Evaluating the cost of litigation

If there is one thing that is guaranteed to attract the attention of in-house counsel it is the possibility of retaining external lawyers at zero cost.

So it was no coincidence that, in the wake of legal and regulatory changes relating to the use of contingency fee and conditional fee agreements (CFAs), my presentation at this year's Legal Monte Carlo focused on the range of options available to clients who find themselves in disputes but are reluctant to commit substantial resources to funding litigation.

Take an extreme example. A client contacts external lawyers and advises them of a dispute that is likely to lead to litigation. The client has two requirements regarding costs: first, they do not want to pay their own lawyer's costs and second, if the client loses the case they do not want to pay the other party's costs. The lawyer agrees that this is reasonable and says they are prepared to review the case against those parameters and decide whether they are prepared to take it on. Is this a credible scenario?

Not at the moment. But, with events that are due to take place next year concerning recoverability of success fees and insurance costs, very soon this may be the way that a substantial number of clients will expect certain cases to be handled.

CFAs allow lawyers to increase or decrease their basic charges depending on the success of the result. CFAs are an entirely rational development. Why should lawyers be paid the same whether they win or lose? In general lawyers can be relied upon to exert their best efforts on behalf of their clients and to that extent offering lawyers incentives to work hard is not essential. But there is nothing more likely to motivate a lawyer to go that extra mile on behalf of a client if they know they will not be paid if they fail to secure a successful result.

Until now, the problem with CFAs in civil and commercial litigation has been that clients are reluctant to pay their lawyers a success fee if only the basic charges are recoverable from the losing party. But this is set to change.

The Government's deadline for consultation on the question of recoverability of success fees and insurance costs was 30 November 1999. Since then, several important and influential groups of lawyers, not least the Law Society, have expressed their support for this development.

If success fees are also recoverable, then apart from the proportion of costs which as a policy matter is not permitted to be recovered (tempering the client's enthusiasm to instruct the biggest law firms and serving the dual purpose of acting as a deterrent to litigation where other dispute resolution avenues are available) the client pays nothing if they lose and very little if they win. This is assuming the credit worthiness of the other party.

The client is still exposed to the risk of having to pay the other party's costs if the case is lost, but that risk can be insured.

Lawyers who are unwilling to take the risk of failing to achieve success under a CFA can also insure this risk. This will guarantee payment of the lion's share of their basic costs even if the case is unsuccessful.

The underlying reason for the shift of emphasis towards risk-taking by lawyers has its roots in the need for the Government to tackle the issue of legal aid expenditure in civil cases. There is much waste in legal aid and for too long it has been possible to pursue cases with the benefit of public funding when the litigant would not have risked their own funds, knowing the prospects of success, if there had been no alternative. If a litigant would not be prepared to take their chances unassisted, why should the taxpayers be expected to support them?

But the entire debate has moved on from a simple argument about legal aid, to a review of how litigation is best funded. At one end of the spectrum is the extreme no win, no fee, very little risk case and at the other end is the sharing of risk between lawyer and client. This is where the future lies for commercial litigation.

Although access to justice for all is perceived to be a noble aim of the recent reforms of the civil justice system, litigation is universally recognised to be undesirable if it can be avoided. The costs consequences of non-compliance with protocols and failure to accept Civil Procedure Rules Part 36 offers act as considerable restraints on fruitless litigation. The next and potentially the most important development of them all is the threat of being exposed, in the absence of amicable resolution of the dispute, to considerably higher costs awards incorporating success fees and insurance costs.

The successful litigaters of the next generation will be those who are masters of the skill of case analysis and risk assessment but who also have the courage to underwrite their own instincts.

Mark Humphries is a solicitor-advocate, a partner at Linklaters and Chairman of the Solicitors Association of Higher Court Advocates.