17 September 2012 | By Katy Dowell
10 July 2013
28 March 2013
6 January 2014
7 May 2013
11 September 2013
Although lawyers have been the big winners in mammoth commercial court cases in recent years, costs are falling proportionally
The costs amassed during the recent court battle between Boris Berezovsky and Roman Abramovich have raised eyebrows, but efforts made by the courts in recent years have brought about a sea-change in case management and legal fees are coming down
The £100m legal fees run up by billionaires Boris Berezovsky and Roman Abramovich have once again raised eyebrows with regard to how much international litigants are willing to pay London lawyers. Yet had Mrs Justice Gloster and Mr Justice Mann not ordered the cases to be co-managed by the commercial and Chancery courts the fees might have swollen further. The judiciary is taking steps to control costs by focusing on case management and the courts have come a long way since the infamous Bank of Credit and Commerce International (BCCI) trial.
The epic and costly court battle between auditors Deloitte and the Bank of England (BoE) over BCCI sensationally ended on the morning of 2 November 2005. Deloitte brought the £850m claim on behalf of creditors, accusing the BoE of not supervising the London-based, Luxembourg-incorporated BCCI, which had closed in 1991.
The case opened in January 2004 before Mr Justice Tomlinson with then-Essex Court Chambers head Gordon Pollock QC beginning what turned into a 79-day opening statement for Deloitte. Pollock was paid a £3m brief fee for his appearance while the bank’s counsel and instructed firm, Freshfields Bruckhaus Deringer, were understood to have pocketed £75m. Deloitte’s lawyers at Hogan Lovells legacy firm Lovells racked up costs of £38m.
It was a bitterly fought battle, but one that did not warrant an indemnity costs fight, the BoE said. Later it was agreed that Deloitte would pay the Bank costs of £73.6m.
Handing down his indemnity costs judgment in April 2005 Tomlinson J attacked the case, branding it a “farce” that “had the capacity to damage the reputation of our legal system”.
At the same time Equitable Life was pursuing a £2.6bn negligence claim against former auditors Ernst & Young (E&Y). The insurer argued that E&Y had been negligent when it audited the company’s accounts.
The case finally got to court in April 2005, four years after the claim was launched, with the onus on Equitable Life to show how E&Y had been, as it claimed, negligent. This proved impossible and in September the case settled.
Brick Court Chambers’ Mark Hapgood QC was instructed by Clyde & Co legacy firm Barlow Lyde & Gilbert partner Clare Canning (who, incidentally, was named as E&Y general counsel in September 2011) to lead the defence. He was joined by 7KBW’s Jonathan Gaisman QC, who slammed the case: “At the end of this very long, costly and utterly pointless piece of litigation there is a salutary lesson to be learnt for those thinking of suing auditors.”
It was subsequently revealed that the defendant had spent £25m on its legal team while the claimant’s legal costs were in the region of £40m – all for a claim that stood little chance of success.
The two collapsed cases served as a wake-up call. For London to succeed as a litigation centre the courts needed to show how effective they were at managing cases. The BCCI and Equitable Life cases were examples of how not to run litigation.
To outsiders the cases seemed like a feeding frenzy for fat-cat litigators whose firms were producing record turnover figures year after year. When judges start criticising the cases they are presiding over as well as the conduct of certain lawyers it is clear that a wider review of larger trials is necessary.
In January 2007 the Commercial Court Users’ Committee was set up. Comprised of judges, barristers, solicitors and two major litigants the committee was to look at how to improve court users’ experience of the system. By December the committee had produced a series of recommendations the then-head of the Commercial Court Mr Justice Smith said should apply to all cases in the court. Those proposals were folded into the civil procedure rules (CPR).
They included greater client accountability and involvement in the process of litigation; shorter statements of cases; shorter trials; use of court-endorsed lists of issues; early judicial view on issues; and summary assessment of costs under £250,000. All this was designed to allow judges greater control of cases to stop litigation spiralling out of control.
As Clifford Chance partner Simon Davis, who sat on the working party, explained at the time: “The recommendations were intended to make sure that litigation, albeit adversarial in nature, was focused on those issues that really divided the parties. This was all with a view to reducing work being undertaken unnecessarily, such as clients having to produce large numbers of documents that may not actually help anyone decide the case.”
Six months after the CPR were amended the system was to get its first real test in two mammoth cases dominating the courts: the Buncefield litigation and Tajik Aluminium dispute.
Buncefield was a high-profile dispute, with oil giants Total and Chevron battling out who should be held liable for the 2005 explosion at the Hertfordshire oil storage depot.
Mr Justice Steel, a strong advocate of the working party recommendations, was appointed to preside over the fight. His appointment was seen as an indication that the judiciary wanted to make the pilot trial work. If he could pull it off it would be a resounding endorsement of the guidance.
Perhaps it is only now, years later, that litigators can truly assess the impact Steel J made in the Buncefield case.
The battle was bitterly fought, with Herbert Smith partner Ted Greeno instructed for Chevron, bringing in Jonathan Sumption QC, then of Brick Court, and his setmate Andrew Popplewell QC.
In March 2009 Steel J found Total to be vicariously liable for the incident, setting the case up for a hard-fought costs battle. Costs for both parties were put at around £58m. This included a £12m fee for Herbert Smith including a £750,000 disbursement for Sumption’s three-day court appearance.
According to Steel J’s April 2009 judgment on costs, the fact that both Total and Chevron had run up such huge bills because the claim was for £750m meant that it was only for the court to decide what could be deemed “reasonable” costs. This is something that could affect any costs dispute between Berezovsky and Abramovich, but more of that later.
Chevron argued it should be entitled to indemnity costs on the grounds that Total unreasonably contested the issues of negligence and foreseeability. Taking control of a dispute in which everyone was lobbing indemnity claims at everyone, Steel J stepped up.
The judge awarded indemnity costs on the issue of negligence up until the date when liability on this issue was admitted. Total had denied fault for two years after the action was begun even though it knew the truth from its own internal investigation at the outset.
However, the judge refused to award indemnity costs in relation to the issues of foreseeability, stating that Total’s case was not “manifestly so weak as to justify indemnity costs”. He also refused costs claimed on off-site negligence and vicarious liability.
Looking back it was clear that there was no big winner in the Buncefield trial aside from the lawyers acting in the case and Steel J himself.
One claimant lawyer working on the case commented at the time: “When you look at how long it took to bring the case to court, how long the case lasted and how it was managed, it was all done well – particularly as it is a process where you go into as much detail as possible. The costs compare favourably to what they would be anywhere.”
Unlike Buncefield the Talco case did not last long in live court. It did, however, generate some eye-watering legal fees. Among the most expensive cases in British legal history the battle, in which Herbert Smith advised the Republic of Tajikistan in a dispute with a group of aluminium traders, settled midway through the 18-week trial, in November 2008.
There were few secrets about how much was being spent on the epic fight. In April during a disclosure hearing Mr Justice Tomlinson heard how Herbert Smith was earning more than £50m in fees for the work partner Simon Bushell was carrying out for the Tajikistan government. At the height of the Talco case Herbert Smith had five partners – including lead partner Bushell, Gary Milner-Moore and Stuart Paterson – working on the case, as well as 20 fee-earners for extensive disclosure.
The case revolved around fraud claims made by Talco, Tajikistan’s state-owned smelter, which claimed that its supplier – a Guernsey-based company run by Tajik national Avaz Nazarov – had siphoned off up to £245m in profits. Nazarov and eight other defendants denied wrongdoing and launched their own multimillion-pound counterclaim.
The defendant costs up to the April hearing for Clyde & Co, Byrne and Partners and Magrath, which were all acting for defendants, came in at around £27m. Those costs were to spiral further as the court battle escalated.
Tomlinson J, who presided over the case, was clearly becoming irritated by the fight when he criticised Herbert Smith’s actions in court on 18 November, 2008 as “absolutely intolerable” after it emerged the firm had removed the judge’s documents covered in his annotations which he called “private and confidential” and replaced them with a “completely virgin, unmarked copy”.
This blatant disregard for the judge might be dealt with more harshly by a judge today, but the fact that the case was settled not long after the incident shows that it had some impact on the trial.
Through a series of deals and bust-ups this case is connected to Rusal, the aluminium producer at the centre of the dispute between Russian oligarchs Oleg Deripaska and rival billionaire Michael Cherney.
Back in January 2009, in the aftermath of the Tajik case, Rusal settled its own claim against Herbert Smith. The dispute related to advice given to Rusal by Herbert Smith in the long-running Talco litigation.
The firm and Rusal released a joint statement after the arbitration settled.
“In 2007 Rusal brought arbitration against Herbert Smith arising out of the firm’s representation of it at an early part of the Talco litigation,” it stated. “Herbert Smith successfully defended the claim, but the tribunal saw nothing improper in the fact that it had been brought and neither party was criticised for their conduct in the events giving rise to the claim.”
Had the case made it all the way to open court perhaps the billing structure for all firms involved in the case would have been laid bare. Some suggest that in settling the dispute the parties avoided the public eye and the judicial nit-picking of the costs schedule.
The court had taken control of the litigation, putting costs at the heart of the dispute and encouraging both sides to consider their positions.
Rates of light
More recently, those at the top of the judicial hierarchy have been vocal about their concerns over fees. In May the Master of Rolls Lord Neuberger sparked debate when he called for the days of the hourly rate to come to an end.
The hourly rate “leads to inefficient practices – at worst it rewards and incentivises inefficiency”, he said, calling for a costs council to be established.
Neuberger MR was part of the trio of judges who sat on the Court of Appeal (CoA) panel that agreed with the High Court that £105m costs billed by Leigh Day & Co in relation to its group litigation against Trafigura should be cut.
Leigh Day sent shockwaves through the profession when it unveiled a £105m bill for a group litigation order it brought against Trafigura on behalf of 30,000 Ivory Coast residents. The firm and its counsel in the case, 39 Essex Street’s Robert Jay QC, had been instructed on a conditional fee arrangement (CFA) and its bill was calculated to include a 100 per cent uplift.
Cutting the uplift to 58 per cent Neuberger MR stated: “The time, expertise and effort devoted by solicitors to identifying a potential claimant, and negotiating the terms on which they are to be engaged by the claimant, in connection with litigation, cannot, in my view, be properly described as an item incurred by the client for the purposes of the litigation.”
The original case was settled after Trafigura agreed to pay out £30m of the £100m claimed. A costs battle between the parties settled in late December last year following the CoA ruling.
It will be for Neuberger MR’s successor, Lord Dyson, to decide whether a costs council is necessary to combat the hourly rate as he suggested. As the newly appointed president of the Supreme Court, however, it is likely that Neuberger MR will continue to call for what he sees as a more efficient method of billing.
Mrs Justice Gloster was one of the judges sitting on the Long Trials Working Party and in Berezovsky v Abramovich she put the lessons learned there into action. Equally, the mammoth legal teams instructed by the parties involved worked flat out to get the case organised.
With two six-month trials lined up for Berezovsky, detailed planning was the key to avoiding another Equitable Life scandal.
A recap: Berezovsky personally served papers against Abramovich in 2007. At the heart of the claim were allegations that Abramovich coerced him into selling his 21.5 per cent share in Russian oil company Sibneft at a significantly reduced price and that the defendant had broken promises over a deal involving Rusal.
Gloster J dismissed the claims in full, stating that Berezovsky was an unreliable witness whose ‘I blame my lawyers’ excuse was not convincing.
In the Chancery proceedings Berezovsky alleged that significant proportion of assets and funds worth between $2bn and $3bn (£1.3bn and £1.9bn) held by the estate of Arkady ‘Badri’ Patarkatsishvili, or a large number of trusts and funds set up by Patarkatsishvili, as well as assets held by Anisimov, are in fact part-owned by Berezovsky.
On Thursday (13 September) Berezovsky withdrew his claims against the Patarkatsishvili estate with neither party admitting liability. He also withdrew claims against the Salford Investment Company.
In August 2010, a year before the commercial trial was to be heard, a case management conference held by Gloster J and Mann J decided that parts of the two cases should be heard together.
As Gloster J explained in her executive summary judgment: “That order identified a number of issues, defined as ‘the overlap Issues’, which arise in both the commercial court action and the Chancery actions. Mann J and I directed that the overlap issues should be tried and determined as preliminary issues in the Chancery actions at the same time as the trial of the commercial court action.
“We further ordered that each of the parties to the Chancery actions should be bound only by the findings made at the joint trial on, and might participate fully in, the overlap issues, but should not be bound by findings at the joint trial on any other issues.”
The result was that the case duplications were halted in their tracks, saving time and money. Under the global spotlight the case was managed effectively, focusing the minds of all lawyers involved on the issues at hand.
Counsel involved in the litigation agreed it was a smoothly run case.
“Having participated in the first-ever joint trial in the Chancery Division and the Commercial Court, I’m aware of the overlap in the work,” commented Serle Court barrister Jonathan Adkin, a counsel for the widow of Georgian oligarch Patarkatsishvili in the Abramovich case, earlier this year. “This will only grow following their move together into the Rolls Building. Chancery and commercial barristers need to be able to provide expertise in both fields, with cases increasingly straddling the divide.”
Effective judicial management of cases is helping underpin London’s status as a world-class disputes centre. Greater cooperation between the courts is setting an example for legal teams to follow. The memories of the BCCI and Equitable Life cases still echo, but gone are the days of ineffective case management thanks to the efforts of a modern judiciary determined to bring what were perceived to be fat-cat lawyers to heel.