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Commercial Question

Fixed-fee litigation

updated on 24 June 2014

Question

Is the future of litigation based in fixed fees?

Answer

Contrary to what some traditionalists may suggest, law firms, first and foremost, are businesses and should be run with a view to maximising profit and market share. As with all businesses at present, this has been made increasingly difficult by unforgiving economic times. So how do you ensure that a law firm thrives when its clients are themselves businesses attempting to survive tough economic conditions? In the past, it may have been enough for a law firm to win clients based on its specialisms and, to some extent, this is still true. However, clients are now demanding more from their law firms. Not only do they want the finest legal minds, with acute specialisms to deal with their cases; they also want to ensure that they are getting value for money. They want 'added value'.

Traditionally, law firms have charged their fees on a time-cost basis. Put simply, the more time spent on a case, the higher the legal fees at the end. Hourly billing has previously been described by Richard Susskind as a mindset and a way of life. Lawyers charge for their input and not for their output. So does this ensure that clients get best value for money? Despite being a long-standing practice, hourly billing does have shortfalls. It does not encourage lawyers to work in the most economical and efficient way. To a certain extent, this can mean that large legal fees do not necessarily demonstrate that the client has received a level of service, nor that the service has added value to its business. For this reason, forward thinking law firms are beginning to change the way in which they charge for their time.

Cost of litigation

Pursuing litigation is one of the main areas in which legal fees can sky rocket. It has been said by some that, unless you are certain of your case, litigation can be an expensive and risky game of roulette. Litigation can then become a balancing act for companies - will the justice which can be achieved by proceeding with a case be outweighed by the potential risk of legal expenses incurred in getting to that stage? For law firms, this is a detrimental balance. If the cost of litigation means that companies decide not to bring a claim or use a cheaper law firm then law firms quickly lose their competitive edge and, in this market, it becomes easy to fail.

In order to combat this, innovative law firms are moving toward the use of alternative fee structures across all areas of law, but especially in litigation, for example, fixed fees or staged-based fees.

Fixed fees and why they appeal to clients

Fixed-fees packages offer clients comfort in knowing that the legal costs for a certain amount of work will be fixed at a certain level. Fixed fees can be offered on a staged basis, with a fixed fee being agreed for a small section of the work needed, or on a larger scale basis with a fee being agreed for all the work involved in proceeding with a case from initial contact to resolution. While this does not guarantee a client’s claim will be successful, it does mean that they are offered the security of being able to budget for their legal fees and make an informed decision at the end of each stage as to whether to carry on to the next stage in the claim.

Fixed-fee agreements can be offered on a case-by-case basis or even on a yearly basis, with all of the company’s litigation being pursued for a set price each year.

While clients benefit from the peace of mind that fixed fee agreements bring, they can be risky for a law firm to offer. While on the one hand a law firm can make money from fixed-fee arrangements by working efficiently and spending less time doing the work than the client is being charged for, litigation is unpredictable and work can take longer than first anticipated. The additional cost for any unexpected work cannot be passed on to the client, as the fee has been fixed, so additional costs must be absorbed by the law firm. Sensible pricing is therefore key.

This situation can prove to be a 'Catch-22' for a law firm. While it may attract more clients by offering fixed-fee arrangements, if it has to absorb the cost of doing so, this can affect the law firm’s profitability and ultimately its ability to compete in the legal market place.

What this change means for the future of law firms

At present, the use of fixed fees is relatively uncommon, but it is likely that more and more law firms will choose to follow this route. As businesses are slowly emerging from the recession, they may be looking more critically at their expenditure and expecting more from their legal services providers. It has been suggested that in the not-too-distant future, law firms will be rated on comparison websites, with price and value for money playing a vital part in the ratings.

So how can the legal profession adapt to this critical change? Going forward, the key players in the legal market will be the firms that are not afraid of change. The introduction of alternative business structures (ABS) has created a huge advantage for law firms, as they can now offer a range of specialisms and be guided by a range of experience. Firms can offer cross-selling opportunities to clients and the chance to address all their issues using one firm. Maybe an analysis of the first firms to adopt ABS will show the strongest players in the legal market - the ones which are embracing change.

The use of fixed fees has also presented an opportunity for law firms to change their hierarchies. Firms may create job opportunities for paralegals, with solicitors moving further into management roles to ensure that work is being done as efficiently as possible. This creates exciting opportunities and entry into a profession which some have seen as being elitist.

The need to compete on price may also see a shift to the North. With the cost of living and working being cheaper in the North and the increased use of technology in cases, there is no reason for all offices to be based in London. These cost savings can then be passed on to the clients. Irwin Mitchell is a key example of this, with its head office in Sheffield.

Finally, it may mean that clients are encouraged to settle their cases where appropriate. If pricing is transparent and clients are aware of exactly how much each stage of litigation will cost them, they are able to make informed decisions as to when to proceed and when to consider negotiating. This puts clients in a strong position and will also have a knock-on benefit for the courts, which face a demanding case load.

Other funding options

While fixed-fee agreements are popular because of the certainty they provide for clients, there are other options which can ensure that the cost of litigation is manageable. These can include the use of after-the-event insurance (ATE), damages-based agreements (DBAs) and litigation funding.

ATE policies can be taken out to protect clients once they become aware that they need to litigate to protect their interests. An ATE policy will provide cover for the other party’s legal fees in the event that the client is ordered to pay these. It will also cover the client’s disbursements, such as barristers’ fees. In some cases, the policy can also cover the client’s legal fees. The benefit of having an ATE policy is that it provides the client with reassurance that, should they lose the case and be ordered to pay the other party’s legal fees, these will be covered by the policy. In order to obtain an ATE policy, the case will be subject to a risk assessment; this provides the insurers with assurance that the case has a reasonable prospect of success. This does mean that it may not be possible to obtain an ATE policy in every case.

Following reforms to the law on 1 April 2013, DBAs are now available in contentious work. They work on the basis of an agreement between client and solicitor that, should the client be 'successful' in their claim, the solicitor will retain a percentage of the damages which are recovered. 'Successful' will be defined in each case and can cover settlement and a court decision. These arrangements can be good for a commercial client’s cash flow, as they do not have to pay any money for their legal fees until they have been ‘successful’ - at which point a percentage is deducted from the damages gained. DBAs also allow clients to work their legal fees into their balance sheets as, if they are unsuccessful, they will only have to pay the disbursements incurred in the case. However, DBAs are not available in every case, as they are only suitable for cases in which damages are being claimed or are likely to be awarded. In addition to this, it is essential that the damages the client recovers exceed the legal fees incurred.

Litigation funding is the provision of funds by a third party which has no connection with the matter. In return for this funding, they will require a share of any damages awarded. The advantages of this type of funding are similar to those of DBAs in that they provide certainty to clients and can assist with their cash flow. As with ATEs and DBAs, a third-party funder will need to know that the claim has a reasonable prospect of success, that the case will be proportionate to pursue (ie, the legal costs will not outweigh the value of the case) and the client will be able to pay the percentage agreed with the funder should they be successful. This funding option is relatively new and can seem strange to some clients, but it is an option which may grow in popularity in the near future as law firms attract funders who are willing to provide this service.

As can be seen, it is an exciting time for law firms and litigants. Litigation does not have to be uncertain and costly. If a client has a good case, there is no reason why the cost of litigation should put them off from proceeding with the case, as long as they choose a law firm which has these options available to them.

Although we cannot be certain what these changes will mean for law firms and clients alike, or even what changes are around the corner, one thing is for certain - the firms that will succeed are those which are not afraid of change in a new client-led market.

Emma Cowell is a first-year trainee in the commercial litigation team at Irwin Mitchell.