Change writ large: legal costs under review

Will proposed reforms of the legal system actually cut the cost of a day in cour for an SME? GrowthBusiness investigates.

A courtroom is generally the last place any business would want to be. Aside from the large legal bills associated with corporate litigation, there is the added stress and time taken up by being involved in a legal dispute.

Despite the downsides, businesses are increasingly being forced to launch or defend actions. From intellectual property disputes and client contract breaches to the publication of defamatory material, there is a raft of reasons why businesses are calling in the lawyers.

While there have been numerous attempts in the past to reform the legal system, it remains prohibitively expensive, particularly for the general public and small companies. However, change is possibly on the horizon.

In January this year, the biggest ever shake-up to the civil courts was proposed following a review of the system by one of the most senior judges in the country, Lord Justice Jackson. His report, The Review of Civil Litigation Costs, found that, among a number of other issues, there have been huge rises in civil litigation costs in England and Wales in recent years.

To address this, Lord Jackson has proposed a set of reforms to improve access to the legal system, many of which have been backed by justice secretary Kenneth Clarke, who in March opened the proposals up for public consultation.

Victims of success

One of Lord Jackson’s key focuses was conditional fee agreements (CFAs), most commonly known as ‘no-win, no-fee’ arrangements, which are popular in personal injury, defamation and privacy actions. They involve a losing party paying, in addition to damages, a winning lawyer’s ‘success’ fee. Currently, after the event (ATE) insurance premiums, which can be purchased by claimants to protect them against the costs of losing a case, can also be claimed.

Clarke says CFAs often encourage defendants to settle, even when the defendant is in the right, due to the fear of the massive legal bills. As part of the reforms, he has proposed to stop winning parties recovering success fees and ATE insurance premiums in civil litigation.

Instead he proposes that success fees will be paid by claimants to their own lawyers out of their damages, but they will be limited to 25 per cent of the total, and to ensure fairness he would like a 10 per cent rise in general damages for pain and suffering.

Other proposed reforms include plans to improve how court judgments are enforced and an increase in the use of mediation to help people avoid court. There are also plans to raise the small claims limit from £5,000 to £15,000, change the county court jurisdiction so that the High Court is used for bigger and more complex claims only, and expand the use of an online system to cut waiting times and legal expenses.

Commercial realities

Clarke says the changes to the ‘no-win, no-fee’ system will act as a disincentive to anyone bringing ‘spurious cases’; however, many industry players say the reforms go too far.

Justin Cohen, chief executive of law firm Litigata, says, ‘The reforms have been designed to attack personal injury claims, but there was no thought to the effect on commercial litigation. It’s a one-size-fits-all approach – it’s basically attacking all segments – and it will make access to justice harder for litigants to pursue with lower-value cases.’

Andrew Brown, partner and litigation specialist with Capital Law, agrees that the changes will affect businesses, saying that the government’s proposals will have the ‘reverse effect’ of what is intended and may lead to more lawyers ‘cherry-picking cases’.

‘The problem with these changes is that they are anti-business,’ he explains. ‘Capital Law has been involved in a number of cases where we’ve used this system (CFA or hybrid CFA) to back businesses that wouldn’t have been able to afford to take on cases, even when they knew they were in the right.

‘This new system would make that difficult, and would result in more unscrupulous individuals or organisations getting away with dishonest and unlawful practices.’

Brown adds that he believes the government is taking a ‘populist angle’ and focusing on a narrow part of the market, citing examples of personal injury claims against the NHS or local authorities: ‘Of course this is emotive and plays to public feeling that the burden of claims on the NHS should be reduced. But in doing so they’ve taken their eye off the fact that the vast majority of these disputes are business-to-business and therefore these measures will have an adverse effect on business.’

Practical problems

Blandy & Blandy associate Emma Banister Dean, who works in commercial litigation and has formerly been part of the Law Society’s Civil Justice Committee, says that while she agrees with some of the proposed reforms, the overall objectives of reducing business legal costs and combating rising insurance premiums are unlikely to be met.

‘The idea is a good one but in practice it is not going to work as it is hoped,’ she says. ‘The majority of the claims [in this area], commonly “trip and slip” claims, are still going to be taken on by solicitors because their fee will be taken out of the damages.

‘The volume of claims may be slightly reduced because solicitors will probably baulk at cases that are more complex, [but] I believe the changes to “no-win, no-fee” will not have the impact in easing insurance premiums that has been trumpeted.’

According to recent research on corporate litigation by market research company Ipsos MORI, most businesses are concerned with the financial implications of launching and defending a claim.

The report, titled Litigation Funding: Understanding the Strategies and Attitudes of Corporate UK, finds that costs are the foremost concern for 76 per cent of respondents. This compares with just over a quarter who say the judgment is the biggest worry and less than 25 per cent who singled out the impact of court action on their business brand.

Given the report’s findings, Litigata’s Cohen says he is ‘astounded’ by how many businesses are unaware of the products and services available to decrease legal costs. He says possible options include cost-neutral plans, which combine CFAs and ATE, third-party litigation funding and litigation outcome hedging.

Cohen says third-party litigation funding involves a professional funding company, or a hedge fund, paying a client’s fees on an interim basis in exchange for a share of the damages. This avenue is most suitable for major cases involving seven-figure values.

In litigation outcome hedging, defendants typically use insurance to reduce the liability attached to ongoing or potential litigation. The insurance can cover both damages and legal costs and can be arranged around a single large dispute or a large volume of smaller claims.

Talk is cheap?
Another option is mediation, which, while not directly impacting fees, may save businesses in the long run. As part of the civil justice reforms, the government is proposing to make it compulsory for parties in small-value cases involving claims of up to £15,000 to attend mediation services rather than court. The current limit is £5,000.

The move is based on the reportedly high settlement rates that follow mediation. The Centre for Effective Dispute Resolution claims that 75 to 80 per cent of cases settle under mediation, while another provider, In Place of Strife, says at least 80 per cent settle at mediation or shortly thereafter.

James Wingfield, corporate litigation solicitor at Howard Kennedy, comments, ‘Mediation is a route you can go down, and it might be a fast and cost-effective route to settlement. There are no guarantees, however, and I can’t say that mediation will cut the cost of litigation, because it might not work. Though, if there is an option to settle quickly and early, it is cost effective.’

‘One of the other benefits of mediation is that it may help parties continue a business relationship that might have been destroyed by litigation. Not every case is going to be open to that, but for the businesses who may want to hang on to their customers, it is a sensible avenue to take.’

Above all, Wingfield says, finding the most suitable legal representation available is the key to not only accessing, but also paying for the costs associated with pursuing justice: ‘Choose a lawyer who knows your industry and has good experience of the types of claims that you are interested in pursuing or defending, because that would be a good choice, and it would be pay off in dividends.’


Todd Cardy

Todd Cardy

Todd was Editor of between 2010 and 2011 as well as being responsible for publishing our digital and printed magazines focusing on private equity and venture capital.

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