Making money without capital – international litigation
October 2015 | SPECIAL REPORT: INTERNATIONAL DISPUTE RESOLUTION
Financier Worldwide Magazine
Commercial disputes, otherwise known as litigation, are often perceived with anxiety, time intensive and costly distractions from a company’s core business. They can, however, present incredible opportunities to acquire or obtain control of new business at a significant discount.
New rules introduced in 2013 permit English law firms to act on a ‘contingency’ basis, charging clients a percentage of their damages as opposed to billing an hourly rate. This revolution in fee charging, previously unlawful in the UK, was heralded as good news for corporates and entrepreneurs looking to finance international litigation. The fact is, however, that since their arrival on the litigation landscape, very few English law firms have been willing to act for their clients on this basis.
London is arguably the global centre for legal disputes, with English judges and English law trusted internationally as the gold standard of fairness in business. English lawyers have traditionally charged on an hourly rate with invoices issued monthly. The dreaded time-spent basis, seen by many a client and financier as lacking value and incentive, is at worst a driver for tediously long legal submissions and an excuse for many lawyers unable to articulate themselves succinctly. Other costs, such as barristers and court fees, are passed on to the client as and when they are incurred. Fine, one might say, providing there is some certainty as to what it might cost and the duration of proceedings. The reality, however, is that most claims are uncertain and in the capitalist global society we live in require a blank chequebook from the start to ensure a win, be it achieved at trial or as is usually the case, through a negotiated settlement. As a consequence many corporates and entrepreneurs shy away from litigation and the opportunities it can present: opportunities, for example, put bluntly, to generate cash or acquire assets, such as a competitor, for nothing.
The contingency agreements under the 2013 rules are called Damages Based Agreements (DBAs). Under a DBA there is no monthly invoice. The law firm will assume the cost of litigation and may also pay all expenses such as barristers’ fees, experts’ fees, court fees and in return – and only in the event of an agreed successful outcome – the law firm will receive a percentage of monies recovered (up to a maximum of 50 percent). This was seen as a welcome extension of the old Conditional Fee Agreement (CFA) method for funding civil cases where a law firm could previously charge double or nothing for their fees on a no-win-no fee basis, with the losing party paying the bill. Under the new regime the law firm is permitted to assume far greater risk for a far greater reward (there is no financial cap). In the event of failure the law firm is paid nothing.
For corporates or entrepreneurs the benefits are obvious: certainty, improved cash flow, reduced risk and no blank cheques. Those unwilling to expend capital now have the opportunity to pursue litigation against far richer opponents, assembling a legal army with firepower at no cost. Traditional war of attrition may be a thing of the past as, crucially, lawyers are incentivised to focus on the client’s practical objectives, and will only get paid when the client wins. The idea will not appeal to some of those in wigs and gowns but an old fashioned business has got an entrepreneurial make over. Or so you would think.
Since 2013 the reality from the ground is that very few law firms have been willing to take the contingency risk. DBAs are confidential, so there are no reliable statistics – but the word on legal street is that the capital outlay is simply too much for most law firms. The primary reason lies in the profile of English lawyers themselves. With high overheads (teams of salaried lawyers and smart offices) lawyers characteristically have an inherent aversion to risk themselves. They entered a profession requiring academic and intellectual curiosity and a steady income: the idea that they should share risk or even borrow funds to invest in litigation does not sit comfortably with many of the large city firms.
Of course, a client’s interests may be best served with an hourly rate or fixed fee model, and they should always be advised of the options, but it is interesting to note that many blue chip clients and entrepreneurs have yet to require or demand that their lawyers propose a contingency, all or nothing fee. Whether this is because they would rather suffer the capital outlay (and thereby assume all the winnings), or because their lawyers do not offer this option, is not widely known. Time will tell.
There are, of course, downsides to contingency agreements and fears that they can compromise a lawyer’s independence and their duties as officers of the court. Would dishonest lawyers, for example, destroy a document, the disclosure of which might cost them a $10m fee? There is no perfect answer. But, frankly, any business opportunity which requires little or no finance has got to be of interest to anyone with commercial nous. The losing party to any dispute will usually pay the winning party’s costs. Litigation is thus not risk free, but there are insurance policies available to limit this exposure.
What we have found is that the most attractive outcome of working on DBAs is the effect it has on the lawyer-client relationship. The actual sharing of risk creates a far deeper de-facto business partnership: and to be successful in litigation, it is that relationship which is so crucial.
Ashkhan Candey and Andrew Dunn lead the Commercial Disputes team at CANDEY. Mr Candey can be contacted on +44 (0)20 3370 8888 or by email: email@example.com. Mr Dunn can be contacted on +44 (0)20 3370 8888 or by email: firstname.lastname@example.org.
© Financier Worldwide
Ashkhan Candey and Andrew Dunn