18 February 2013 | By Katy Dowell
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Firms are considering their options prior to the Jackson reforms deadline in April, but fewer cases are likely to be viable
When it comes to the costs management of disputes, litigators are, more often than not, perceived to be lacking in commercial awareness, but lawyers who are financially astute can reap the rewards of innovation by improving cashflow and maximising returns.
In April a raft of reforms aimed at overhauling the costs management of civil disputes will be enacted. The implementation of the Jackson reforms are expected to be the trigger for a profession-wide overhaul of the way cases are managed.
The background to the reform programme is well-rehearsed and much debated.
Alarmed by the rising costs of litigation in England and Wales, in 2009 then-Master of the Rolls Sir Anthony Clark asked Lord Justice Jackson to see what could be done. A year-long review ensued and in January 2010 Jackson LJ published his proposed reforms.
The appellate judge suggested that the end of conditional fees and the recoverability rule would help reduce costs. Under the Woolf regime, put in place in 1999 to bring about conditional fee agreements (CFA), lawyers had become used to front-loading fees with the aim of capturing the maximum uplift should they win the case.
The tendency for lawyers to push costs up at the outset was having an adverse effect on the broader market, Jackson LJ concluded, allowing costs to spiral out of control.
Recoverability of after-the-event (ATE) premiums should be done away with, as should the uplift offered to lawyers on successful cases, the judge said. Instead, more use should be made of third-party funding models and contingency fees.
Some suggest that Jackson LJ put in place the mechanisms for a third-party funding ‘big bang’. The introduction of contingency fees, or damages-based agreements (DBAs) as Jackson LJ calls them, has forced many firms to look at their litigation models and how they can best fund viable cases.
As the April implementation day looms, however, firms are still struggling to get to grips with the concept. The most pressing challenge has been the lack of detail on the structure DBAs can take (see box). There remains a great deal of professional curiosity about how firms can best use third-party funds to get cases off the ground while sharing the financial risk.
Vannin Capital founder Nick Rowles-Davies speaks for many when he says: “In the past year demand has grown month-on-month. Third-party funding is seeping into the lawyer’s psyche.”
Using private equity funds to finance cases is a relatively new concept here, albeit one that has existed in the US for some time. Funders such as FirstAssist - now Burford - Harbour Litigation, Vannin and Calunius Capital have become more visible in the UK in recent years, although take-up among firms has been restricted.
Nevertheless, third-party funders are starting to see their market take hold. The prospect of risk-sharing is attractive, as is the concept that such funds can be used to improve work-in-progress (WIP) levels.
WIP funding is one concept dispute resolution teams are considering for the post-Jackson market. For example, if a lawyer is working on a case that has costly disbursements and is expected to run for a long time, external investment could be used to ensure cashflow for a firm with a shallow money pot. When the case is won and the contingency fee paid, the funders are reimbursed by the firm with a chunky uplift on the borrowing.
Mayer Brown partner Rani Mina says the firm has had discussions about the possibility of WIP funding.
“We want to be a trusted firm that has good relationships with funders,” she says. “We may be able to do joint pitches in front of clients and develop attractive proposals.”
Addleshaw Goddard is another firm looking at the possibility. The firm has attempted to set itself up as a pioneer in terms of litigation funding, having conducted one of the highest profile disputes in recent years on a CFA - Berezovsky v Abramovich.
Partner John Gosling says Addleshaws is developing products for the post-Jackson environment, but remains tight-lipped about the fine detail.
“Most likely, it will mean working with both funders and [ATE] insurers,” he says. “I think we’ll see a variety of models coming out in the next few weeks and months. We’re all looking at developing products.”
Head of litigation Simon Kamstra chips in: “We have a huge competitive advantage in that we have lived through the process - it can be a hairy business.”
RPC is also exploring opportunities presented by the new regime. The firm has not been shy to use conditional fees in top-tier cases. Partner Tim Brown has agreed a CFA deal with rice importer Manmohan Varma, who has a multimillion-pound claim in the High Court against his former friend Lakshimi Mittal, chair and CEO of ArcelorMittal.
Partner Geraldine Elliot says the firm is “very positive” about DBAs, adding: “Having the additional ways of funding is a good thing.”
Mid-tier in funders’ sights
It is mid-tier firms such as Addleshaw Goddard and RPC, and the US firms in London - those with experience of the contingency fee model such as Quinn Emanuel Urquhart & Sullivan - that funders such as Burford are looking to attract.
“Those are the firms on the phone wanting to talk,” says Burford’s UK-based chief investment officer Ross Clark, who has been touting them for business.
“It’s much harder to build relationships with the magic circle,” says Clark.
He adds that US firms in London “‘get’ contingency fees and the concept of risk-sharing - they’ve seen how the funding model works in the US”.
Harbour head of litigation funding Susan Dunn says there is a great deal of nervousness in the market, and understandably so.
“Most firms are still afraid,” she says. “They haven’t practised DBAs. We’ve done it on tribunal matters and US matters, and what we’re finding is that they’re coming to us to find out if we can help.”
In fact, Dunn claims she has been inundated with calls from FTSE100 companies intrigued by being able to take litigation costs off the balance sheet.
“We’ve had a succession of FTSE100 companies coming to us and wanting to see how funding works,” she says. “The motivation is that a big piece of litigation can have a big budget and in-house lawyers are asking whether they want to spend that money or share the risk externally.”
Elliot agrees, adding: “Corporate claimants see [funders] as being able to take risk off the balance sheet. DBAs will provide the impetus for third-party funders to co-invest with law firms in cases.”
“If clients need or want help to lay off that risk, they will want to use external money,” adds Clark. “That money can be used to fund all costs, including disbursements.”
While many litigators remain uneducated as to the possibilities offered by funders, others are using the April implementation date as an opportunity .
Clark says some firms are also looking at what could be done to fund books of cases, whereby a firm is allocated a set amount to spend as it sees fit across a range of disputes. “We’re talking to people about it,” he says.
Gosling adds that third-party funding can be flexible.
“You could split [funding] to cover a portfolio or use it on an individual case and wrap it around with ATE insurance,” he suggests.
Confusion remains, practitioners say, because of the lack of practical detail on how the Ministry of Justice (MoJ) sees the new model working.
Many in the market believe there is room for a hybrid model using both third-party funding and ATE insurance. However, MoJ guidelines published in January suggest that the opposite is true.
“The DBA guidance is unambiguous,” says Clark. “Everyone had intended that there would be hybrid DBAs [using ATE insurance].”
Such a model would combine third-party funding with larger ATE policies, with the insurance premium paid upfront or in stages to lay off the risk of losing the case and having to repay a funder.
“Funders and insurers will be working more closely together,” says Clark.
Matthew Amey, a director at funding broker The Judge agrees.
“Firms should be excited that funding is being more closely aligned with ATE,” he says.
It is clear, however, that a significant portion of UK plc will be cut off from funding options, particularly in the SME market.
“Fewer cases will be economically viable,” says Amey. “The problem is that you can no longer run cases where the costs are high and the payout too low.”
QBE European Operations underwriting manager Rocco Pirozzolo adds: “You can’t get away from the fact that some claims will be squeezed from the market.”
Some may go so far as to suggest that the end of recoverability will spell the end for the ATE market, but brokers say that would be a step too far.
As the April deadline comes closer ATE providers are witnessing a surge in demand for their product.
One underwriter says: “There’s no doubt in my mind that we’re seeing cases that normally would have been held off for a while. They want to get them into the system before no-win, no-fee disappears.”
Clark says: “It started around December when firms we know well started to push cases through.”
These are the disputes underwriters and lawyers agree will likely get locked out of the justice system post-Jackson. According to Amey, they are the cases where the costs of disbursement are too high and the amounts claimed too low.
“The problem is that you can no longer run cases where the costs are too high,” he says.
“There’s a real problem that a whole demographic will be legally disenfranchised,” adds Clark. However, for higher value cases where ATE is used in conjunction with third-party funding, the market will thrive.
According to Pirozzolo it is in big-ticket claims circles that a degree of discipline will resurface. This may mean the cost of premiums rockets as insurers will no longer be able to recover premiums from the losing side.
“It comes back to the traditional insurance model, a place where the insured pays the premium in advance,” explains Pirozzolo. “Exactly how this is paid - in a lump sum or through staged payments - is up for discussion. The brokers negotiating the deal become crucial. Instead of front-loading costs, lawyers, brokers, underwriters and funders should be front-loading expertise at the outset of a case to ensure the client is getting the best possible deal.”
Pirozzolo says a cultural shift is needed among litigators - they need to share more information with litigation investors upfront.
“To make this work, you need to take the people with you,” he says.
Although they have been criticised for locking some out of the litigation market, the Jackson reforms present an opportunity for funders and lawyers working on big-ticket claims. They are also expected to bring a degree of discipline to the ATE market.
Knowledge gap between lawyers and clients
Research carried out by Harbour shows the knowledge gap between private practice lawyers and their clients. The funder surveyed 37 law firms, 33 barristers’ chambers and 31 in-house counsel to find that just 21 per cent of the in-house lawyers questioned have an understanding of funding models, and none recall discussing the option with their external lawyers.
The same survey shows that more than 90 per cent of firms and chambers are aware of the market.
The key reforms to costs rules
The much-awaited new Civil Procedure (Amendment) Rules 2013 have now been published.
They herald many changes to the way costs are addressed in civil proceedings, and this article highlights some of the most important ones.
A key reform is costs management, which will apply in all multi-track cases except the Commercial and Admiralty Courts. Parties will have to file and exchange (detailed) costs budgets at the outset of a claim. The court can then make a ‘costs management order’, which will mean that the parties are required to agree each other’s budgets, and in respect of budgets that are not agreed, the court will revise and approve them. It is notable that the court only becomes involved in this process if the parties do not agree. The court is then required to have regard to the budgets when making any case management direction, and not to depart from the budget on detailed assessment without good reason. This will mean that costs have to be carefully considered at the outset; costs matters cannot just be left to the end of a case.
CPR Parts 43-48 have been completely rewritten. There will be no new Part 43 and Parts 44-48 have all been re-ordered, although they contain many of the existing provisions.
There are also important new provisions. Rule 44.3(2)(a) includes the new definition of proportionality, which provides that even necessary costs will be disallowed if they are disproportionate. It remains to be seen how this rule will be applied where it produces a harsh result in an individual case.
The new Part 44 Section II introduces ‘qualified one-way costs shifting’ in personal injury cases. Hence a successful claimant will be able recover costs; but a successful defendant generally will only be able to recover costs to the extent that the claimant is awarded damages or interest. One exception is that a defendant can apply to the court to recover its costs in full where the claim is found to be ‘fundamentally dishonest’; and the precise meaning of that phrase is likely to be the subject of some argument.
Taken together these reforms will have a profound impact on the approach by courts to costs; and every practitioner will need to be familiar with the new rules.
Robert Marven, barrister, 4 New Square
DBA and CFA: state of play
On 22 January the latest draft damages-based agreements (DBA) regulations were laid before Parliament. The assumption is that they will be approved by Parliament unchanged.
A DBA is defined as a private funding arrangement between a representative and a client, whereby the representative’s agreed fee (the payment) is contingent upon the success of the case and is determined as a percentage of the compensation received by the client.
The draft regulations prescribe the requirements with which a DBA must comply to be enforceable. These are that the DBA specifies the claim to which it relates, the circumstances in which the lawyers payment, expenses and costs are payable, and the reason for setting the amount of payment at the agreed level.
The maximum payment is 50 per cent of damages in civil litigation - other than in personal injury claims, where the maximum is 25 per cent, and in appeals, where no cap applies.
Importantly, this payment, other than in employment claims, includes counsel’s fees and VAT, so the cap is lower in practice than it appears at first sight.
Equally important is the fact that partial DBAs are apparently not permitted by the draft regulations, and only those that are true “no-win, no-fee” agreements are allowed. This means they are unlikely to be used widely in commercial litigation.
The CPR will also need to be amended to cover DBAs but, as mentioned above, they have not yet been published. It is not clear whether they will flesh out the minimal provisions contained in the regulations, or if it will be left to the courts to do this.
Conditional fee agreements
On 22 January the draft Conditional Fee Agreements (CFA) Order 2013 was also laid before Parliament.
These regulations are also likely to be approved by
Parliament without change and undermine the existing CFA regime by providing that successful litigants may no longer recover CFA success fees from the loser.
Neither will they be able to recover a premium paid for after-the-event insurance. The draft regulations prescribe the requirements with which a CFA must comply in order to be enforceable. The maximum amount chargeable as a success fee remains 100 per cent other than in personal injury claims, where there is a cap of 25 per cent.
Charlie Clarke-Jervoise, professional support lawyer, Hogan Lovells