How to survive the changes to the litigation landscape

By Tony Williams and Richard Tromans

Introduction

Three regulatory upheavals will increasingly impact litigation in England & Wales: the Legal Services Act 2007, which created Alternative Business Structures (ABS) and which has already been implemented; and then the Legal Aid, Sentencing and Punishment of Offenders Act 2012 (LASPO) which comes into effect this April along with the Jackson Reforms. When combined, their effect will reshape the litigation landscape in this country.

End of referral fees

The ban on referrals via LASPO will primarily affect PI claimant law firms that have paid claims management companies (CMCs) for cases in the past. The symbiotic relationship of CMCs and PI firms is therefore set to collapse. The SRA is likely to rigorously enforce the ban on referral fees although it will be interesting to see if law firms are able to devise means of avoiding the impact of the ban.

We also will see, and already are seeing, CMCs buying law firms to integrate the two sides of the claimant business via ABS structures. This will leave traditional PI firms at a serious disadvantage unless they have the scale to reduce costs and/or the size to develop a national brand that consumers will be attracted to. Without a clear future source of cases smaller firms will face a severe challenge. We will see, and are seeing now, many PI firms going out of business, or selling-on their cases to firms that are able to adapt to the new environment.  The extension of the RTA portal for matters up to £25,000 and reduction in fees will further hurt the profitability of many smaller PI law firms. The SRA believes the impact will be so great it is bracing itself for multiple interventions and firm wind-downs.

Contingency fees

The Jackson Reforms will support the growth of contingency fees, especially Damage Based Agreements (DBAs), which will encourage lawyers to pursue cases that offer high level damage awards. DBAs may also create more aggressive, US-style, litigation in this country as there will be far more to play for and far more to lose.  Unlike with Conditional Fee Agreements (CFAs) any firm signing a DBA will not be able to charge fees to the claimant.  Accordingly the firm’s profitability will depend on their ability to win cases quickly with as little spent as possible on legal fees and disbursements.  This will fundamentally change the incentives from the CFAs where the more fees incurred the higher the recovery to an environment where a large early settlement will be most advantageous for the lawyers.  Larger commercial firms will be attracted by matters that could deliver major damages in the millions of pounds. However, they will also need to become more adept at costing and balancing risk, and will need to take on multiple matters in order to hedge their investments. The cash flow implications for law firms wishing to undertake substantial DBA related work will be significant.

Smaller law firms that pursue a DBA strategy may be successful if they choose cases carefully and run them efficiently but the margin for error will be small.  Barristers may be under pressure to accept DBAs or see advocacy work taken in-house.  Litigation funders may be utilised to mitigate the financial risks to the law firms.

Costs

The Jackson Reforms will place an increased focus on early stage budgeting of legal costs. This could put pressure on law firms’ and barristers’ earnings, as they risk seeing their recoverable fees reduced for work they believe they have rightly billed for and spent considerable time on. While the large law firms will be able to “stomach” losses, small firms and barristers, who are self-employed, may not be so resilient and may face financial pressures.

More investment will need to be made in budget planning, both in time spent on costing each potential stage of a dispute, as well as developing IT solutions that will aid lawyers in predicting dispute costs. Again, this will disadvantage the smaller firms that neither have the finances to develop software, nor the partner or support staff availability to spend significant time on cost planning.

The future?

Overall, the changes from the three regulatory revolutions will have a major impact on smaller litigation law firms that will not have the scale, human resources or financial resources to survive in this environment. We can expect many small firms that focus on litigation to go bust, or be taken over by larger firms. However, a few small firms that understand and adapt to the new environment could thrive, as is the case in the US.  The reforms will also test barristers in smaller, less financially robust chambers. The main winners from these changes will be the large commercial law firms and the ABSs. Will such “extinctions” in the legal services sector be good for justice? That perhaps is a subject for another blog post. But certainly, the world of litigation is about to change forever in this country.