Big Bang Change in Law Helps Companies Litigate

Relish or perish the thought, at some point the odds are that your business will find itself involved in a legal dispute. For owners and managers this immediately brings to mind one word – expense.

1st April 2013 saw a “Big Bang” in business related litigation. The changes, often termed “The Jackson Reforms” after the Judge who made the recommendations, are very important as they herald new methods of funding disputes and imposing controls on escalating legal costs – both welcome changes for businesses involved in litigation.

Traditionally, lawyers have charged an hourly rate for their work; often leading to the feeling that a blank cheque has to be written and also perhaps that it maybe in the lawyer’s interests to draw out a dispute. Fixed pricing for litigation is offered by some law firms, but not many.

Not just confined to personal injury cases, for some time now lawyers have been able to run business dispute litigation on a “No Win / No Fee” (properly called a Conditional Fee Agreement-“CFA”). Put simply, the lawyer gets paid if the case succeeds. Consequently lawyer and client share in the risk of litigation, rather than the traditional arrangement of the lawyer getting paid win or lose.

Historically to reflect the risk to lawyers that they do not get paid if their client’s case does not succeed, the losing party had to pay an additional “Success Fee”, which was calculated as a percentage of the winner’s legal costs. So the legal costs were higher if a CFA was in place. Also because a CFA only protects a party in respect of its own legal costs, After The Event insurance cover is routinely taken out to guard against the potential liability to pay the other side’s costs if the case fails. Pre 1st April 2013 that insurance premium could be recovered from the losing party.

Lord Justice Jackson identified that reform was needed because the problem with the system was that a party with a CFA had little interest in conserving costs as he was insulated from them. Often the losing party picked up a disproportionate bill for costs with a success fee and insurance premium on top.

The 1st April changes sweep away the right to claim either a success fee or an ATE insurance premium from the losing party. In some respects, this makes the playing field more attractive because it eliminates the risk of having to pay disproportionately high legal costs if you are the losing party.

The 1st April reforms also brought in a brand new way of funding business dispute litigation namely Damages Based Agreements (“DBA”). Again the concept is that client and lawyer share in the risk of litigation - the lawyer is only paid if the case succeeds. However, unlike CFA cases, with DBAs the lawyer’s payment is not determined by the number of hours spent on a case but is pegged to the amount of damages recovered for the client. It is more “value based”. This can offer clients more certainty particularly when a fixed amount of damages is claimed.

DBAs are subject to a cap to preserve the client’s damages. In commercial cases the amount recoverable from a client in costs cannot exceed 50% of damages, net of costs recovered from the other side, in first instance proceedings. DBAs are generally unsuitable when defending a claim or where the claim is other than one for damages.

Although at first blush the new options for funding business disputes in the Courts may seem to be a headache, in fact they offer golden opportunities for businesses to realise a mutual interest in the outcome of their cases with their lawyers. Importantly, those in business responsible for buying legal services should ensure that they instruct lawyers who are able to offer expert advice on the most effective up to date funding options to ensure best value.

For more information about business dispute litigation and funding please contact Alison Neate, Partner, Business Dispute Resolution Team, Smith Partnership on 0116 247 2000.