these days is being conducted on an hourly rate basis.
It's not all bad, though, there have been some modifications and changes over recent years.
First of all, cost estimating. So the courts have required, and frankly the commercial practices demanded, that litigation lawyers get much better at cost estimating.
What this means is that there are certain tranches of litigation responsible now to fixed fees.
So if I'm doing a case, Michael, and I know you've got a cupboard full of documents, I won't charge you on an hourly rate basis for that,
I can charge you a fixed fee for the disclosure part of that.
If I know you've got three witnesses in the case, you can say to me, James, you've got experience of this, you've been doing cost estimating for years now, can't you give me a fixed fee for that?
Now that requires open transparency and honesty with the client, and what often happens is a client says I've got a cupboard full of documents
and actually it turns out they've got three servers as well which are full of documents, and that's quite hard to fix fees.
But if you get the scoping right, it's possible to do it.
The other thing that the courts are doing is they are more and more capping costs, so costs capping is coming into play in the UK.
In fact from April 2014 it's going to apply in all courts in the UK save for claims over £10 million. So the judges are taking a much more interventionist approach to litigation costs.
So most of the work we're doing is back to hourly rates. We are doing some fixed fees.
We are seeing some cases if, genuinely, clients either can't afford it or alternatively they just don't want the cash flow of a large piece of litigation,
then there are some funding options which include either a conditional fee agreement whereby the client will wear the success fee out of their damages.
Equally you can still get that after the event insurance premium, but you'll have to wear the premium, and if you just don't want that, the third party funding is an available option.
But most litigation we're seeing is back to the good old hourly rate, so whereas before April of last year Wragge & Co had,
at any one time, five or six cases on no win, no fee with after the event insurance premiums,
we don't have any of those at the moment. We've got one or two old run-off cases, but no new cases are being taken on, so it really is back to what's the hourly rate,
give me a sensible estimate that you're going to stick to, and if possible fix fees for me along the way for each stage.
Michael: Thank you, James.