Legal Success Fees Leading to a Whole New Kind of Failure
As the economic slowdown prolongs, we hear of fresh cases of economic pain all the time. Lawyers, often regarded as the sharks of the corporate workplace, are the latest to be at the receiving end. A report coming in on April 2, 2012 states that lawyer Patton Boggs is the latest casualty in the increasing trend of clients not paying lawyers.
Given the high costs of litigation, many clients get into a success fee based relationship with their lawyers. Such arrangements have many names, such as "contingent fee," "conditional fee," or " no win no fee."
In this arrangement the lawyer assumes a part of the risk of failure. Upon success the client pays a fixed fee or a percentage of winnings. In some such arrangements, the lawyer may also bear the costs associated with the litigation. Initially, this was thought of as a tool to help the poor file court cases. But as time progressed, we saw that even the biggest of corporations were happy with a success-based fee, even if it meant ending up paying a much higher fee.
But this creates a new risk. As we can see in the case of Upaid Systems Ltd. v. Satyam Computer Services Ltd., the money at stake was tens of millions of dollars. Since the lawyer bears a part of the risk, the fee tends to reflect that. As a result, when the verdict turned out to be favorable, the client felt the fees were too high. And then follows the default.
While official figures are not available, it has been widely reported in the press that Satyam agreed to pay Upaid a sum of $70 million. As a result, we can estimate that the money owed to the lawyer could be in the vicinity of $10 million. It can be argued that had this not been a no win no fee case, the fee could have been a small fraction of this amount.
So it turns out that the very tool that was created to overcome economic hardship, has turned out to create a whole new kind of economic hardship. Such paradoxes abound in the current economic landscape. And if the economic predicament that we are all experiencing keeps prolonging, we will hear many more seemingly strange developments.