The UK Needs to Rethink Adverse Costs to Stay Ahead of its Rivals

With Brexit looming, recent promotional activity from the continent is indicating that some of the UK’s £25bn legal industry could be lured overseas. Craig Arnott, Managing Director at Burford Capital, explains the complexities of Brexit and the legal industry below.

In part this is driven by uncertainty surrounding the UK’s jurisdiction in Europe under the Brussels I Regulation. Other European courts have in response begun adopting UK legal practices, offering proceedings in English and opening international courts in an attempt to attract the UK’s lucrative legal trade.

Frankfurt, Paris, Amsterdam and Brussels are all jurisdictions that have received a boost from the Brexit decision, and have begun to make their own legal systems more attractive to the type of litigation that previously would have been pursued in London without a second thought.

This is not all bad news for providers of litigation finance, even those based in the UK, because they can be agnostic about the geography and forum of litigation so long as there is a robust and predictable judicial system.

Further, the shift in dispute resolution work from London to Europe after Brexit is happening for other reasons as well. Costs, or more specifically adverse costs, particularly for competition and class action-style cases with multiple, deep-pocketed corporate defendants are making more and more claimants look to the continent. With international competition intensifying, the UK faces a considerable challenge from the issue of adverse costs exposure.

This is because while it is one thing to not win damages in your case, it is an entirely different matter to have to pay the other side’s costs as well, as it can multiply potential exposure from litigation three, four or five-fold.

The adverse costs risk in the UK commercial courts has far outstripped inflationary increases in the last ten years. In the RBS Rights Issue litigation, RBS’s costs estimate for the liability phase was £90 million, and whilst that is a truly exceptional number, £5 million for the costs of a defendant to trial is by no means unusual.

If you consider a case where there are multiple defendants (either at the claimant’s choice or added in under the Part 20 procedure), the exposure is similarly multiplied, meaning potential adverse costs in a cartel or competition matter could easily hit £20 million.

To remain ahead, London therefore must develop strategies to address costs concerns for would-be claimants – and external financing offers one potential solution. Burford recently announced an offering designed to meet a need in the marketplace for the significant level of adverse costs coverage that is required to protect claimants’ exposure in the UK. To address adverse costs risk in commercial litigation and arbitration, Burford can offer insurance on Burford-funded matters.

Legal finance can offer relief from this extraordinary exposure insofar as a third party assumes the downside risk in the event of a commercial litigation loss. However, it takes a very well capitalised litigation finance business with significant risk tolerance to handle this degree of risk and also provide cover for costs, meaning claimants will have to do their homework before going ahead.

The UK’s legal industry must be a key component to be secured whatever the outcome of negotiations with the European Union. It cannot rest on its laurels and must continue to adopt the changes and innovations necessary to keep British law at the forefront of the legal world. Only in this way can the UK remain at the forefront of the international legal world and continue to attract global litigation and arbitration.

Leave A Reply