Paying the price

Court of Appeal judge, Lord Justice Jackson, produced a report in 2010, ‘Review of Civil Litigation Costs’. A cornerstone of this publication was the introduction of cost management within the litigation process.

We are now in a ‘new era of cost management’ that will substantially change the ‘landscape of legal costs and funding of litigation’ – or at least we are if we choose to believe the headlines that have appeared in the legal press over the last 18 months.

In some ways it is shameful that the judiciary has taken so long to introduce steps to manage and control legal costs, whether in multi-million pound commercial disputes or in simple personal injury cases. Costs have exploded in the last 15 years without proper controls. The top 100 law firms in England have generated average yearly fee income of £14bn over the last five-year period, and the no-win, no-fee culture in personal injury cases has seen rates as high as an astonishing £900 per hour.

The Master of Rolls Lord Neuberger in Simcoe v Jacuzzi UK Group (The Lawyer, 22 February 2012) highlighted his concerns that the claimant’s lawyer’s fee amounted to six times what was paid out to the client in this case.

Bumpy ride

So what does the future hold, in regard to the legal profession? Well hold on to your hats; the rollercoaster is about to start.

On 1 October 2011 a costs management pilot scheme was introduced in the Technology and Construction and Mercantile Courts, under the guidance of His Honour Judge Simon Brown QC. Under the pilot scheme, all parties to the action are required to produce a detailed budget of work completed, and work anticipated, up to and including the trial.

Parties must fill in the costs budget precedent form HB, a comprehensive document that runs to nine pages in length. The respective parties then exchange budgets and submit formal comments. All this information is given to the trial judge who will approve or deny the budgets.

At the invitation of Lord Justice Jackson, the Centre of Construction Law at King’s College London was asked to monitor the progress of the pilot scheme. The interim report was published on 3 February 2012. In short, the judges found the process beneficial; the legal profession found it a negative step. One lawyer questioned by the monitoring team stated that he always under budgets, never over-budgets. Herein lies the crux of the problem.

I am working on a case at the moment for a client who was given, by a senior partner of a top 50 law firm, an ‘off the cuff’ figure for costs of £20,000. The case involved disputes over the validity of a will, possible forgery and professional negligence. Costs for all parties were approximately £400,000.

The simple truth is turkeys don’t vote for Christmas.

Reapng rewards

All the parties’ clients will be given access to all the budgets. They can assess their own lawyer’s costs and global potential costs to assess the risk in relation to the rewards.

The concept of risk in relation to rewards was established in the SRA Costs Code in 1999. The bailiff in Jersey in the case of Alhamrani v Rusa Management [2006] referred to the Jersey Financial Services Committee’s Codes of Practice for Trust Company Business (2001, paragraph 2.1). He said: “It is not generally in the best interests of the beneficiaries that a trustee should fall out with his legal advisers. Yet he does have a duty to be robust in contesting any charge made by his lawyers that he considers to be excessive or relate to work that was unauthorised or unnecessary. The duty embraces an obligation to consider whether a particular lawyer or firm of lawyers is appropriate to the problem upon which advice is sought, and the scale of the trust assets.”

In layman’s terms: budgets, cost management, risk in relation to rewards.

Therefore, in theory, the ‘new era’ of costs management has in fact been available for over a decade in England.

In December 2011, the local Jersey newspaper had an article about the UK government’s scrapping of the VAT loophole on low-value goods. Both Jersey and Guernsey’s governments had decided to launch an appeal against this decision. A Jersey minister was quoted as saying the legal costs on a worst-case scenario would be £350,000. A Guernsey minister was quoted as saying costs would be in or around £60,000. I was surprised at the 400 per cent difference in estimates of cost of the respective governments for what in essence would be identical legal work.

The fact that I, in a rough and ready calculation, estimated costs in the many millions is almost irrelevant. Almost, save my offer to prepare an independent budget for both governments pro bono was ignored.

Money marketplace

The second biggest impact on litigation is the growth of third-party funders. In essence, these companies will fund all of a client’s legal costs for a percentage of damages. I would say that the major players in this marketplace have raised together a combined total of around £500m since their inception. The third-party funders believe funding beneficiaries involved in trust disputes will be a substantial marketplace in the future.

A survey compiled by city law firm Wedlake Bell and published in the Law Society Gazette (4 February 2011) stated: “Legal disputes over trusts had soared by 238 per cent during the recession. Beneficiaries who have seen the income generated by their trusts or the value of assets held in trusts slump during the recession have increasingly looked to recoup their losses by bringing claims against trustees alleging their assets have been mismanaged.”

The issue over the legality and enforceability of ligation funders offshore was tested in October 2011, in the Royal Court of Jersey in the Valetta Trust case. The Royal Court concluded in this case that it was in the public interest that the agreement in question was regarded as valid and enforceable. An interesting decision when the no-win, no-fee litigation is not enforceable in Jersey.

I was very impressed with a law firm in Guernsey who asked me recently to meet a cross-section of their clients to discuss legal fees, from wealthy individuals, to major trust companies and international banks. There were no PowerPoint presentations; no brochures and no sales pitch just straight, at times very blunt, discussions. The clients all wanted budgets, the clients all wanted to discuss alternative billing/funding for future cases. It was all about money. It was all about business.

The rollercoaster is gaining momentum, however reluctant a passenger the legal profession may be.

Jim Diamond is a costs lawyer and legal costs management consultant www.jimdiamond.com