How To: price litigation
Practitioners face a sea change in litigation from April, as radical changes to the way cases can be funded could see firms take on a greater share of the risk. The new costs budgeting regime also comes into force for most multi-track civil cases, with warnings that practitioners who get it wrong face limited scope to apply for relief, disciplinary action for professional misconduct and being sued by clients for negligence.
It is notoriously difficult to predict costs accurately early on in a case; but fail to exchange budgets seven days before the first case management conference (CMC), and the only recoverable costs may be the applicable court fees – leading to very difficult conversations with clients.
As judges are told to be robust in enforcing the costs budgets, with an emphasis firmly on proportionality rather than necessity, the new regime will determine the conduct of litigation and influence every strategic decision.
Throw into the mix: the new damages-based agreements (DBAs), the end of recoverability of conditional fee agreement (CFA) success fees and most after-the-event (ATE) insurance premiums, a ban on referral fees, qualified one-way costs-shifting and legal aid changes which will take swathes of cases out of scope, and the challenges of pricing litigation become clear.
How are practitioners preparing for the new era when there is still so much uncertainty about the changes? The government finally laid a long-awaited statutory instrument containing the revised Civil Procedure Rules before parliament earlier this month. But at the time of going to press, no revised practice directions have been published and there will be further amendments to the CPR in March.
Cost expert Tony Guise, director of Guise Solicitors and chairman of the Commercial Litigation Association, says the way in which the regulations have been introduced has been ‘haphazard, the drafting hasn’t been helpful and it has all been introduced in a mad rush, which is making for a very challenging environment in which practitioners must adapt their businesses and advise their clients. The possibility of significant levels of satellite litigation is very high, further prejudicing clients’.
Emphasis on function
The recent Court of Appeal decision in Henry v NGN put down a marker for the profession to get on top of the new requirements. The judgment made it clear that courts will be expected to place particular emphasis on the function of the budget as imposing a limit on recoverable costs. Practitioners who go over budget without first seeking court approval will do so at their peril unless they can prove they have ‘good reason’ for doing so.
This is certainly a wake-up call, says David Greene, former president of the London Solicitors Litigation Association: ‘But I don’t think people should be over-dramatic about it. Budgeting is undoubtedly a big procedural change, but there has to be a bedding-in period with the courts allowing parties a learning period, using a degree of discretion. It is likely defendants may use failure to comply with the rules as a tactic and demand cases be struck out if something is a day late, but it would be a waste of time to have those arguments.’
Greene is also unsure the new regime will achieve its aims. ‘The strictures of the new regime could mean people will aim high and budgeting could actually increase costs,’ he says. ‘Everyone will be flying blind until the Senior Court Costs Office has determined some of the issues.’
Nicholas Gould, partner with construction and energy law specialists Fenwick Elliott, heads the cost management pilot research project. ‘This new approach really is a sea change,’ he says. ‘Gone is the reasonableness test. Instead judges will look at the estimates and award costs based on those estimates. Detailed cost assessments could well become a thing of the past.’
What is clear is that, while courts have been told to look at overall costs rather than take a detailed, nit-picking approach, practitioners’ performance in pricing the litigation will come under greater scrutiny from the start. Judge Simon Brown QC is the designated mercantile judge sitting in Birmingham and has been involved in the cost budgeting pilot since 2009. He has drawn up a CMC form which he proposes sending out after 1 April. It sets out clearly what parties have to do and the sanctions they face if they do not. The form can then be filed electronically, with the cost budget, before the CMC to avoid extra pressure on already beleaguered court staff.
He says practitioners should be developing skills in budget preparation and investing in control software, as well as e-disclosure. ‘No judge likes to brand professional litigators incompetent, but there will be no excuse for not following the rules,’ he says. ‘The message from the master of the rolls at the start of the judicial training was “you must be tougher”. If you make robust cost management decisions, the Court of Appeal will back them. None of us wants to have to use the new, more robust sanctions and relief from sanctions provisions that will come into force in April – that would only serve to encourage litigants to sue their own lawyers for their defaults.’
But Brown warns there are likely to be more applications for indemnity costs at the end of hearings and trials on the grounds of ‘conduct’ in litigation, so lawyers will find their performance in costing the case coming under scrutiny with much more limited options to apply for relief from any sanctions.
‘In our experience, pricing litigation is incredibly ad hoc among law firms,’ says James Delaney, director of brokers TheJudge. ‘It ranges from the “how long is a piece of string” approach, with some very crude “back-of-a-fag-packet” estimates, to in-depth analysis. But both can prove inaccurate if there is a sudden change in the litigation.’ The difficulty post-April, says Delaney, is that, particularly for smaller-value cases, many are going to be borderline with regard to whether they are economic to run. The accuracy of the cost budget will ‘make or break’ them.
The temptation previously was to capture the client, so firms underestimated the costs, he says. ‘Now the temptation will be to go high to avoid any potential negligence risk. It will be a tricky balancing act between business development and business prudence.’
Manchester firm Pannone has produced detailed costs budgets for clients since 2005. Head of dispute resolution Paul Jonson says the firm hired someone from a large national firm whose sole job is to prepare detailed budgets from start to finish. She keeps and analyses historical cost data so she can give fee-earners a draft budget. They then come back with any nuances or differences in their case so she can produce a bespoke budget which sets out the costs and breaks them down into stages, the grade of fee-earner doing the work, when the costs will come in and what level of costs the client can expect to recover from the opponent.
Jonson says Pannone offers blended rates, so the client pays one rate for everyone who works on the file, and fixed fees for parts of the budget. ‘We are clear about the parameters because we have to make assumptions. If they are right, we expect clients to hold us to them and, if it takes us longer, that’s hard luck for us.’ The challenge with the new cost management rules has been to ensure the information they give the client can easily be converted into the new court document.
CMS Cameron McKenna uses specialist non-lawyer project managers, who work with the lawyers and clients to produce a case plan and cost budget. Commercial litigation partner Guy Pendell says clients will be much more involved in litigation decisions post-April. ‘What Jackson wanted was parties to have more skin in the game so they have a genuine interest in the way their case is run, because they will be paying a proportion of it or giving up a slice of their damages,’ he says.
One option being considered by firms is to bring in cost specialists earlier in the process to help fashion the litigation strategy. Pricing consultants are offering their services while some firms have set up their own cost departments. Now that costs are an integral part of the litigation rather than a ‘bolt on at the end’, says Iain Stark, chair of the Association of Cost Lawyers, it makes sense to involve them earlier. ‘As solicitors get more sophisticated about the new regime, I think you will see more and more of us go in-house,’ he says.
‘What I am hoping is the legal profession recognises that the days of unqualified cost professionals who don’t have insurance and aren’t regulated are numbered. This is why I forced the association to go down the regulatory road and I hope this will see us come of age.’
Choosing the right funding strategy will be crucial. The imminent changes have prompted the Law Society’s Civil Justice Committee to establish a working party to prepare model agreements for CFAs. Under the new rules, claimant practitioners running non-personal injury/clinical negligence cases under a CFA will be able to claim up to a maximum 100% uplift on base costs from their client as a success fee. That figure is capped at 25% in PI and clinical negligence cases.
Guise, a member of the working party, believes CFAs will continue to be an attractive option to clients because, unlike a DBA, payment of legal fees in the CFA regime does not depend on recovering cash. Where they may also become popular among practitioners is as a back-up in case no money is recovered under a DBA, leading to non-recoverability of costs – a risk which arises from the drafting of the DBA regulations.
‘Under the regulations, it appears that you won’t be able to recover any costs from your client under a DBA if the losing party turns out to be unable to pay the damages,’ says Guise. ‘But however much you try to risk-assess your client’s case at the start, including your opponent’s financial status, they could have gone bust by the time you win the case or your success could tip them into insolvency. So the only way you will be able to run a DBA with any assurance of being paid may be with an interlocking CFA, which will make it clear that it will only kick in if there is nothing recoverable under the DBA – clearly you cannot double-recover.’
Concern about the changes prompted a group of clinical negligence lawyers to set up a new forum, the Society of Clinical Injury Lawyers (SCIL) to look at the business issues. Chair Stephen Webber, head of clinical negligence at Cardiff-based Hugh James, says firms will have to take some difficult business and marketing decisions about whether to charge clients a success fee. ‘Many practitioners feel very uncomfortable about taking a slice of client damages, but running cases without taking a success fee won’t be a sustainable business model,’ he warns.
Greene says the CFA market is too mature and the DBA regulations too uncertain for them to wither away. ‘Some ABSs and practices are saying they won’t take any success fee in PI cases – but whether that will be sustainable long-term remains to be seen,’ he says. ‘The only way that will work is to do cases in bulk – and that means heavy advertising, for instance on daytime TV. But that is expensive. Some small practices may consider collectivising their advertising, but arguably that could be seen as a form of referral fee.’
When it comes to DBAs, Greene is concerned there will be issues of conflict: ‘A client seeking £10m who settles for £8m and sees his solicitor take £3m for work which would otherwise be valued at £100,000 is going to say “hang on a minute”.’ Asked what he thinks of DBAs, Stark says: ‘Do I think Mrs Miggins who receives £10,000 damages will then go to the Sun and say my greedy lawyers have taken 25%? I leave you to draw your own conclusions.’
Jonson says DBAs look attractive for some cases, such as professional negligence claims. If Pannone decides to offer them, the firm will create a bespoke letter of advice setting out what a DBA involves and what the client can expect, to make sure they clearly understand the commitment, the fee set-up and the way the reward is shared. ‘Some highly promiscuous clients may shop around for the best deal but those aren’t clients we want,’ he says. ‘Professional negligence is a very specialist area. A client may think they are going to save a few quid but they may not get the right settlement at the right time.’
National firm Eversheds is considering its position in relation to DBAs. Partner Mark Surguy says DBAs are potentially very risky and, while it would consider risk-sharing in the right cases, that should not be confused with risk transfer. ‘Why would I want to assume responsibility for someone else’s case?’ he asks. ‘Funding pending a predictable outcome is one thing, taking on a risk that an outcome may not occur and only receiving payment if it does occur, is something different.’ The key to success with DBAs, he says, is having a balanced portfolio so that the winners outnumber the losers, but that means having a substantial tort practice. Beyond that, very careful risk assessment and other profitable work to offset or hedge the losers is vital.
Pendell agrees: ‘The challenge for firms will be the time it takes to assess whether to take on a case. It may be you will have to outsource some of that to counsel. You will also need strong risk management processes – you don’t want a partner taking on a dodgy case and only finding that out two years down the line when it is lost.’
Another area full of uncertainty is the ATE market. Premiums are expected to come down but insurers are cagey about the products they are likely to offer after April. Greene says options may include deferred premiums, pay as you go and some form of funding to cover the premium in return for a slice of the damages. Another suggestion is that insurers will offer trusted firms ATE on an annual basis to cover all their cases on a delegated authority. ‘Insurers are interested in a portfolio approach,’ he says. ‘What they don’t like is adverse selection, where firms only come to them with the ones they think are potential losers.’
Delaney says the changes will make clients more price-sensitive because their stake in the outcome of the case increases, so lawyers will have to shop around for the best offers from third-party funders and insurers. ‘Some good quality cases which could be litigated before 31 March will become uneconomic after 1 April,’ he says. ‘But where there is demand, there will be people trying to be inventive to meet it.’
The pressure to get the figures right will spread beyond solicitors. Counsel will have to ensure they get their fee notes in promptly and experts will be expected to file budgets and seek approval for changes. When it comes to litigation support, Jonson says accountants are among those offering different fee structures, including deferred fees and staged fixed fees, for work outside a part 35 role. His firm has also been approached by accountants wanting to discuss how they can be involved with DBAs.
With so much at stake, will litigators be ready when the bell tolls for April Fool’s Day? While much remains uncertain, what is clear is that this is litigation’s moment in the spotlight.
Grania Langdon-Down is a freelance journalist