Litigation, Costs, Funding and Behaviour

Implications for the Law

Willem H. van Boom, Willem H. van Boom

• Publisher: Routledge
• Year: 2016
• ISBN:
  9781317104223
• Edition: 1
• Topic: Jura
• Subtopic: Rechtstheorie & -praxis

This collection explores the practical operation of the law in the area of litigation costs and funding, and confronts the issue of how exposure to cost risks affects litigation strategy. It looks at the interaction of the relevant legal regime, regulatory framework and disciplinary rules with the behaviour of litigants, courts and legislatures, examining subjects such as cost rules and funding arrangements. The book discusses a wide range of topics such as cost-shifting rules, funding and mass tort litigation, cost rules and third-party funding (TPF) rules in specific areas such as intellectual property (IP) litigation, commercial arbitration, investment arbitration, the role of legal expense insurance arrangements, fee regulation and professional ethics. The contributors include renowned scholars, experts in their respective fields and well-versed individuals in both civil procedure and the practice of litigation, arbitration and finance. Together, they present a broad approach to the issues of costs, cost-shifting rules and third-party funding. This volume adds to the existent literature in combining topics in law and practice and presents an analysis of the most recent developments in this fast developing area.

1 Introduction

Willem H. van Boom

 

 

 

 

In litigation and other forms of dispute resolution, parties usually incur substantial costs. Apart from the time spent in court and the so-called ‘opportunity cost’ involved in litigation, civil proceedings give rise to attorney fees, expert and witness costs, court fees and reimbursements. Some of these costs may be recouped; others may remain where they happen to fall. How does the exposure to cost risks affect litigation strategy? And to what extent does the opportunity to shift costs on to the adversary influence these strategies? Does the legal framework for litigation cost allocation (cost-shifting rules) further influence the litigants’ behaviour? And how do private financing arrangements such as insurance and third-party funding (TPF) fit into this picture? Do funders exercise specific powers over parties and their lawyers? Do they introduce certain dynamics to the proceedings that would otherwise not exist? And, if so, is that bad? Should there be a legal framework in place to restrain these third parties or should this best be left to market forces?

In this volume ‘Litigation, Costs, Funding and Behaviour: Implications for the Law’, experts from various jurisdictions confront these issues by presenting their legal, economic and policy-oriented perspectives. Their contributions include topics such as cost-shifting rules and the behavioural response they elicit; the insurance, financing, sale and commodification of claims; and specific case studies in areas such as intellectual property (IP) litigation, personal injury litigation, investment arbitration and class action litigation.¹

With this introduction, a brief overview of the themes and contributions to this volume is given. The contributions can be divided into three themes: general perspectives (Chapters 2, 3 and 4), specific case studies (Chapters 5, 6 and 7) and mass litigation (Chapters 8, 9 and 10).

General perspectives

Chapters 2, 3 and 4 offer general perspectives on litigation, costs, third-party funding and the behavioural implications for litigants.

By means of general introduction, Chapter 2 titled ‘Litigation costs and third-party funding’ offers an in-depth comparative analysis of the issues, developments and regulatory choices concerning costs of litigation and funding arrangements. It also reflects on the behaviour of litigants and others involved in the business of litigating, adjudicating and settling private disputes. This chapter thus paints the background against which the following chapters are to be understood.

Chapter 3, titled ‘TPF and its alternatives’, authored by Jef De Mot, Michael Faure and Louis Visscher, offers an economic analysis of third-party funding and its alternatives. From an economic perspective, TPF can be considered as a remedy for cases where individuals do not bring claims because they do not possess sufficient funds to bring the claim, and do not have access to other ways of financing their claim. TPF can also mitigate rational apathy in cases of so-called dispersed losses. The authors explain why TPF emerges and how it can help cure the failures that result from incomplete access to justice. However, they acknowledge that TPF has both advantages and disadvantages in terms of effects on the behavioural incentives of the parties involved in litigation. By means of comparison, the authors explore viable alternatives for TPF, namely legal expenses insurance (LEI) and attorney contingency fee arrangements.

In Chapter 4, ‘Playing the man not the ball’, John Peysner reviews recent developments concerning the financing of access to justice in England and Wales. It seems that since the recoverability of conditional fees and after-the-event insurance has been effectively abolished, TPF agreements may act as potential fuel for a range of corporate and individual claims. Such arrangements may bring sufficient reward for investors in the context of limited returns on investments in an era of low interest rates and the need for balanced portfolios. However, concerns are voiced that TPF in the English context may in fact herald an era of frivolous claims, unfettered financial speculation and predatory practices. Against this background, Peysner analyses a recent attempt by the ‘Justice Not Profit’ organisation sponsored by the US Chamber of Commerce Institute for Legal Reform to convince English policymakers to rein in TPF. However, Peysner’s analysis cautions policymakers not to discard the evidence, which in fact indicates that in the English context TPF may well be a useful addition to the existing funding options.

Specific case studies

Chapters 5, 6 and 7 are devoted to specific case studies concerning the interplay of costs, cost rules and funding of litigation.

In Chapter 5, Charlotte Vrendenbarg explores ‘Legal costs awards and access to justice in Dutch intellectual property cases’. In Dutch civil litigation, the conventional rules on recoverable costs hold that the loser pays the prevailing party’s legal costs according to a simple system of predictable tariffs. The 2007 statute implementing the European IP Enforcement Directive 2004/48/EC introduced a completely different set of rules for IP litigation in the Netherlands. There, a full cost-shifting regime was introduced in support of IP right holders to enforce their rights before the courts. Vrendenbarg explores the effects of this new regime on litigants’ behaviour. Based on the available literature on the effects of costs shifting in general, she conducted a survey among Dutch IP practitioners and found that the effects of the new regime seem to be mixed at best. Obviously, the decision to litigate or to settle depends on many variables but practitioners do report irrefutable changes in litigation behaviour under the influence of the new regime. For example, the introduction of the full cost-shifting regime seems to reinforce the tendency of risk-averse parties to settle rather than to litigate, regardless the merits of their case.

In Chapter 6, ‘“Mercantile adventurers?” The disclosure of third-party funding in investment treaty arbitration’, Eric De Brabandere takes us into the domain of investment treaty arbitration. There, the function of arbitration is different from normal commercial arbitration between commercial parties since one of the parties involved is a sovereign state at the receiving end of foreign investments on the basis of international investment treaties. As part of these treaties, receiving states agree to dispute resolution by independent arbitral tribunals rather than by their domestic court system. This system of investment treaty arbitration has both advantages and limitations. One of the issues is whether the presence of a TPF covertly covering and fuelling an investment claim or group of claims should be disclosed to the tribunal. What could be good reasons and less well founded reasons for favouring such a ‘duty to disclose’? Eric De Brabandere weighs the arguments pro and con, in light of the specific functions of arbitration in the context of international investment treaty law.

In Chapter 7, ‘Experimenting with conditional fees in the Netherlands’, Ben van Velthoven and Peter van Wijck test whether a recent experiment set up by the Dutch Bar Association allowing conditional quota pars litis (QPL) agreements between client and solicitor is fit for purpose. The overall aim of this fee regulation experiment is to increase access to justice for victims of personal injury. The experiment therefore allows solicitors to abandon the hourly fee rule and opt for a conditional QPL fee. In a sense, the solicitor acts as ‘venture funder’ of his client’s claim. The question is whether this experimental scheme can be of mutual benefit to both parties and lawyers, in comparison to hourly fees, and whether the experiment actually succeeds in improving access to justice. In order to address these questions, the authors develop an economic model and then run a simulation to gauge the behavioural effects of the regulatory experiment. The good news is that their simulation method seems apt to generate rough predictions on real-life effects of the regulatory experiment. Less comforting is the finding that it seems unlikely that claimants and lawyers have the capacity to compare the suitability of the available fee options. This lack of overview alone may be a good reason for parties to stick to the traditional and well-known remuneration rule of hourly fees.

Mass litigation

The three final chapters are concerned with costs and funding of mass litigation procedures.

In Chapter 8, ‘Financial arrangements with litigation funders and law firms in Australian class actions’, Vicki Waye and Vince Morabito analyse the development of TPF in Australian class actions. The chapter examines the Australian class action landscape and considers the growth of class actions funded by third-party investors. After outlining evolution and various business models, the tension points for claim governance are identified. Moreover, the response of the Australian regulators and judiciary to TPF models in class actions is analysed and compared with developments in other jurisdictions. One of the interesting problems with the Australian class action is that law firms are only allowed to charge a success fee by means of a capped mark-up over regular lawyer fees, whereas TPF QPL remuneration by third parties is neither regulated nor scrutinized. Against this background, the authors consider the problems posed by close relationships between funders and class legal representatives and they examine whether regulation could address these problems.

In Chapter 9, titled C‘Funding of mass claims in Germany: Caught between a rock and a hard place?’, Astrid Stadler analyses the response by the German legislature and judiciary to the involvement of funders in mass damages claims. For instance, German courts are reluctant to embrace mass claim litigation by ‘special-purpose vehicles’ (SPVs) to whom claims are assigned. These SPVs are in fact unable to sue on their own behalf without facing obstacles that normal plaintiffs would not face. For example, to prevent their case from being thrown out of court without judgement on the merits, they will have to offer security for costs more or less automatically, which is contrary to existing rules and makes litigation more expensive. Stadler argues that in Germany, as in many other European countries, a clear statutory framework for litigation funding and the activities of SPVs should be introduced. This should ensure that SPVs are not banned outright but rather that they are regulated so that they can offer true added value to access to justice for individual claimants.

Finally, in Chapter 10, ‘Entrepreneurial motives in Dutch collective redress: Adding fuel to a “compensation culture”?’, Ilja Tillema explores the often used argument that the involvement of TPF in collective damages actions encourages an unethical ‘compensation culture’ detrimental to society. The chapter maps the evolution of Dutch collective redress and the ensuing funding practices over the past ten years. Some say that there has been a surge in commercially driven collective redress cases, thus fuelling a Dutch ‘compensation culture’. Indeed, Dutch policymakers and courts have introduced hardly any legal restrictions on investing in collective redress actions. Tillema asks whether this has caused a change in the commercial landscape and whether we can find evidence that this liberal stance has fuelled, as some feared it would, a Dutch ‘compensation culture’. These questions are highly relevant, given recent plans to further extend the Dutch legislative framework for collective redress. Tillema surveys the incidence of collective damages claims in recent years and she finds no evidence that the (slow) rise in the number of collective damages actions is related to entrepreneurial funding. Moreover, leaving aside the occasional incident, there is no evidence either of a rise of frivolous lodging of collective damages claims. Tillema thus exposes the ‘compensation culture’ argument as unfounded rhetoric.

Outlook

The contributions to this volume revolve around costs, cost rules, funding arrangements and behaviour of litigants. Costs matter, as do cost allocation rules and the opportunities offered by legal systems to third parties to act as funders of the litigants. How does the risk of having to bear the brunt of such cost as legal expenses, attorney fees, legal experts, court fees and so forth affect litigation strategies and the willingness to settle? Do cost-shifting rules influence litigants’ behaviour in this regard? And do third-party funding arrangements cause further changes in this behavioural pattern? Insight in these questions is vital to our understanding of the interaction of the relevant legal regime, regulatory framework or disciplinary rules with the behaviour of litigants, courts and legislatures. These issues are addressed in this volume.

One conclusion can already be drawn here. None of the contributors is outright hostile towards TPF or speaks against the clever design of cost rules as a means to achieve optimal levels of access to justice or to evoke certain behavioural responses. What is clear, however, is that the devil is in the details; for instance, in certain markets for legal services the introduction of unfettered TPF agreements could disrupt an existing market balance or could lead to unfair practices. Therefore, if anything, this volume shows that the design of cost (allocation) rules and the dynamics caused by the involvement of TPF in civil litigation merit careful consideration from both the legislature and the judiciary against the background of the legal system and legal culture of the country at hand.

Note

1This volume focuses on private funding arrangements. Hence, public legal aid remains mostly outside the scope of the contributions.

2 Litigation costs and third-party funding

Willem H. van Boom¹

1. Introduction

Most often, the private costs of conducting civil litigation are high. Litigants face court fees and charges, disbursements, fees for legal representation and costs of witnesses a...