Litigation: asset or liability?
How contingency fees could change commercial litigation

On Thursday 19 January, Herbert Smith hosted a seminar to discuss how anticipated changes to the costs and funding regime are likely to change the litigation landscape for those who bring and defend claims.

Following introductory remarks by litigation partner Ted Greeno, there was an address by Lord Justice Jackson, the architect of the reforms that will (amongst other things) allow lawyers to conduct litigation on the basis of contingency fees, also known as "damages based agreements" (DBAs).

Presentations were also given by: Leslie Perrin, chairman of litigation funder Calunius Capital and of the newly formed Association of Litigation Funders of England and Wales; Matthew Amey, a director of The Judge, a broker specialising in after-the-event (ATE) insurance and litigation funding; John Kunzler, a senior product manager at Travelers Insurance; Charles Plant, chair of the Solicitors Regulation Authority (SRA) Board, and a consultant to and former partner of Herbert Smith; and Michael Napier, who was until very recently chairman of Irwin Mitchell and also chaired the Civil Justice Council working party that developed the new code of conduct for litigation funders. These were followed by a panel discussion chaired by Ted Greeno.

Some key points emerging from the presentations and discussion included:

• Removal of the current restrictions on contingency fees, combined with the liberalisation of the legal services market allowing outside investment in law firms, means that there will be the opportunity for outside capital providers to invest not only in litigation, via third party litigation funding arrangements, but also in law firms which pursue litigation on a contingency fee basis.
   
• There are many details still to be worked out as to how contingency fees will operate in practice, including: whether there should be a cap on the level of contingency fee in commercial cases; what controls should be placed on the lawyer's ability to terminate the arrangement; and whether the lawyer should be potentially liable for adverse costs.
   
• If third party funders are liable for adverse costs but solicitors acting under contingency fees have no such liability, this might encourage funders to buy or set up law firms to conduct cases under such arrangements, rather than putting in funding as a third party, so as to benefit from that protection.
   
• The environment in which contingency fees are to be introduced will be very different from the present also because of the abolition of recoverable success fees and ATE premiums, which will change the balance substantially as these arrangements will no longer have significant advantages over third party litigation funding.
   
• There is some uncertainty as to the continued viability of the ATE insurance market once recoverable premiums are removed. Parties may become less willing to take out ATE insurance for good cases. The basket of cases covered by ATE could therefore downgrade, meaning a lack of premiums in successful cases to cover the cost of paying out in unsuccessful cases.
   
• The ATE market is likely to diversify its business model, including by assisting litigation funders, and/or solicitors acting under contingency fees, to cover their risks. We may even see insurers guaranteeing firms a minimum level of income.

Please click here for a more detailed report of the seminar on our "litigation notes" blog.

The contents of this publication, current at the date of publication set out above, are for reference purposes only. They do not constitute legal advice and should not be relied upon as such. Specific legal advice about your specific circumstances should always be sought separately before taking any action based on this publication.

© Herbert Smith LLP 2012