Is Expertise Alone Still Enough?
Whether your client is an individual, a small business or a large corporate, purse strings are tightening generally and everyone is trying to cut back and save money where they can. And while litigation is often considered as ‘counter-cyclical’, in that the worse the financial climate becomes, arguably, the more cases are pursued, litigants are still very much looking for value for money. Law firms are finding, as much as any other business, that clients are increasingly pushing the boundaries in terms of getting advice and services at as low a cost, and risk, as possible.
A recent survey conducted by YouGov showed that over 45% of small businesses say legal disputes ‘had a tangible effect on their company in loss of income, additional costs or loss of reputation’, yet the Legal Services Board published in May 2013 that just 12% of legal disputes result in the client taking external advice. And only 12.6% of those surveyed thought external lawyers provide a cost-effective means to resolving legal disputes. In other words, over 87% of those businesses believe that law firms simply cost too much.
So. what can be done to decrease the clear divide between lawyers who understandably want to boost fee income and clients who, perhaps equally understandably, want more value for money? Being educated about what can be done in terms of external funding options, and discussing that openly with the client from the outset, is certainly a step in the right direction.
During recent discussions with leading litigators from around the globe, many have admitted to us that they are seeing an increasing trend for clients to put pressure on firms to tender against one another for a given piece of litigation, encouraging the legal team to spend time and money on the case before any type of retainer is formally agreed. Naturally, if the firm wins the business then it will arguably make this money back, however if it doesn’t, it could be losing hundreds of thousands of pounds’ worth of work in progress.
Anecdotally, I attended a meeting this month with a very large international law firm and the partner mentioned that the firm had recently pitched for a substantial case from a current client. The pitch was created and conducted in the firm’s ‘usual’ way and the very strong expertise of the legal team and their experience and size as a firm were promoted heavily. All of the lawyers involved walked away thinking that they had secured the client’s business and even had, prematurely as it turns out, a celebratory drink afterwards. A phone call a few days later revealed that the client had instead opted for a firm who had promoted a more creative, alternative fee structure, which involved utilising litigation funding and insurance. And, according to the partner I was speaking to, this was certainly not the first time this situation had arisen, much to his senior partner’s annoyance.
It is true to say that historically corporate clients were less interested in hedging litigation risks by using insurance or external funding however times are definitely changing and we have been instructed to secure financing packages for some of the largest banks and multinational corporations in the world, who rightly see these types of products as another form of risk mitigation for the business.
At the end of last year, when TheJudge asked commercial litigation lawyer attendees of its panel debates surrounding litigation funding issues whether the percentage of clients wishing to discuss alternative fee arrangements (including CFAs, DBAs, ATE insurance and litigation funding) had increased over the past 12 months, 72% agreed that it had. Since then, there have of course been substantial changes to the funding landscape following implementation of the LASPO Act on 1 April 2013, so following the endless publicity of those changes, clients are arguably now even more alive to the options now available.
So what can be done?
While books of high-volume, low-value cases, such as negligence claims against surveyors or valuers, are now more routinely run on CFAs (or similar) with the use of litigation insurance, it is probably never a good idea to offer a commercial client a completely ‘risk free’ financing package when it comes to a piece of sizeable litigation or arbitration. It’s important for the client to retain ‘skin in the game’ and really buy into the process as opposed to only going through the motions and waiting for the pot of gold at the end. However, there are undoubtedly things that firms can be offering to clients in the initial pitch that will help in terms of gaining a competitive advantage over other, less forward-thinking, peers.
Some larger firms have inevitably been of the view that offering ‘no win, no fee’ or even ‘no win, low fee’ arrangements simply isn’t their style; they just don’t have the appetite to risk any of their WIP on the outcome of the case and their clients are apparently entirely happy to pay their hourly rate in the usual way.
By analogy, HMW and Blockbuster unfortunately never thought that the digital download would catch on to the extent it has today and history is of course full of such examples. ‘Change is the only constant’; an ancient Greek philosophy perhaps, but nonetheless relevant today. The defensive view to hang on to pure pay-by-the-hour retainers appears however to conflict with a recent study carried out by law firm Field Fisher Waterhouse in which over half of those surveyed said they didn’t think the hourly rate model was a good one. So who is right?
Adapting premuaturely to changing markets and consumer needs can of course prove disastrous; history is equally littered with examples of why being the first to adapt is not necessarily advantageous. But with such a vast precedent of wide-ranging fee agreements, funding structures and creative application of litigation insurance capacity now available, is it now such a leap into the unknown to provide clients with a menu of funding options?
Historically, a firm’s expertise and reputation alone would have been enough to encourage clients to pay the hourly rates they charge, but then you had other equivalent firms maintaining the status quo. Once rival firms start to break the mould, failing to react could be disastrous. For example, it is no longer the case that you have to instruct a Magic Circle firm to access that level of expertise and experience; more and more experienced litigators are leaving large firms to start or join niche litigation practices, which not only avoid conflicts of interest that can be a barrier to lucrative instructions in larger firms, but which are happy to be a little more creative when it comes to funding options. Many surveys of in-house lawyers have highlighted that the relationships they have are with the individual lawyers, not the corporate housing of the firm.
These firms, together with the more innovative larger firms, are being more creative and (promotionally) aggressive when speaking to clients about litigation funding, litigation insurance, discounted fee agreements, costs capping, disbursement funding, security for costs insurance and various other methods of managing risk, and ultimately winning the business because of it. The double digit growth of many of these firms over the past few years has highlighted their success.
It’s not all or nothing
Fortunately, the use of litigation funding or insurance doesn’t have to go hand-in-hand with the firm offering to risk any proportion of their hourly rates. For example, insurance products exist which reimburse the client for legal fees and disbursements in the event that no recovery is made from the litigation, without the lawyer having to take a penny of risk, in addition to covering off the adverse costs risk.
To take that one step further, if the firm is willing to defer a proportion of its fees until the conclusion of the case, it’s possible an insurer will agree to insure those fees in the event of a loss. The firm is therefore effectively offering the equivalent of a ‘no win, low fee’ arrangement but without the same risk to the partners. Alternatively, non-recourse external funding exists to finance the cost of the litigation as it progresses.
For clients who want the litigation to remain entirely off balance-sheet (for example, an insurance company invoking its subrogation rights and seeking to commence arbitration against a third party), taking external non-recourse capital from a litigation funder who only receives payment of its success fee if a recovery is made could be extremely desirable. For other clients there might be a balance to be acheived between the desire for outside capital and the amount of the the recovery they are prepared to concede; the views of the client in question dictate what form of funding, insurance or alternative fee structure is the most appropriate.
I was recently instructed by a director of a large distribution company who was pursuing a breach of contract claim against a drinks manufacturer. The significant future lost profits as a result of the original breach meant it was extremely difficult for the director to convince his shareholders that spending even more money on instructing a law firm to pursue the litigation was a good idea. Naturally, the shareholders wanted to do something about the loss suffered but putting their hands in their pockets to get there just didn’t sit well with them.
The director had a choice of instructing a very experienced lawyer, working for a large US firm in London and going against the wishes of his shareholders in terms of the overall bill, or going for the more inexpensive option and instructing someone who perhaps wasn’t as qualified or experienced. The latter would of course keep the shareholders happy in terms of the immediate spend, but would they still be smiling if the cheaper lawyer didn’t prevail in court?
Fortunately, the existence of litigation funding meant that the director could have the best of both worlds. He instructed the more experienced team, but we kept his shareholders happy by involving a third-party funder to provide the capital and also a litigation insurer to cover the adverse costs exposure. Worse case scenario: the breach of contract claim is unsuccessful and the client company walks away in a costs-neutral position, with the funder having lost its investment and the insurer paying a claim for adverse costs. Best case scenario: the claimant prevails and the shareholders receive the lion’s share of the recovered damages, without having to take an unnecesaary risk on lawyer selection or legal bills.
It might be that a successful pitch in one instance will be won on the creativity applied to funding options whereas others potentially on personality or expertise alone. But each client is different and their triggers for engagement will vary. Winning personalities are not necessarily taught, but understanding what funding and insurance products exist, how the prices vary and how different products can interact to the client’s advantage definitely can be learnt. Of course, where knowledge is lacking or support is required during a pitch, help can always be at hand.
If you have a case which requires creative use of litigation funding or insurance, or if you would like to organise a CPD accredited training session for your firm to help your fee earners understand what they should be advising clients about their financing options, don’t hesitate to contact us and one of our brokers will be happy to help.