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Disrupting legal markets: thinking carefully during Brexit

November 2017  |  SPECIAL REPORT: PREPARING FOR BREXIT

Financier Worldwide Magazine

November 2017 Issue


Just like the rest of the world, the legal world is evolving. Hiring a lawyer does not have to be about them billing you as they go along, implementing the strategy they developed, without any risk to them if it does not work out.

The UK’s modern civil justice system has several methods of funding. But, there are not as many options available for contentious matters. So, in the wake of Brexit’s uncertainty, innovative legal services are more important than ever.

Like accountants, lawyers have traditionally charged clients in units of time – with reference to their hourly rates. Rate setting has become a bit of a black art – and it does not leave clients with much certainty. Lawyers often reference levels of experience and technical skills, areas of specialism, location and good old-fashioned supply and demand when quoting rates – but there is no guarantee that the work will take as little or as long as they estimate.

The problem with this is some lawyers will ‘low-ball’ their rates when tendering for work and the more experienced lawyers often disappear after the pitch stage.

This ‘pay as you go’ model does not give you much certainty, and makes it hard to plan and budget accurately. Without an overall agreed budget, costs can quickly spiral – leaving you with a difficult choice: to pay more than you had hoped (or can afford) for the work to be completed or to stop paying the fees and leave it unfinished. This is the last thing businesses, particularly those with an international angle or workforce, need, at the same time as trying to negotiate the UK’s exit from the European Union.

Using this fee arrangement, lawyers do not share any risk in ultimately testing their advice. When a lawyer charges you on an hourly rate basis throughout a court claim, the risk lies with you. If you lose the case, you will still have to pay your lawyer’s hourly fees, lose your outlay and pay your opponent’s legal costs.

‘No win, no fee’ arrangements – or variations of them, where you pay your lawyer depending on the successful outcome of the claim – have become more popular over the last 10 years.

This model is particularly prevalent in personal injury cases, and is often bandied around in advertising campaigns. It was developed to try and move away from the traditional ‘pay as you go’ structure. In theory, ‘no win, no fee’ creates better access to justice for people that have good claims, but are unable to pay for them to be pursued.

‘No win, no fee’ makes it sound like you are only paying fees if the claim is successful, but that is not quite right. You will still have to pay for disbursements, such as court fees (up to £10,000 to issue a claim), barrister’s fees (unless they are also ‘no win, no fee’), expert’s fees and an ‘ATE’ insurance premium to cover the risk of losing and paying your opponent’s legal costs.

The law also changed in 2013 to significantly water down the ‘loser pays’ rule. Even if you win your claim, you can no longer recover the success fee (which lawyers often charge for bearing the risk of running the claim on a contingent basis) and the ATE insurance premium from your opponent.

With regard to variations, there is an American model called ‘Damage Based Agreements’ (DBAs). In this structure, if your case is successful, you pay your lawyer a percentage of any damages recovered from your opponent. In commercial disputes, this percentage cannot exceed 50 percent of the winnings. But DBAs are not as popular in the UK as they are in the US. There is some uncertainty around the regulations that introduced them, and you will still have to pick up the tab for the disbursements.

The need for a better system – coupled with the relaxing of an outdated law called ‘champerty’ – has led to a surge of third-party funding. This means that a financier (usually a large hedge fund), who has no investment in the proceedings, funds the cost of pursuing the claim, in return for a share of the winnings.

This method is an attractive option for both those who are unable to pay for their own claims, and businesses that want to pursue good claims while saving their capital.

But the whole process of obtaining third-party funding and sourcing ATE insurance can be expensive and time consuming. The financiers and ATE insurers involve their own lawyers and underwriters to ‘second guess’ the advice already given to the client. Financiers also require a favourable opinion from a barrister (usually paid for by the client) before even considering an application, and then getting their own lawyers to review the claim.

This duplicated effort often comes at a price. Many litigation financiers fund claims based on either a percentage of the sum recovered up to 50 percent, or a multiplier of the funds they have used to pursue the claim up to five times. This prohibitive cost means that many litigation financiers ignore most claims under £5m.

Why are these options important to think about with Brexit?

It is all about the political, and business, climate that we are currently in. Given the level of uncertainty in the marketplace, businesses and individuals alike want as much certainty as possible. And if lawyers are offering a way of handling their work that offers this, in an innovative way, they will grab it with both hands.

The hourly rate model will probably become extinct. With lawyers obsessing about time – and failing to listen to what the client wants – they will lose business. It will become even more important to agree budgets from the outset. This is a relatively small step away from a total fixed fee agreement, which is worth exploring.

The rest of the business world is used to requesting or having to adhere to fixed fees and careful project management. The legal profession should not be the exception – there are opportunities for lawyers and clients who embrace it.

 

Andrew Brown is a partner at Capital Law. He can be contacted on +44 (0)29 2047 4420 or by email: a.brown@capitallaw.co.uk.

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