Client attitudes to billing arrangements in commercial disputes

Transcription

1 Client attitudes to billing arrangements in commercial disputes

2 CONTENTS Firm decisions: How companies resource legal work The hourly rate in disputes: Is the jury still out? Fixed fees: Fantasy or reality in commercial disputes? Our views The views of our respondents Research methodology About Field Fisher Waterhouse LLP About the authors This research was commissioned by Field Fisher Waterhouse and conducted independently by Carnaby Co, a London-based research and strategy firm which specialises in advising international professional services firms.

3 PETER STEWART Partner, Field Fisher Waterhouse LLP 3 Our independently-conducted research reveals growing interest across Europe in finding new ways to pay for legal advice in high-value disputes. In particular, it showed a widespread desire to move away from the familiar hourly rate model. Companies are looking to law firms to provide budget certainty before a case starts; and senior executives and their legal teams increasingly feel it is fair that law firms share in the litigation risk. Alternative fee arrangements in disputes are being expected by more and more companies. We interviewed 80 large companies across six countries in Europe on how they procure expert legal services and what they might like to change. The focus was on contentious work. The results offer fascinating insights, and reveal trends and disagreements across the region. Besides working with law firms to build fixed fee arrangements in disputes to replace the hourly rate, many of the companies we spoke to already use conditional fees - that is where a different rate is charged by the firm depending on the outcome of the case. The most significant development, however, is yet to happen, although it is starting to appear on the radar. It is the change in UK legislation in April 2013, which will allow law firms to charge their fees on the basis of a percentage of the award - damages-based arrangements. This will see the introduction of US style commercial litigation to the UK. It is potentially an even bigger change than the Woolf Reforms in So, is time up for the hourly rate? There is no simple answer to this. The hourly rate is well known to many companies, and indeed is a fee model on which many in-house counsel have been brought up. It is a big step to change the well-known even if it is not the well-loved. There are, however, alternatives and they are gaining greater currency. We believe that this trend will continue, and will be accelerated by damagesbased agreements. We hope you find our report useful. If you would like to add your views on any of the issues raised, please get in touch. Our thanks go to the companies which took part in the survey and to our clients Scott Pugh from Sport England and Kane Pirie from Travel Republic whose input helped shape this study. Contact t: +44 (0) e: peter.stewart@ffw.com

4 FIRM DECISIONS: How companies resource legal work

5 QUESTION: How does your company resource legal work? 5 Very nearly all of the organisations we surveyed rely to some extent on external legal resources, particularly for dispute resolution. Beyond the headline figures, there is a spectrum of attitudes to deciding which type of work stays in-house and which gets handled by a firm. For companies which process a lot of transactional work, in-house staffing can make better financial sense than outsourcing by default. But for many large organisations, having highly-skilled senior lawyers in-house is important too; hence it cannot be deduced that companies staff for volume and outsource for complexity. Staffing for disputes is different, of course, as there is an uneven flow of work. So companies tend to rely more heavily on firms when the need arises. However, we discovered that companies which are frequently in disputes tend to have proportionately larger inhouse dispute teams. In-house only 1% Mostly in-house, with some outsourcing between firms 59% Even split between in-house and outsourcing 29% Mostly outsourced to firms 5% Outsourced only 6% We have a good relationship with our panel law firms. We choose one for each piece of work after a rigorous assessment against our key criteria. Director of Legal. Business services firm, UK

6 QUESTION: How would you describe your use of external law firms? Large companies almost always use more than one law firm. Complex organisations working across multiple jurisdictions can rarely have all their legal services needs met by a single firm despite rapid internationalisation of the firms themselves. Increasingly, the decision to engage multiple firms is made not only to ensure geographical and subject matter coverage, but to drive down price. Companies tend to retain firms with equivalent or overlapping skills, and put projects out to competitive tender. Scott Pugh, principal in-house solicitor at Sport England, sees tendering as a healthy way of finding the right advice at a competitive price: I use two firms, both of which have particular strengths. Each individual piece of work might suit one team better than the other, in which case I will make a call on which firm to choose. But there are also times when either firm would do the job well, so I might then call in a quote from both firms. For us it works well and I think modern law firms expect to be able to make a competitive cost argument as a matter of course. One external law firm 1% Multiple firms, resourcing work based on expertise 86% Multiple firms, with capable firms competing for each mandate 9% Not applicable 4%

7 QUESTION: How would you describe your approach to choosing a firm to work with on a dispute? 7 Select from our panel of regular firms 53% 67% Seek a specialist firm, depending on the matter in hand 44% 27% Do not use law firms for disputes 3% 6% All countries UK only The best-value approach to buying legal services is preferred, unsurprisingly, by companies which adopt this approach in their own sector. We have a decent-sized in-house legal team, but also bring in one of a number of firms when we need them, said one senior corporate counsel. We are careful to source expertise at the right level, and get a quote for each new job. Companies often need to look outside their panels for disputes work, although less so in the UK where the majority of large law firms have dedicated disputes practices. And expertise/ reputation was by far the most important factor when sourcing a disputes lawyer, followed by familiarity then cost. It is clear that in contentious legal matters large companies are still willing to pay for high quality advice. Cost is important. But if the dispute could bring the business down, then management will throw money at it. Legal counsel. Business services firm, UK

8 THE HOURLY RATE IN DISPUTES: Is the jury still out?

9 QUESTION: For disputes, do you tend to pay external lawyers at an hourly rate for the amount of time spent on a case? 9 All Countries Yes 61% UK only No 33% No 22% Don t know 10% Don t know 6% Yes 68% In the UK, Belgium, France and Germany, the default model of payment for legal advice in disputes is the hourly rate. But this mechanism where billing for advice on a case is calculated simply as a function of time spent and seniority is starting to show its age. Whilst some clients see it as fair and transparent, others are put off by its inherent limitations. In particular, the uncertain duration of disputes means that the hourly rate carries risk, and risk which is all the client s. So some clients are using alternatives. And not all countries use the hourly rate as standard: the majority of respondents in Spain and Italy do not. Even within law firms including our own opinions over the model s worth vary from lawyer to lawyer. The perceived effectiveness of the hourly rate tends to depend on the sector being served, the type and length of the dispute, and the level of advice being given. It also depends on the maturity of the market in question. And there are lawyers both in-house and from firms who support the hourly rate only in the absence of viable alternatives. We do use the hourly model of payment sometimes but we tend to use a fixed rate as the legal cost can be too high to sustain. General counsel. Manufacturer, France

10 QUESTION: What is your attitude towards the hourly-rate model? Less than half of our respondents support the hourly-rate model. Even then, there is acknowledgement that the model itself is good only when certain assumptions are made: paid-for time needs to be wisely and productively filled and at the right level of seniority (if a partner is photocopying or trawling through legal texts, she may be working It is not a good model hard, but it is not work that represents value); there must be an inherent desire on behalf of the firm to complete work in the minimum amount of time possible which means a trusted relationship is critical to the model s success; and in the modern era of transparent reporting, clients need to see evidence of where time is spent in terms of business benefits, not just on completed time sheets. 51% 60% It is a good model 31% 27% Don t know 18% 13% All countries UK only We always try to secure a deal with law firms, we discuss a discount which will leave both parties happy. General counsel. Media company, France

11 QUESTION: How would you describe your approach towards paying hourly rates? 11 Pay external lawyers their hourly rates without question 1% 3% Typically seek a discount from their hourly rates 81% 84% Do not pay hourly rates Don t know 13% 3% 5% 10% All countries UK only The results in these two charts may correlate: a trend of dissatisfaction in an industry s pricing model could induce price pressure. Adding to the dissatisfaction with hourly rates, there is the widely-held belief amongst inhouse lawyers and procurement executives that flexibility can be found in firms charge-out rates. Some respondents were blunt in stating that they think law firm fees are too high. Part of the problem is that where the client is not offered any alternative fee model, the client s only option is to negotiate on the amount of the hourly rate. Economists might argue that growing pricepressure points to a slow-moving but inevitable slide towards commoditisation. But whilst it is true that the supply of volume legal services is becoming price-led, expert legal advice in commercial disputes continues to command high fees. This pattern was summed up by Kane Pirie, chief executive of Travel Republic: If a company is under threat, it needs the right team to protect it. A law firm partner may look expensive on a per-hour basis, but if his advice saves the company a fortune, it is money well spent. I m less comfortable engaging firms at the lower level, especially for basic work that could be staffed at a fraction of the cost by my own people.

12 QUESTION: Does your approach to paying for disputes differ from country to country? All Countries UK only Don t know 4% Yes 22% Don t know 7% Yes 31% No 74% No 62% We don t know the law in other jurisdictions, so we have to rely on lawyers in other countries. The basis doesn t differ fundamentally: we try to negotiate a fixed fee. Director of legal. Construction company, UK

13 FIXED FEES: Fantasy or reality in commercial disputes?

14 QUESTION: Have you used, or discussed using, other types of fee arrangement? Yes 94% No 5% Don t know 1% We see that movement away from reliance upon the hourly rate is on a spectrum: some companies have detached themselves completely; some are using a hybrid of payment models; others are at the evaluation stage. We are trying to move away from this pay-per-hour model. We would rather have a fixed fee model, because it increases trust and reduces doubt. Head of legal. Semiconductor manufacturer, Germany I try to split disputes into chunks and agree a fee for each stage in the process. It would be good for lawyers to take some responsibility for dispute results. Director of legal. Financial services firm, UK

15 QUESTION: Is budgetary certainty an important consideration in managing a legal dispute? 15 All Countries UK only Yes 90% No 4% Don t know 6% Yes 78% No 8% Don t know 14% There is, according to some of our respondents, a clear business case for companies to pursue alternative fee arrangements in dispute resolution. Of paramount importance is accurate forecasting: an organisation needs to have a good idea of what a dispute might cost. The single biggest problem with the open-ended use of the hourly rate is that it is risky for the client and no risk for the firm. If the case drags on due to unforeseen circumstances, the hourly rate model can be good news for the firm, but can cause budgetary problems for the client. clients operating within the hourly rate model but insisting on detailed forecasting by the law firms. Further budgetary security is added by insisting that any revisions are made and approved in good time. I would want to see the law firm and the lawyer taking an increased financial responsibility for the legal case they work on. Director of legal. Financial services firm, UK Our interviewees yield information on the development of new payment models. We see

16 QUESTION: Which of the following have you used, or considered using, for disputes advice? Inflexible fixed fee Fixed fee, with changes agreed in the event of unforeseen circumstances Conditional fees None Other 45% 43% 26% 41% 1% 3% 16% 32% 74% 81% All countries UK only Conditional fees are used by over 40 per cent of companies in Germany and the UK. This mechanism might typically take the form of twin hourly rates: win the case and the firm will receive certain amount per hour, lose the case and it will receive a pre-agreed fraction of that amount per hour. Contingency fees are not currently legal in Europe, and so were not considered as an alternative fee arrangement in this report. But the goal for many of the in-house lawyers interviewed is a number: a fixed fee or a capped fee. You will see from the verbatim responses that clients tend to want firms to share the risk in disputes advice. Even when there is a trusted relationship and detailed forecasting, companies want to be sure that their investment is limited. Every single respondent said that they would consider a fixed fee for disputes advice. A word of warning though: fixed fees do not mean cheaper fees; it is clearly right that a law firm can include in a fixed fee an amount to represent the risk premium.

17 OUR VIEWS: Lawyers are paid to reduce risk for their clients. But the accepted payment model for advice in commercial disputes pushes risk onto the client. We believe that firms should pursue ways of taking back some of that risk and it is clear from our research that large companies are expecting this to happen. The hourly rate model is not broken. As part of a menu of options, it can work very well. But firms should be prepared to offer their clients an alternative billing arrangement, and should be looking closely at fixed fees or fee capping. The arrival of contingency fees as an option in England and Wales next year offers still more flexibility to clients and firms alike. The pursuit of new billing arrangements should not be seen by clients as an opportunity to drive down the price of expert legal advice. Indeed, it should sit quite separately from efforts to negotiate on price. Use of fixed fees, conditional fees or contingency fees may not equate to paying less for a piece of advice, and guaranteeing a price may even carry a premium over the hourly rate forecasts to compensate for the extra risk involved for the firm. For firms with a good track record of forecasting likely costs on disputes including barristers fees and other disbursements a move to guaranteeing prices should not represent too daunting a step. And the extra security offered may just make the difference to a client choosing a firm in a wellsupplied market. CONTINGENCY FEES From April 2013, contingency fees in commercial disputes in England and Wales are set to be allowed under Lord Justice Jackson s Civil Justice Reforms a change which could lead to a radical reform of the dispute resolution landscape. Under the new rules, lawyers will be allowed to pursue claims on a no win, no fee basis and charge a contingency fee, calculated as a percentage of the client s recovery if the case is successful. Relevant legislation implementing the key changes has passed through parliament. Further legislation is expected, with the changes coming into force in April The use of contingency fees could radically change the landscape of dispute resolution in the UK. There are no plans to legalise contingency fees in the other European countries in this study.

18 RESPONDENTS VIEWS On the use of law firms... A relationship with a law firm and the lawyers on the case is not merely important; it is fundamental for the successful resolution of a case. A relationship based on trust, knowledge and competence - together with a fair budgetary consideration - is the key to a successful legal procedure. Head of legal. Oil and gas company, Italy I would rather pay a bit more and have excellent results, professionalism and quality of service, than pay less for poorer standards or results. In disputes one cannot compromise on quality. Legal services manager. Engineering company, France When we have a problem to solve we like to find a specialist law firm that we can trust: one that will give us a fixed fee and the peace of mind that the job is going to be done well. Head of legal. Construction company, Spain On fixed fee... We prefer a fixed sum for commercial disputes, although we do use a payper-hour method initially when calculating the amount of work that will be required. The hourly method is preferred by a lot of law firms, but we only use it as an initial method. Then we negotiate a fair fixed fee arrangement. Legal counsel. Construction company, Spain It is very difficult to produce a fixed fee for disputes work; any fixed fee would almost certainly be wrong, one way or the other. General counsel. Engineering company, UK I prefer fixed rate. Overall, it s a better, more competitive method of payment. The pay-per-hour method can be very expensive. Legal services manager. Engineering company, France

19 RESPONDENTS VIEWS 19 On hourly rates... With the pay-per-hour method you can evaluate the work a lawyer does very accurately. You will have a complete file and explanations on the exact work that has been put in that hour, leaving no room for misinterpretation or error. Head of legal. Financial services firm, Belgium The hourly rate doesn t allow me to keep costs under control. It requires me to trust the efficiency of the firm, which I can t always do. Legal counsel. White goods company, UK I don t think the pay-per-hour model is good simply because it protects the law firm but not us, the client. Whether a legal case goes well or not, they will always be paid. Managing director. Chemical company, Italy On costing a dispute... Budgetary certainty is important, but it is not paramount. You want to win! Head of legal. Financial services firm, Belgium Business across the board is having to look at different ways of pricing. Hourly rates open the way for people to look into things in a more detailed way than a dispute requires. Legal counsel. Construction company, UK The right result matters more than accurate forecasting, and if (when) we win we would recover the costs from the opposition. Legal counsel. Financial services firm, UK On future disputes... I d like lawyers to take more of the risk, and make savings all round. Legal counsel. Financial services firm, UK I d like to see a lot more flexibility and more a goal-oriented approach by law firms, using a method that is linked to the ultimate result. Head of legal. Food processing company, Italy

20 RESEARCH METHODOLOGY Research was conducted on behalf of Field Fisher Waterhouse LLP by Carnaby Co, a London-based advisory firm Results shown are highlights of a structured survey, conducted on the telephone. Questions were a mixture of multiple choice and freeanswer responses Interview targets were senior legal decision makers at companies and financial institutions chosen from a bought-in database, supplied by TLS Data All but two target organisations have an annual turnover exceeding 100m All data was handled in accordance with the Data Protection Act (1998) 80 people answered the survey in full, 37 from the UK and 43 from five countries across mainland Europe: Belgium (17), France (5), Germany (7), Italy (9) and Spain (5) Supporting information in this report is from Field Fisher Waterhouse LLP or from named clients of the firm This report and its supporting data remains the property of Field Fisher Waterhouse LLP. Reproduction in part is permitted, as long as the context is kept and the firm is credited

21 STATISTICS 80 general counsel and senior in-house lawyers interviewed on the telephone Target companies were international, from multiple sectors, with an annual turnover of more than 100m Interviewees were based in the UK, Belgium, Italy, Germany, France, and Spain

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