The smarter barter
19 August 2003
Hindsight is a wonderful thing. Equity-for-fees deals have all but been written off and buried, alongside all those other failed dreams of the doomed dotcom era. And so there was some surprise to discover that Field Fisher Waterhouse, the firm credited with championing the craze the first time round, is not only at it again, but going a stage further and offering its own services on two new business-to-business (B2B) internet exchanges.
You do not have to look far for evidence that the more entrepreneurial types are beginning to lessen their grip on the security blanket that is the hourly rate. Instead, they are increasingly prepared to engage in some creative thinking on fees.
Last week, The Lawyer reported new ventures not just from Field Fisher, but also an innovative scheme called Dare (Dispute Assessment and Risk Evaluation Service), which is backed by City firms Edwin Coe and Penningtons, and Tony Guise, the president of the London Solicitors' Litigation Association. Dare offers fixed fees for pre-litigation commercial advice through a call centre, which is administered by a leading after-the-event (ATE) insurer. Then there is the continuing success of Lovells' Mexican wave solution, devised by the property team for client Prudential Property Investment Management. This marries the guaranteed quality of a City firm with the lower costs of regional firms by subcontracting less complex matters to regional firms Cripps Harries Hall and Knight & Son.
Elsewhere, the profession's traditional suspicion of risk-sharing fee arrangements - mainly conditional fee arrangements (CFAs), contingency arrangements and all stops in between - appears to be in slight retreat. Witness the enthusiasm for CFAs in the libel sector, led by Peter Carter Ruck & Partners and David Price Solicitors & Advocates, as well as the appearance of claims consultancies set up by shipping firms to work on contingency fees associated with the likes of Ince & Co and Clyde & Co. There is flexibility on fees out there, if you know where to look.
That said, there are many firms that remain sceptical about both the business case for, and the ethical problems of, such unorthodox approaches. "Cash is king," states Jane Mann, head of employment at Fox Williams, bluntly summing up her firm's ethos. "Firms are wise to operate on the basis that cash and cash collection matter a great deal, because that's the way you keep the debt down and pay your own bills. It tends to lead to a stronger and healthier firm to manage."
There are two main reasons why Mann's firm eschews the temptations of alternative fee arrangements - and why, she argues, other firms should. "If you start, for example, taking equity instead of fees, you're moving away from the traditional law firm model and introducing
other elements into your business - including the element of risk-sharing," she says. "And you have to face the fact that, as a lawyer, you might know the law business, but you don't know other businesses."
Her second objection is the inherent "conflict of interest" between client and lawyer. For example, under a CFA there is pressure on the lawyer to settle the case as speedily as possible, which might not be in the best interests of the client. Or, in a shares-for-fees arrangement, there might be a time when the lawyer wants to sell their shares in their own client - hardly a vote of confidence.
Of course, there are less genteel reasons why other lawyers declare their opposition to such deals. "It's been a tight couple of years and everyone's trying to undercut everyone else. Some of these ideas have more than a whiff of desperation about them," reflects one corporate lawyer.
Unsurprisingly, that is not the Field Fisher view of the world. "The future for hourly chargeout rates just isn't that rosy," says Michael Chissick, a partner and an outspoken advocate for equity-for-fees, as well as other alternative fee arrangements. As for the suggestion that anything other than the hourly rate smacks of panic, he responds: "If you go behind the snootiness [of such an attitude], the firms are all doing everything they can to get the business as well. The reality is that firms are undercutting everyone and doing fixed fees whatever they might say."
Field Fisher is advising Professional Spirit and Bartercard on the launch of websites allowing businesses to offer their services or products in a cash-free economy. Chissick is being part-paid in shares by Professional Spirit, an online marketplace aimed at professional services firms such as law firms, accountants and IT companies. But the firm will also play an active role in both schemes - for example, it will be offering personal injury (PI), commercial property, employment and IT advice to Bartercard's 55,000 members.
Although critics have been quick to damn shares-for-fees as something of a dotcom disaster, Chissick stands by such deals. "They're useful to win clients and they like them as a way of showing you're doing business in the way that they're doing business," he says. He also points out that his firm has never undertaken work on a purely equity basis and that it has yet to sell any of its equity in its clients (although at current share prices, who can blame it). True, Field Fisher never spotted the next eBay or Yahoo! as US West Coast law firms did, but neither did it have its fingers burnt too badly.
IT firm Tarlo Lyons has six shares-for-fees clients and has no regrets. According to Kevin Barrow, head of company and commercial, one of them has been extremely successful and, on the whole, there has been "a net gain".
"In any event, we never just took equity," says Barrow, echoing Chissick. "We always effectively charged at least 50 per cent of our time and quite often it was for the sort of work we'd have discounted anyway. Although I don't believe in
loss-leaders, I think a loss-leader with equity makes things a bit sweeter." His firm would still consider such an arrangement if the right client were to come its way.
The new Dare project is another innovative move designed to appeal to small and medium-sized businesses. "We're trying to overcome a problem," explains Brian Raincock, managing director of Litigation Protection, the insurer behind the scheme. "How the hell do you get small and medium-sized businesses access to justice without an enormous bill?"
The scheme has two stages, with a fixed cost at both levels. The first is a simple questionnaire about the claim, which can be referred, through LawSure Direct (a Litigation Protection subsidiary) to the panel solicitors, who carry out an initial risk assessment (£950 plus VAT). If the case is worth pursuing, it proceeds to Stage 2, where the solicitor will request any additional information and, if appropriate, arrange a meeting to consider the case. This leads to a written analysis, which will be sent to a barrister at Littleton Chambers or Middleton Chambers. The barrister will then provide a written assessment of the case's prospects for a further £3,050. This whole process will be completed within 28 days of seeing a Dare solicitor, who then advises the client of the best way to proceed.
Basically, Dare applies a PI claims management company structure to commercial disputes with a central call centre and panel of law firms. Understandably, any comparisons to the notorious Claims Direct or The Accident Group are met with howls of protest. They could not be more different, maintains Raincock. For a start, there will be no payment to the management company by the firms. Nor will the 'call centre' be manned by unqualified school-leavers in an office block in Manchester. "We're not expecting 100 calls a day, but around three to five," he says. "This is a sophisticated operation allowing business directors to proceed with confidence. This isn't about 'slips and trips', but serious business disputes." The scheme will be looking at disputes concerning "a working minimum" of £50,000 in lawyers' fees, he adds.
Most City lawyers might be forgiven for thinking that conditional fees were the exclusive preserve of their colleagues on the high street and their rear-end shunt clients. "CFAs in a business context is happening,"
Raincock reports. "But one of the problems that we all have is establishing whether we have a reasonable risk to underwrite - that's a question for both lawyers and insurers. Somehow you have to get a feel for the case, and that's the idea behind Dare."
Although CFAs might be the only form of 'no win, no fee' sanctioned by Parliament, there has been a surprising awakening of interest over the last 12 months in US-style contingency fees, where lawyers take a slice of the damages (as opposed to CFAs, where lawyers are rewarded by an uplift on their own fees). Earlier in the year, The Lawyer reported on SJ Berwin preparing a US-style class action on behalf of UK pension fund investors on a contingency basis. Although the Law Society bans such deals, the firm can do this because the cases are being handled in conjunction with Washington DC-based firm Hagens Berman and the fact that the litigation will take place in the US.
Shipping lawyers are also proving to be enthusiastic converts to contingency fees. Philip Bush, a former partner at London shipping firm Jackson Parton, took his name off the solicitors' roll to set up the UK Mercantile Contracts Enforcement Agency (UMCEA), through which he receives instructions on a 'no win, no fee' basis. Although Bush initially expected to do mostly small ship claims, his work has blossomed into PI and claims relating to the non-payment of commercial debt.
According to Bush, the popularity of these deals are twofold. "First there's the certainty of it. Clients know what their maximum exposure is going to be from the beginning and they aren't going to be surprised by bills landing on their desks," he says. "But also, a client doesn't think that he has value for money if he loses and still has to pay. So they evaluate whether they want to do it through UMCEA or on a time basis through lawyers."
Bush carries out the work until court stage, at which point he refers it to Jackson Parton, which he instructs on a CFA basis if it is UK-related. So what does he make of the profession's reluctance to embrace 'no win, no fee'? "I don't see why the Law Society has so little faith in its professionals that it doesn't consider a solicitor can properly deal with a matter on a contingency basis," he says.
Chris Beesley, co-chair of Ince & Co's admiralty business group, launched Incite Claims Management to run a similar contingency scheme around 18 months ago, and so far in the region of 100 matters have been referred to him. In one of his first cases he was paid $7,500 (£4,700) for just 45 minutes' work while working for a 15 per cent cut.
"There's a definite sea change taking place here among corporates that now say they aren't interested in traditional hourly rates, and instead they want more law- per-hour, or not pay by the hour at all," reflects Wragge & Co senior partner Quentin Poole. Wragges' own approach to this sea change is to offer a whole range of risk-sharing on transactional work. Fees are reduced or wiped out if a deal does not take place and are increased if it does. "We do it all the time, and we even keep a register of such arrangements to know just what kind of risk we're exposed to," he says.
There is also an inexorable move to fixed fees. Recently, Wragges for the first time put in a fixed fee on a beauty parade to a client that spent in the region of £7m a year on legal fees. Poole also has a number of existing corporate clients that are "seriously interested" in working on that basis. "Sooner or later, clients will start doing those deals because everyone spends ages and ages of wasted time working out these costs and arguing about whether the trainee should have spent so long on the case," he says.
Field Fisher is enthusiastic about using fixed fees for its less established clients. "We're very keen to work with them on a fixed fee just to shatter that myth that if they come to a big City law firm they're going to have to pay thousands of pounds in fees charged for work done by trainees chatting about them when they're on the train," says Chissick.
It was Lovells' creative Mexican wave solution (winner of The Lawyer's Client Care Programme of the Year Award) that landed the City firm the Prudential Property Investment Management (PruPIM) work, which with a fund value of almost £12bn is the largest property investment management business in the country.
While Poole applauds the idea, he claims that it is not quite as innovative as Lovells would have us believe. "We're operating our own Mexican wave," he says, half seriously. "Yes, we have a London practice, but our product is 'manufactured' in Birmingham."
Clearly, it is an idea that is ripe for exporting to other sectors. "It's about trying to confront an issue," says Lovells property partner Shaun Lamplough. "The idea was driven by an awareness from our perspective that we needed to address low-value work and, on the other hand, we needed to address the clients' requirement that they have one main source of legal supply. How did you square that circle?"
It is a question that City firms will increasingly need to ask themselves.