Kain Knight InBrief 22

Issue 22 | November 2014

COSTS

IN BRIEF

Solving your costs problems in the new legal landscape

SettleFirst Consulting JLT Kain Knight is pleased to announce the acquisition of Dubai based SettleFirst Consulting, specialists in debt recovery and collections.

SettleFirst is a management consultancy firm, with a specific focus on the recovery and collection of debts for clients in the insurance, legal and banking sectors. They have an intimate knowledge of Federal and Emirate level legislation in the UAE with regards to the recovery of unpaid debts. One of the main aims of their recovery specialists is to prevent the need for litigation; however, where debts remain unrecoverable and litigation becomes necessary, they are able to assist clients in this process through partnerships with leading law firms.

It is our intention to develop SettleFirst’s existing income streams and also use the business as a platform to provide our legal costs services to firms based in the UAE and throughout the rest of the GCC region.

Peter Petyt, our Chief Executive Officer said, “The acquisition of SettleFirst is an important step in our growth programme, providing valuable geographical and service line diversification. There are compelling synergies between SettleFirst’s existing client relationships and Kain Knight target clients in the GCC region, and we intend to grow SettleFirst’s existing services alongside the provision of existing and new legal costs services”.

Inside this issue 02

As the cost sands shift…

03

Kain Knight heads for the dunes!

Mitesh Modha

Costs in the USA

06

Richard Lloyd

04

A Funder’s Perspective Oliver Gaynor

Funding Michael Kain

08

Meet the Team…

Mitesh Modha

02 | Kain Knight InBrief

As the costs sands shift, Kain Knight heads for the dunes!

Think of Dubai and most people think of the Burj Khalifa, dune bashing and shopping malls the size of towns.

I must admit that upon landing the day before Ramadan and in 45C heat, legal costs were not at the forefront of my mind so much as simply surviving the next few months.

As I was to discover however, with Dubai continuing to grow as a litigation hub the need for costs expertise will only continue to increase.

In between battling the soaring temperatures and managing Kain Knight’s recent acquisition in the region (SettleFirst ConsultingJLT), I took the opportunity to meet with practitioners and find out about their experiences of costs in the region.

Mention inter partes costs recovery to any practitioner within the local Dubai courts and you’ll most likely be met with a perplexed look. Costs recovery is at best nominal with parties generally having to bear their own costs. However, it is no surprise, given the number of international law firms based in and around the Dubai International Financial Centre (DIFC) and the number of practitioners within those firms with common law backgrounds, that you soon meet lawyers who are familiar with the concepts of “taxation” and “proportionality”.

If you venture into the DIFC you’ll discover, at its heart, the DIFC Courts, established in 2004

by His Highness the late Vice President of the UAE and Ruler of Dubai, Sheikh Maktoum bin Rashid Al Maktoum. The courts administer a unique English-language common law system comprising judges and registrars from common law jurisdictions including the UK, Singapore, Australia and Malaysia as well as trained UAE judges. The jurisdiction of the courts was initially restricted to institutions based in, or contracts executed within, the geographical boundaries of the DIFC. However, in October 2011 its jurisdiction was significantly extended to include any contract which specifies DIFC Courts jurisdiction or any dispute where the parties elect to use the DIFC Courts.

As legal institutions go, the DIFC Courts are still very much in their infancy. Thus it is no surprise that they lag behind the UAE Courts in terms of number of cases being processed each year. However as commercial contracts provide increasingly for DIFC Courts’ jurisdiction, it is only a matter of time before more disputes begin to find their way before this increasingly internationally renowned court. We all know what follows legal disputes in common law jurisdictions and a number of multi-million pound claims with accompanying costs issues have already made their way through the DIFC Courts.

In light of the extensive input of UK Counsel in the drafting of the rules of the DIFC Court (RDC), it comes as little surprise to find provisions which closely resemble large sections of CPR 44-47. It also turned out that had I landed a couple of months earlier, I would have had the pleasure of hearing a speech by none other than the now retired Senior Costs Judge Master Hurst to an audience of DIFC and UAE Court practitioners.

The other significant method of dispute resolution in the region is that of arbitration with forums such as the Dubai International Arbitration Centre (DIAC), the DIFC-LCIA and

the ICC hearing arbitrations in Dubai. Whether or not costs become an issue depends on the background of the arbitrator (civil or common law background).

In any event, whether it be by way of litigation or arbitration, the Ruler of Dubai and Vice President of the UAE, His Highness Sheikh Mohammed Bin Rashid Al Maktoum, is committed to making Dubai an international legal hub. In time, we believe that there will be an increasing need for costs expertise in the UAE and in the rest of the Middle East. With Kain Knight having made a commitment to the region we believe we are well positioned to provide that expertise, both now and in the future.

With Dubai continuing to grow as a litigation hub the need for costs expertise will only continue to increase.

Mitesh Modha, Head of Technical & Special Projects, Kain Knight

Kain Knight InBrief | 03

Costs in the

USA Along with over-sized trucks, baseball and apple pie, the ‘American Rule’ of Plaintiffs bearing their own costs unless specified otherwise by contract or statute is a long-standing US tradition.

Recently however, there has been an apparent shift in legal opinion towards the ‘English Rule’ of ‘loser-pays’ amidst concerns regarding the burden of litigation on potential Defendants.

The American Rule arises from the argument that a potential litigant should not be dissuaded from bringing a claim because of the risk of paying the Defendant’s expenses if the claim is unsuccessful. However, it is also argued that the absence of risk to a prospective Plaintiff promotes speculative lawsuits reliant on a Defendant electing to settle rather than incur the costs of defending a weak claim for which no fees will be recoverable in any event.

One of most prominent departures from the American Rule arises from the field of patent litigation, a field currently under particular scrutiny due to the activities of ‘patent trolls’.

These entities commonly purchase patents on the open market and seek to generate profit through enforcing and collecting licensing fees on the purchased patents.

Whilst the companies in question claim to be merely enforcing their property rights, they have drawn criticism for abusing the patent process, targeting individuals and small businesses with demands for licence payments and for hindering innovation.

On 29th April 2014 the US Supreme Court decision of Octane Fitness, LLC v. ICON Health & Fitness was handed down.

By way of background, the federal Patent Act provides that in ‘exceptional cases’ an unsuccessful Claimant can be ordered to pay both parties’ costs. Previously, a high bar was set in the 2005 case of Brooks Furniture Manufacturing, Inc v Dutailier International, Inc, namely that a claim must either involve ‘material inappropriate conduct’ or be shown to be both ‘objectively baseless’ and ‘brought in subjective bad faith’.

In the case of Octane Fitness, the Supreme Court took a different view and held that the framework to qualify for a fee-shifting award set out in Brooks Furniture was unduly harsh and contrary to the intention of the statute.

The Court found that an ‘exceptional’ case should be considered on the totality of the circumstances of the case, for example a case could be found to be ‘exceptionally’ lacking in merit albeit brought in good faith but still qualify for an attorney fee award.

It remains to be seen however how the various jurisdictions interpret the Supreme Court’s approach in Octane Fitness. Following the decision three District Courts found that cases were exceptional and awarded attorney fees to the successful Defendant1. Most recently however, the California District Court was asked to consider whether Apple was entitled to recover $16 million in attorney fees following its successful trademark dispute against Samsung (Apple Inc -v- Samsung Elecs. Co.).

Apple argued that the jury’s finding that Samsung ‘wilfully infringed’ on Apple’s trade dress was sufficient to consider the case ‘exceptional’ and therefore attract an attorney fee award. The California Court however found that the arguments raised by Samsung at trial were ‘reasonable defences’ and therefore the jury finding alone was not sufficient to constitute an exceptional case. It appears therefore that the definition of ‘exceptional’

remains subject to argument and will no doubt continue to be tested in the future.

The case of Apple -v- Samsung was also noteworthy in providing a demonstration of the use of fee-shifting as a sanction for misconduct. Samsung were found to have revealed confidential patent information during the discovery process and were ordered to pay Nokia a total of $1.15 million and Apple a total of $893,000 in attorney fees and costs. That said, Apple and Nokia did not have it all their way with the Judge reducing various time entries for block-billed tasks of 10 hours or more by 20% and expenses for first-class travel by approximately 70%!2

Whilst the American Rule remains the default position, the Supreme Court decision in Octane Fitness has brought a renewed focus to the merits and application of the ‘English Rule’ in managing the litigation process. Meanwhile, as aspects of the American Rule such as qualified one-way costs shifting are introduced to England via the Jackson reforms, an approach drawing from both Rules appears to present the best chance of ensuring a balance between access to justice and easing the burden on potential Defendants.

Patent Litigation Fee-Shifting, July 2014. The Corporate Counselor, Law Journal Newsletters

1

Legal Fee Advisors Dispatch : July 16, 2014 (www.legalfeeadvisors.com)

2

Richard Lloyd Pacific Costs, California

04 | Kain Knight InBrief

Cost Budgeting:

a Funder’s Perspective Much ink has been spilt on the effect of Jackson LJ’s cost management reforms, and in particular the difficulties posed by cost budgeting.

A lot of feedback from practitioners struggling with Precedent H would be unprintable - particularly from senior litigators used to practicing on hourly rates, and used to clients paying monthly bills in full safe in the assumption that the majority of those costs would be recoverable inter partes if the case succeeded. In that comfortable world, CPR 3.18 is a rude awakening: “when assessing costs on the standard basis, the court will (a) have regard to the receiving party’s last approved or agreed budget for each phase of the proceedings; and (b) not depart from such approved or agreed budget unless satisfied that there is good reason to do so.”

The phrase “crystal ball” springs to mind.

Anyone who has managed a complex piece of commercial litigation will know that it is impossible to accurately predict every single twist and turn that may occur. Applications are made, documents appear, witnesses fail to appear, extensions are granted, appeals are lodged. Rare it is that lawyer and client can sit down together on a post-case debrief and say, “well that went exactly according to plan”. Rare too that cases come in under budget, or that costs judges are willing to allow recovery for that item which was unwittingly missed from the budget.

Clearly the process is burdensome. However, it would be wrong to say it is without benefit. From a client’s perspective, a properly detailed and thought through cost budget is extremely useful, akin to a project management plan: it maps out the likely shape of the proceedings, including the peaks and troughs of activity and expense, and allows those managing the company’s legal spend some visibility into an otherwise opaque area of expense. Before I left private practice to join Burford in late 2013, I had two cases that required costs budgets to be submitted. Both cases settled before the budgets came to be scrutinised by court; however, the exercise was valuable for both clients who participated closely in the budget preparation (for example, as to the identity and availability of witnesses and documents), and who used the final versions to obtain internal sign off to proceeding with the litigation.

The same rationale very much applies for litigation funders, because funders share some of the financial risk of the proceedings with the client. The key questions for the client and the funder are thus the same: how much is this litigation asset worth, when will it be realised, and how much do I need to invest to get there?

The importance of proper cost budgeting is a vital component to a third party’s funder’s decision whether to invest in a case or not.

One of the questions we are most frequently asked by solicitors and clients is whether we would invest in a case of a particular damages size – for example, a claim for £5m.

The phrase “crystal ball” springs to mind. Anyone who has managed a complex piece of commercial litigation will know that it is impossible to accurately predict every single twist and turn that may occur.

Kain Knight InBrief | 05

The answer depends not just on the amount of damages, but the amount of the cost budget and thus investment required to get there. There needs to be enough headroom for both the funder and the client to make acceptable returns from the case – so the £5m case is potentially viable if the cost budget is low, but not if it is in the millions.

There are of course glosses to this. The damages figure needs to be properly thought through – preferably reviewed and supported by a forensic damages expert - and it should allow for the inevitable discount if the case settles, as the majority of cases do. Very much the same applies to the cost budget. Our general experience is that just as damages get overestimated, costs get underestimated.

Thus, while it is not entirely accurate, the old adage of “double the budget and halve the damages” is not without some truth.

It follows that when funders receive copies of budgets from Claimants seeking investment capital, we have to carefully scrutinise the figures and assumptions built in. Is the budget proportionate to the likely size, shape and complexity of the proceedings? Has provision been made for some of the more frequently overlooked areas of litigation expense, such as the cost of potential enforcement proceedings against an overseas Defendant who will not willingly pay? Has adequate contingency been built in, to cover those other areas which cannot be predicted at all? Has it been prepared or at least reviewed by a professional costs draftsman?

It is far better to have over-estimated at the outset rather than underestimated. Funders will usually be sympathetic to rolling over any unused portion of the budget (say witness statements were £100k cheaper than expected) to another area (say trial preparation), provided the overall investment figure does not increase. It is far more problematic for funders to have to go back to get internal approval to increase the investment size mid-way through a case: few Investment Committees will be willing to plough more funds into a case where the impression, whether rightly or wrongly, is that costs are spiralling out of control.

Clearly, as the body of Precedent H builds up within law firms, and before the costs judges too, it will become easier for practitioners to get the figures right first time. Another benefit from bringing in a professional draftsman at the outset is the perspective they can bring on how much particular cases typically cost to run. Interestingly, from a quick analysis we ran on 50 randomly selected funding applications, the average cost was 10.9% of the claimed damages size – though of course by their nature some types of claims will be proportionally more expensive to bring.

So the discipline of good budgeting is important for funders as well as clients. One final perspective may be that it is also a good discipline for lawyers. This may perhaps be counter-intuitive, and it is not the feedback we generally hear from practitioners. But, the market for legal services, and in particular the way that legal services are paid for, is changing fast. The Jackson reforms are a key component, but so is client demand. Firms that can successfully compete for clients on pricing as well as quality will tend to succeed in a competitive market. In terms of winning litigation mandates – particularly big ticket, complex commercial cases – the cost budget will be the key driver of price.

Our general experience is that just as damages get overestimated, costs get underestimated.

on the case succeeding. This is the typical structure we see in our US investment portfolio, where Claimant firms take on cases on pure contingency arrangements (say 30 – 40% of damages) and then seek financing from us as the case proceeds. Burford now offers just such a solution in the UK with the market-leading Burford Hybrid DBA; demand is expected to increase further once the DBA Regulations are clarified by the Ministry of Justice.

The rewards on the right case can be spectacular, but firms can only propose such arrangements if they have done their homework on damages and costs – just as funders and clients do. Either way, it is the lawyers who master the economics that will be best placed to succeed in the future.

Oliver Gayner is a Solicitor specialising in complex commercial litigation & arbitration, and is the Litigation Funding Manager at Burford Capital, the world’s largest provider of litigation risk solutions.

A firm that can show a track record of delivering, say, construction industry arbitrations for £1.5m will be a more attractive option to the General Counsel of a multinational engineering company than the firm that estimates £2m, or that estimates £1.5m but cannot keep to it.

More attractive still – at least for many clients - will be the firm that offers to do the case for free, but with a contingency fee based

Oliver Gayner, Litigation Funding Manager, Burford Capital

06 | Kain Knight InBrief

Funding

A few years ago the alternatives to funding any sort of legal service were fairly straight forward.

For non contentious work the options were simple.

You or your friends and family or your employer would pay. In some cases, the Solicitor was entitled to charge on a percentage basis such as in employment matters.

For contentious work it was again fairly straight forward.

In addition to the above (apart from a percentage basis) there were the additional options of legal aid, trade union backing and some insurance cover.

So what are the options today?

With regard to non contentious work the options have not changed. The real changes come with contentious work. These are the only ways in which a Solicitor can charge his client.

1.

Private retainer

Still the most obvious and great for the solicitor, but in view of the other options, not necessarily great for the client. The problem being that not all Solicitors offer the other alternatives. If the client wishes to use a particular Solicitor he normally has to do so on the Solicitor’s terms. Many clients are unaware of all of the options.

If you look at the Solicitor’s Code of Conduct that was amended in October 2013 what the Solicitor has to do is to give the clients “the best information”. As to what that means is open to interpretation. The Solicitor does have to tell the client about insurance services and legal aid if appropriate. That basically means that the Solicitor has to see whether the client has any BTE insurance (Before The Event insurance) and tell the client how ATE insurance (After The Event insurance) works. Most clients are not aware that they actually have legal cover (BTE) as it is very common with most credit cards and insurance policies.

2.

Legal aid

At one time in the distant past virtually everyone could get cover from one of the Government funding provisions although they might have had to make a contribution. It was means tested but for most of us on modest incomes this was available. Over the years legal aid has been significantly reduced. It is now virtually not an option for any normal litigation.

Kain Knight InBrief | 07

3.

Before The Event Insurance

Most home owners and car drivers have this already and probably do not know it.

It is usually limited in amount and the client normally has to use the insurers’ Panel Solicitors.

4.

After Event Insurance

This has become very popular. Prior to April 2013 it was a must for most litigators.

Basically it worked hand in hand with CFA’s. The client could take out this type of insurance just in case he lost and was hit with a large bill from his opponent. It is different to most other forms of insurance in that the client did not have to pay anything up front. If they lost they could claim and still not pay anything. If they won they still did not have to pay and the ATE supplier would be able to recover its’ premium from the loser. A “win-win” for most litigators.

However, in April 2013 the rules changed making the client responsible. If a client lost he still does not have to pay, but if he won he had to pay the premium from out of his damages. Some ATE premiums have to be paid up front now. It is still very popular as it continues to take the risk out of losing but it can be expensive in Commercial cases.

5.

Conditional Fee Agreements (CFAs).

This works hand in hand with ATE insurance. Again, prior to 2013 this was the best thing since “sliced bread” for litigators. CFA’s were available to all forms of litigation and advocacy apart from criminal and matrimonial matters. Again, the client had no risk. If he lost then the Solicitor did not get paid. If the client won then the client would recover most of his fees from the loser including a success fee and the ATE premium.

After April 2013 the client has to pay the success fee limited to eg: 25% in personal injury of his damages and the ATE premium. CFA’s cannot be used if there is any insurance in place such as BTE.

6.

Collective Conditional Fee Agreement (CCFA’s):

This is the same as a CFA but it relates to a number of cases as opposed to individual agreements. Trade Unions and Insurers often enter into CCFA’S with their Solicitors. This means their members do not have enter into individual CFA’s.

7.

Discounted CFA’s.

This works in the same way as a full CFA but the client pays something regardless of the outcome. It usually works with the client paying either a lower hourly rate if he loses but if he wins the Solicitor will recover his full hourly rate from the opponent.

8. Damage Based Agreements DBA’s.

Until recently Contingency fees were unlawful in most contentious matters but not in non-contentious cases. These types of agreements have been used in employment tribunal matters for years. The client pays his Solicitor a percentage of his damages if he wins. In April 2013 the Government extended the use of DBAs.

Michael Kain Chairman, Kain Knight

08 | Kain Knight InBrief

Meet the team

Mitesh Modha A vegetarian, long-term suffering Tottenham Hotspur fan with a penchant for legal costs and halloumi, Mitesh joined Kain Knight in July 2010.

Part inspired by the 90’s drama This Life and part by an unending desire to argue even the weakest point, Mitesh embarked on his legal career when he attended the University of Kent in Canterbury (little did he know, 10 years later he’d be working for a company which has an office based only a stone’s throw away from one of Canterbury’s illustrious student hangouts! – it’s a small world). After 3 years of hard work, a fair amount of 5-a-side football and a number of nights in the student union, he left university with a 1st Class LLB (Hons) degree. Thereafter he undertook his Bar Exams and was called to the Bar in 2005.

In his time as a freelance advocate in County Courts up and down the country and the High Court in London, he was forced to become a hardened advocate who could think on his feet and deal with the practicalities of litigation and court work.

He joined Kain Knight as a member of the company’s in-house advocacy team dealing with detailed assessments nationwide. He continues to undertake detailed assessment on substantial costs matters and now also

handover of Kain Knight’s recent acquisition, SettleFirst Consulting, and to explore legal costs in the Middle East which involved a 3-month secondment in Dubai. He recently returned and is looking forward to getting involved with future Kain Knight “projects” in the pipeline.

attends Costs Management Conferences dealing with costs budgeting. In addition to attending court, Mitesh also drafts Bills of Costs, Costs Budgets, Points of Dispute and Points of Reply. He also provides internal and external seminars providing updates and guidance on developments within the costs world. He was recently promoted to Senior Associate and is Head of Technical & Special Projects. His first “project” was to oversee the

Contact us

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Disclaimer Consistent with our policy when giving comment and advice on non-specific issues, Kain Knight cannot assume legal responsibility for the accuracy of any particular statement. In the case of specific problems it is recommended that professional advice be sought from your normal contact.

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