The Elephant in the Court Room

Cost Implications on dismissal of a counterclaim or third party claim

We've recently come across an inconsistency in the Supreme, County and Magistrates Court Rules, with implications that litigators should be alert to.

Order 63A.16 of the County Court rules provides that dismissal of a counterclaim or third party claim carries costs with it, unless the court otherwise orders. No such provision exists in the Supreme Court Rules.

The reason that litigators should be aware of this rule is that there are many instances where such claims are dismissed without adjudication on the merits, or because they are settled. In such circumstances, consideration may need to be given as to whether an order should be sought, specifically providing that no costs are payable, or awarding costs to the claimant.

On the other hand, because of the absence of the provision in the Supreme Court Rules, when finalizing a matter, consideration must always be given as to the appropriate orders to be sought regarding the costs of a counterclaim or third party claim.j

Dangers of separate components in Calderbank offers

A recent Federal Court decision considered the reasonableness of rejecting offers made.  Nothing unusual about that, but the unusual aspect of the decision was the consideration of the reasonableness of rejecting the individual components of an offer.

The proceedings involved claim under the Fair Work Act, the claimant seeking damages arising from contravention of the Act.  Under the Fair Work Act, costs are generally not awarded.  The applicant sought costs, relying on the respondents rejection of a series of without prejudice offers as evidence of unreasonable behaviour.  The court looked at the individual components of the offers, and considered the outcome against each of those individual components.  It found that, although the applicants' offers were less than the compensation awarded, some of the individual components were greater than what was awarded and in those circumstances it was reasonable for the respondent to decline that component of the settlement offer.

The particular component considered in this case was costs which have been thrown away.  The case highlights the difficulty of seeking a fixed amount for costs, are a cost order has been made and a party is seeking to compromise that order as part of an offer of settlement.  It would be necessary to establish the reasonableness of the amount of the offer relating to that cost component.

Third party payers - a warning to commercial lawyers!

The Legal Profession Acts now enacted in the majority of Australian states, have the concept of "third party payers", of which there are two types, associated and non-associated.

 

Associated third party payers are those who are not the client of the law practice, but have a direct responsibility to the law practice to pay the client's costs.  Examples are insurers, companies paying the costs of an employee or director, a father paying the costs of a child.

 

Non-associated third party payers, do not owe a responsibility to the law firm, but rather have a responsibility to the client to pay part or all of the client's legal costs.  Commonly, this liability to pay costs arises out of contractual obligation, examples being mortgages, leases, and other commercial documentation.

 

Yet it appears that the draftspersons of such documentation fail to take the provisions of the Legal Profession Acts into account when drafting the costs clauses.  This is highlighted in the decision of Boyce v McIntyre, a decision affirmed by the NSW Court of Appeal

 

The simple facts were that Boyce (law firm) was seeking to recover legal costs from McIntyre (non-assocaited third party payer) who was responsible for payment of Boyce's client's "reasonable legal costs" pursuant to the terms of a lease between client and McIntyre.

 

There was a cost agreement between Boyce and client which provided for paymet of a fixed fee of $3000, and Boyce advised McIntyre that the estimated legal fees were $3000.

 

McIntyre sought to have the fees assessed and on assessment, the cost assessor held that, as there was no cost agreement between Boyce and McIntyre, the costs should be assessed on the basis of what was "fair and reasonable" and not by reference to the provisions of the cost agreement.  This approach was affirmed both by the Costs Review Panel and by a single judge of the NSW Supreme Court. 

 

In jurisdictions where there are scales of costs (i.e. all other States and Territories other than NSW), the costs would be assessed by reference to the relevant scale of costs or remuneration order.  This is something which needs to be addressed by the draftspersons of commercial contracts.  It may be necessary to have the third party payer enter into a cost agreement with the law firm, but this then makes them an associated third party payer, with all the associated rights of a client to disclosure, to negotiate a cost agreement and to challenge costs.

 

Many clients could be substantially out of pocket due to the differential between actual costs and what would be recoverable on a fair and reasonable, or scale basis.

Perfection is an aspiration not a goal

Perfection is an aspiration not a goal - should be a standard direction for many clients to their lawyers. Yet many lawyers, particularly young lawyers would not understand what it means.  To put it another way, "you don't need a Rolls-Royce when a bicycle will do", a quote from Rio Tinto's General Counsel.

It's all about proportionality - whilst in a perfect world, you would interview every potential witness, review every document, not matter how limited the relevance, and conduct endless interlocutory applications to compel the other party to also produce every shred of evidence, it is a rare matter where this level of work is proportional to the the issues involved.

In Australia, this statement is also now the mantra of the judicial system.  Judges and other judicial administrators have recognised that the system cannot support a perfect world.  Courts do not have the resources to allow every case to be run as the "perfect" case.  Discovery is becoming so enormous, that judges must intervene and limit the categories of documents to be produced.  In the Federal Court, the "rocket docket" recognises that parties can't have unlimited time to get their acts together in compiling and examining evidence.  The combined goals of ensuring parties get a fair hearing, whilst also ensuring disputes are finalised in a speedy fashion, mean that no case will be conducted as the perfect case.

So, it's a matter of focusing on what it most important and for clients, on where there money is best spent. Unless you plan how you are going to conduct the matter, and therefore what work you will focus on, you are in danger of doing the following:

• Reinventing the wheel (a recent example - I was asked to advise on cost orders to be sought, and pointed out that I had given exactly the same advice, on the same matter, about 18 months ago)
• Chasing rabbits down burrows but not the rabbit who is the target (example - researching a point of law that is not in issue)
• Finding the weakness in the evidence or the law too close to trial and only after very considerable costs have been incurred  

Case planning and early case assessment, when undertaken which a clear understanding of what the client sees as necessary for the case, are what is required. 

Hollywood Expectations

Do your clients have Hollywood expectations?  By that I mean, they expect things to happen the way things do in the movies. 

 In the movies the following happen:

• Their lawyer only works on one matter at a time (the client's)
• The lawyer is able to find the case/witness/piece of evidence that magically results in a win for the client
• There is never a discussion about how much it is going to cost the client
• Cases are conducted with the speed of light, with major litigation getting a hearing within weeks of the proceedings being issued
• The other side is always in the wrong
• There is only black or white - nothing is ever grey

It should be pretty obvious that if your client has Hollywood expectations, then you are in trouble unless you can remove the rose coloured glasses and have the client see the real world of a legal case. 

Certainty has a Premium

A front page article in today's Australian Financial Review does not predict the death of the billable hour, but certainly shows its waning in favour.  As Telstra's Will Irving is quoted "Certainty has a premium it didn't have before the global financial crisis".

The clients I advise about alternatives to hourly billing are looking for one of two things:

• The lawyer to have some skin in the game

• Certainty of costs

With the former, there needs to be some value component in the arrangement and agreement about what triggers any value payment.  But the arrangements I see proposed by lawyers tend to be the same old hourly rates with a premium for "success".  Lawyers and clients need to be a bit more creative.  What is the value actually being delivered by the law firm?  For transactional work it may be preparing documents that are approved quickly by a regulator.  For litigation, it may be the accuracy of the initial advice on liability and quantum.  The value payment can be tied to that.

Then there is the true value billing arrangement - not tied in any way to time but solely relating to what the client perceives as the value of the lawyer's work.  The basic question is "how much would you pay me to achieve X?"

This is where there is a real problem for lawyers, as it involves dealing in intangibles - what the client wants and needs, and what their perception of value is, (a complex psychological and sociological question).  Until lawyers can break their thinking of tying value to time spent, they will never develop true value billing arrangements. 

But then we come to certainty of costs.  Generally this is achieved through some form of fixed fee billing, sometimes with a value component.  Fixed fees take work on the part of the lawyer.  The work needs to be clearly scoped.  Project management techniques and costing strategies used by other industries should be utilised to plan the matter and work out fees.  But this work has additional benefits - developing a matter plan enables both lawyer and client to see if the matter is going off track and address this quickly.  Secondly, other options and alternative approaches are often identified during the planning process and these can be explored.

But all alternatives require lawyers to take the leap of faith into the uncertain world of abandoning the hourly rate.  It takes courage, but in these uncertain financial times, clients are looking for lawyers who are prepared to be brave.

Direct Briefing of Barristers

I recently presented at a conference of In-House Counsel and in one session the question came up about whether in-house counsel would be personally liable for barrister's fees, if they direct briefed.  But what do we mean by "direct briefing" anyway?  Simply, it means that in-house counsel send a brief to a barrister directly, and not involve a solicitor as a middle-man.

The concern was, that unless barrister's cost agreement was with the in-house counsel, and thereby making him or her personally responsible for payment of the barrister's fees, the Bar Ethics Rules preventing direct briefing by a client would be breached.

I am a great proponent of direct briefing as a way of controlling costs.  I will post separately on the dos and don'ts of direct briefing but suffice to say, in-house counsel will not be potentially liable for payment of barrister's fees, nor is there is a breach of either the Legal Profession Act or the Bar ethic rules when there is a direct brief, if done properly.

This is easiest to understand if you keep in mind there are two different aspects to engaging the barrister -  firstly, who is briefing the barrister and secondly, who is agreeing to be responsible for his/her fees.

In-house counsel would brief the barrister, so the direct briefing rule is not breached as the barrister is not accepting a brief or instructions directly from a client (the definition of direct access in the Bar Rules).

However, the company itself (the client) would agree to be responsible for the barrister's fees and therefore the cost agreement would be between the barrister and the client. This arrangement is envisaged by s 3.4.26 of the Legal Profession Act (Victoria) (and equivalent provisions in other state Acts)

s. 3.4.26

(1) A costs agreement may be made:

(b) between a client and a law practice retained on behalf of the client by another law practice;

In this instance, the barrister only has to give the disclosure normally required to be given to a solicitor retaining them on behalf of a client (i.e. details of how the barrister is charging, when he/she is going to bill, and an estimate of fees to be incurred).

To clarify a couple of points:

• Unless the barrister is charging in accordance with scale, a cost agreement is always required.

• Disclosure is not required where the client is a sophisticated client (as defined by the Act), (most commonly publicly listed companies and the Government).

• Only conditional cost agreements need to be signed - for all other agreements it is possible to specify what conduct will constitute acceptance (most commonly continued instructions).

Bailout for Law Firms

A very funny post from the Wired GC

The Wired GC can now report the results of a 3 month long investigation into governmental support for major law firms. Discussions at the highest levels of the new administration have resulted in a working plan. It has been slow going due to the requirement that no lawyers work on it. While still subject to change, the broad outlines can now be revealed: 

1. Driven by a need to keep the legal industry from imploding. Since so many large firms are needed to document other bailouts, the government wants to bail them out first. 

2. All firms can’t become 100% bankruptcy or Madoff litigation houses. There will likely be some M&A deal flow later in 2010, and there’s talk of an IPO or two in early 2011. 

3. Alternative fee arrangements are still a wildcard. The government has been told in no uncertain terms that many firms would rather fold than go away from hourly billing. But a recent government offer to fund the pensions of equity partners is garnering strong interest from certain firms. 

4. Some “shotgun” marriages may be in the offing. A few link ups of national and international firms could be required by the government as a condition of bailout funding. Early in the process, it looked like some UK firms would be in the lead, lately it’s not as clear. Also, a lot of the best names have been taken, and the headlong rush to confusing acronyms seems to have played itself out. 

5. Equity partners will have to share the pain. The government is requiring some senior-level sacrifice. It’s not certain that any managing partners will have to step down. But at least one major firm has told its 7-series BMW drivers that they will have to roll back to a 5-series (for their second car). Any requirement to “Buy American” has been a non-starter. 

6. Some additional restructuring of firms will be required. Partners without clients are getting a tad nervous. Here are some telltale signs for the slow-on-the-uptake: (a) you are given a really hot assignment as “activities chair” for the next firm retreat; (b) people are coming into your office and taking measurements; (c) your emails to the managing partner are being returned as “undeliverable”; and (d) your code for the Xerox machine says “3 copies left.” 

7. A plan in search of a name. While this train seems to be leaving the station, there is no legal industry bailout moniker yet etched in stone. Two leading alternatives, according to our sources: (a) Lawyers Annuity Protection Directive (Operated Governmentally); and (b) Partner Assets Recovery Scheme (National Income Protection). 

The negotiations are very fluid, and concerns about possible public reaction to yet another government-funded bailout could still derail these plans. Still, one new government appointee told us on deep background: “We just can’t let the lawyers down. They’ve been there for us forever.”

Very appropriate given today's date.

Rationalising Golden Parachutes

Golden Parachutes for exiting executives is a hot topic, in light of payouts to Lehman Brothers exec and others of banks being funded by bailouts in both the US and UK.

In my last post, I mentioned Watchell, Lipton, Rosen and Katz, the top New York law firm that has never billed by the hour, simply setting their fee.

 

For a further analysis of what took WLR&K to the top of the tree, have a look at Bruce McEwen's (Adam Smith) review of a book about the firm by one of their former partners.  The post was written in 2004, and is interesting in today's economic times. WLRK were involved in the development in the 1970s of "Golden Parachutes".  McEwen details the rationale and justification for the large payouts to executives who did not stay on after a takeover.  

"For many [in senior management] the jobs had taken years of effort to achieve....  The knowledge acquired by many of these executives was largely limited to the industry in which their company was involved.  There would be few opportunities for them elsewhere.  A senior manager's job also carried with it a position in the community and often defined social standing.  Much of that would be lost."

Certainly, in the present economic climate, there will be few opportunities elsewhere, but I'm not sure that most would accept this reasoning.  Nor does it sit with the value billing position adopted by WLR&K itself in that there is not the connection between payout and value delivered.

 

For an interesting detailing of who got what in their golden parachute, have a look at the Mint blog.  Perhaps a highlight is Alan Fishman who reportedly left Washington Mutual after being at the helm for only 17 days, and pocketed $19 million in severance pay and signing bonuses. 

 

Still not at $20 million for 2 weeks, but close - and better when you consider going to only one individual!

Pricing Blog from the Professional Pricing Society: Pricing Advice in Two Sentences

Pricing Blog from the Professional Pricing Society: Pricing Advice in Two Sentences.

The Pricing Blog is an interesting source for thoughts on value.  A recent post Pricing Advice in Two Sentences has advice from pricers of how to set the price.