Claim Value Destruction in Litigation
It is often said that everyone loses in litigation, even if you are the party that ultimately prevails at court. What is perhaps not as widely appreciated is that the monetary value of a litigation claim, including those cases managed by some of the largest international law firms, is often significantly reduced by the absence of a proper litigation strategy aimed at extracting maximum value from it.
Litigation involves enormous sums both in terms of the amount claimed and the costs associated with pursuing it. However, the so called “strategies” to manage these large claims are often reactive, too focused on technical legal arguments rather than wider and more impactful points (business and legal), lacking in creativity, inefficient and only nudge the case along the pre-determined path prescribed by the court’s procedural rules. Indeed, at times it appears that a majority of the resources available for a case are preoccupied by document management, a matter which is very important and needs to be done well for administrative and procedural reasons, but rarely alters the course of the case and therefore gives no strategic benefit to the client.
These narrow and basic strategies are unlikely to provide the claimant with a competitive advantage over an opponent. Further, the financial impact of the absence of proper strategy is costing clients millions in lost claim-value and increased costs. What is perhaps most disturbing is that large claims have been managed for so long in the same way that this approach, although deficient, is accepted as standard and incapable of improvement because cases are so fluid.
Most Cases Commence Without a Case Strategy. Why?
Imagine the following. A client has a claim, potentially worth hundreds of millions, perhaps billions, which if pursued, will cost tens of millions to litigate. If the claim were considered an asset or business (which we believe it should be) management would spend sufficient time examining, from a number of perspectives, how best to extract maximum value from the asset and for the least cost. Also, the most effective management team would avoid the process becoming overly technical or a slave to procedure, especially a pre-determined one followed by everyone else, including the competition.
But the robotic approach adopted by many law firms is precisely what happens before litigation commences, even when the mandate is overseen by experienced General Counsel or other sophisticated clients who add business insight (but not sufficient strategic insight, which is understandably left to the lawyers) to the case. It is true that experienced consumers of legal services ensure that the process remains commercial and is aligned with the business. Further, enormous human and financial resources are mobilised within the client and law firm at the start of the process (and throughout) in order to assimilate the detail of the claim and opinions are sought from leading counsel about the best way to proceed. However, despite these diligent and conscientious efforts, the dispute (and wider business problem) is viewed within a single context: how best to formulate a technical legal claim. Although the legal team sincerely believe that they have a proper strategy, in reality, they often only have a legal strategy, not a wider strategy that makes full use of not only the legal aspects, but also the business and human ones associated with the dispute or problem. This is unsurprising when the formal process is a legal and procedural one, and one which is managed by lawyers whose skill sets are highly specialised but limited to careful legal analysis, claim formulation and advocacy.
Why is a proper strategy not formulated? One explanation is that even before the case formally commences with a claim being filed at court, the court rules require the parties to prospective litigation to follow a strict procedure that narrowly focuses the perspective of law firms from the outset, at a point in time when they should be thinking more widely and strategically about all the avenues available to the client to win. For example, in England & Wales, the informal (or less formal) litigation process usually begins with what is known as the Pre-action Protocol stage. The Protocol was intended as a sensible pre-cursor to formal court proceedings, whereby each party sets out their respective case in correspondence and attaches the key documents upon which they rely. The idea is that each side should know the case they need to meet and an effort is made to narrow the issues in dispute before formal court proceedings are commenced. The initiative, which was well intended, was supposed to save time and costs.
However, we rarely see this happen in practice. The reality is that the Protocol phase entails little more than each party advocating their entrenched positions whilst simultaneously accusing each other of not complying with the “spirit of the Protocol.” After significant costs have been spent, the case then usually drifts from the Protocol phase to formal court proceedings, again with no strategic planning other than considering how to draft the Protocol correspondence and subsequently, the formal court claim. The process of preparing the formal claim then involves lawyers marshalling huge volumes of documents (a phenomenally costly but necessary step) with a view to drafting the technical claim as eloquently and as robustly as possible.
As will be evident from the above, the focus on complying with the Protocol, combined with viewing the dispute purely in the context of how the technical legal arguments should be formulated, means that a proper and full strategic plan about how to win the case is never conceived.
Another, more general observation, is that lawyers are trained to focus on the formulation and advocacy of legal points. Many excel at this skill. However, even the best and most commercially aware lawyers will be reluctant to consider the impact of commercial, business and human points, because they do not have the training or experience to assess the merit of these. Further, examining wider strategic considerations appears futile to a lawyer if the point would not be of any interest to the court, even though it may be very impactful in the eyes of the opponent for non-legal reasons. Lawyers often consider these wider points as “not relevant.”
What Should be Done Instead?
It is worth making clear that there is no doubt that very careful thought by the legal team is given to how best to position the case and how to articulate the claim so that it has maximum appeal to the court, with the aim of winning. However as explained above, the heavy focus on the legal claim means that other important and potentially highly impactful factors are not considered. We discuss some of these points below but they are by no means exhaustive and will depend on the circumstances of the particular dispute.
What are the Client’s Objectives?
These must be identified in discussions with the client and should be clearly stated in writing. It is not enough to state that the objective is to win and to do so cost effectively; that goes without saying.
What does the client really want from the litigation? Is it limited to financial compensation? Does the client need to take pre-emptive action only? Is the dispute only part of an ongoing or wider problem that needs to be addressed (e.g. problems with an ongoing recalcitrant shareholder)? Is the problem part of wider political or economic problems (e.g. a sovereign debt dispute or restructuring)? Does the client wish to take criminal and civil action against a party? If so, how should this be done, in concurrent or consecutive proceedings, and in the same or different jurisdictions?
Only by identifying these clearly can a winning strategy that goes beyond legal issues be developed.
Valuing the Claim
What is the claim really worth? The answer is not the value stated in the claim or assessed by damages experts. Neither can it be derived merely by taking the claim value and crudely adjusting it by reference to counsel’s legal opinion. These are necessary components of a valuation but if considered in isolation will exclude important potential value.
For example, has sufficient consideration be given to the wider issues and problems of the opponent which arise from the case? How much work has been done to identify these? The answers to these questions do impact the likelihood of recovery and hence impact valuation. On occasions, particularly when anxiety is at its highest (and costs have mounted), there is a temptation to be too inward looking, seeing only the client’s own problems.
We do not, however, suggest that identifying a claim value should involve the use of expert accountants or the preparation of a separate valuation report. A formal valuation of a legal claim, because of the innumerable variables, would be unhelpful and worthless. Our point is that there is a risk that value is missed if the case is not examined more widely and if value is only determined by reference to the strict legal arguments made.
The valuation should be a natural by-product of a wider strategic assessment of the claim.
Considering the Problem not the Process
We discussed above that almost from the outset of a dispute, decisions about how best to proceed are made by reference to process, not strategic planning. Specifically, we discussed how quickly a claim is examined, opined upon and advanced via the Protocol, before entering formal court proceedings, which are even more formulaic. Court procedural rules serve a very important purpose. Broadly speaking, in the common law world, they provide a framework for case management, the aim of which is to narrow the issues between the parties, clearly identify the points to be decided and ensure proactive management by the court. The process is very much dictated by the pure legal points made by the parties and is obviously neutral.
Therefore, attempting to develop a wider and winning strategy purely within the context of court procedural rules naturally leads to myopia.
Our advice to clients is that before any form of legal proceedings or dialogue is commenced, matters of process and strict legal analysis should be temporarily put to one side and consideration instead given to (a) the wider client objectives; and (b) how these can be best achieved.
In complex disputes the prospect of litigation is high and can rarely be avoided. However, can other steps be taken before or in combination with litigation? For example, in a shareholder dispute, can corporate or governance steps be taken against a recalcitrant shareholder? Can their power or influence be diminished by legitimate “corporate action”? Does a host State have influence over the shareholder? Can the client legitimately take “commercial action” within other businesses that it owns that may impact the shareholder? What are the risks of taking such steps compared with the risks involved in the litigation? Could taking any of these steps negatively impact the court’s view of the client if the case is pursued via the court and the matters raised by the prospective defendant?
In terms of the human element, who are the decision makers and the influencers within the prospective defendant? Are their personal objectives, ambitions and fears different to those of their organisation? Can this misalignment be used to help promote settlement?
We should briefly say something about the use of communication agencies (i.e. the use of PR) and investigation firms. Both industries can on occasion support the litigation strategy. However, in our view they are over-used, often with little positive impact on the case and at great cost to the client. Further, if not managed very carefully the consequences can be disastrous. It would seem that these services are sometimes suggested by law firms, or clients themselves, to add an extra dimension to the case; specifically, to create a more strategic, bespoke and exotic feel about the case. However, often the reality is that the execution of these services is poor and adds nothing to a case that does not have a wider strategy. We are surprised that such an option is taken in the absence of the strategy considerations we have outlined above. If these were considered, there may be less need to use these additional services, or they could be more carefully targeted with the client’s objectives in mind.
Exit Gateways & Contact Points
The greatest potential claim value destruction is usually seen shortly before trial. The client has expended enormous amounts of money and management time, has become frustrated with the case, personal responsibility for a potential loss (for both management and the lead lawyer) looms large and the lawyers suddenly become pessimistic, placing greater emphasis on settlement, sometimes for the first time in the case. There also hovers over the risk of a substantial costs award being made against the client, which of course is daunting.
Once the case enters this phase a sense of urgency, bordering on disguised panic, begins to build. Limited and standard options are presented to the client as follows: (a) the client’s lawyer could speak with his/her counterpart; (b) principal-to-principal discussions could be held, which add a degree of commercial acumen; or (c) an attempt, or further attempt, could be made at mediation. Most of these options ultimately become a horse-trade based on the client’s most recent advice, which may be excessively pessimistic.
It seems counterintuitive that after a case has been the subject of litigation for many years, costing millions, with countless, lengthy and expenses discussions about much less important issues, the grand strategy for settlement is a telephone call or meeting with the opposition, without having created (a) prior opportunities to do so in a more shrewd and less revealing way; and (b) the best possible settlement environment, using all the points and factors available to the client, as discussed above.
Whilst it is true that each party must usually accept less than what they were hoping for and the uncertainty of litigation should be avoided, we see cases settled at distorted values (at an excessive discount for a claimant, and at too much of a premium for defendants) because of (a) the absence of a longstanding strategy which guides the case to the point of settlement; and (b) the simplistic and poorly planned approaches to settlement discussions.
We should not be interpreted as being opposed to cases settling. One of the great advantages of having a proper strategy is to promote early settlement. Further, we are strong supporters of alternative dispute resolution in all its forms, ad hoc and formal. Indeed, we believe that we are leading the way on new proposals whereby a mediator is assigned throughout large cases, not merely for a scheduled mediation, so that he or she has the power to call the parties before them at anytime.
Strategy is Different from Tactics
The above discussion may yield a response from some legal practitioners that litigation is not a business, but an independent process which forms part of the State’s system of justice – the practice of law is a profession, not a business. They may also say that London is a pre-eminent destination for legal disputes, based on a strong independent judiciary and world class Commercial Court for complex disputes, and therefore nothing need change.
Further, the courts have strongly, and quite rightly, guarded against the use of what might be described as “spoiling tactics” by parties in litigation, and have a variety of powers to sanction them should they engage in such behaviour. These tactics are often unproductive, increase costs and waste court time.
However, the early development of a wider case strategy that considers the business issues, objectives, risks and all human factors for both sides does not offend any principle of justice or good case management. To the contrary, a properly developed wider strategy, that overlays the legal strategy devised by the lawyers, provides greater opportunities for the dispute to be settled out of court (and at an earlier stage), creates a greater sense of focus, is more aligned with a client’s business objectives and should reduce costs.
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