In depth

Shipping litigation during uncertain times

Gateley Legal

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It is not particularly controversial or negative to say that the Coronavirus pandemic is having an effect on the shipping industry. It started with the cruise market, has had a knock-on effect in the shipbuilding and has a negative impact on a number of other shipping-related contracts and markets, from dry bulk to tankers, to ship-repair and shipbuilding but to name a few. The yacht market is effectively at a standstill.

Things will improve, markets will recover and we will see a return to normality. Hopefully, this will be quick but in the meantime, all this gives rise to, and we at Gateley are seeing, enquiries - about the legal consequences of delay or cancellation of shipping and commodity contracts, vessel sales, frustration claims, default in mortgage payments, inability to pay hire and so on. We are among those that have had numerous force majeure enquiries - a not straightforward subject under English law.

It is inevitable that some of these queries will lead to disputes – in arbitration or in the English Courts. Historically in such difficult economic times, we will see an increase in litigation - but the current figures indicate that compared with last year the volume of new claims filed in the commercial courts in England has fallen by around a half in the lead up to Easter. While there are obvious logistical problems to overcome in bringing matters before the courts it appears that litigants are simply conserving their resources and holding back from launching expensive court battles during the coronavirus pandemic. 

What can they do in the meantime?

Assessment

With a conservative approach in mind, now would be a good time to assess the merits of claims. There are steps that involve minimum expense and that can improve the prospects of success. Check limitation periods, obtain contemporaneous witness evidence and preserve documents. The last point is worthy of an article of its own and arises out of the new Disclosure Pilot Scheme in the Commercial Court (PD 51U) requiring earlier positive pre-action searches for documents, preservation of them and an obligation to certify that this early exercise has been undertaken. 

In carrying out this and other pre-litigation exercises, a proper assessment of the technical merits of claims can be undertaken. All this will then allow lawyers to provide a more accurate assessment of the legal case and anticipate possible defences. A fortiori is that the security for a claim can be explored in more depth, requested earlier or obtained through the usual, non-voluntary, routes. 

When the time is right, the claim can then proceed, properly supported, assessed and funded.

How then to budget for a claim while still protecting cashflow?

Assessment of the likely costs

Most firms of solicitors should be in a position to provide clients with an overview of the likely costs of litigation even before proceedings are started. This will include an estimate of the costs to every stage of the litigation process. It is never an exact science but it is an exercise that we at Gateley routinely undertake. Indeed this cost budgeting is now mandatory during any litigation in the High Court, where solicitors’ fees, disbursements and expenses, counsel, court fees, experts, copying and even mediation fees are all formally budgeted for and will become the subject of a Court-ordered budget. It is therefore reasonable for a client to want to know what these costs might be at the outset.

Having obtained this general estimate, what options are then available to support these fees during the process? 

Paying the litigation costs

Firstly, it is important to bear in mind, that a losing litigant in England is likely to be ordered to pay the opponent’s fees if the claim or defence is unsuccessful. This can put a claimant off. However, in appropriate cases, it may be possible to take out after the event insurance which will provide protection against the risk of having to pay opponent’s costs in the event the case is unsuccessful. The premium for this insurance can also usually be deferred and is self-insured. 

Legal expenses insurance

Clients should always check existing policies. In shipping contractual claims, it is often catered for by FD&D cover. There are equivalents for trading disputes and there are also many other sources of legal cover (to pursue or defend claims).  However, it is a common feature of all of these policies that the insurer must be notified at an early stage. This can sometimes be quite a tricky and stressful time and we at Gateley have lawyers with significant experience of guiding clients through this important early process.

The traditional retainer

Traditionally solicitors have worked on the basis of a client engagement letter providing for hourly rates and disbursements. Indeed any formal costs budgeting exercise is based on these and even if other sources of funding the litigation are adopted, these are the costs that will be sought from the losing party if the litigation succeeds. The rates are a matter of negotiation between the client and the lawyers. It a realistic assessment of the litigation costs has been made it puts the client in the position of funding the litigation in stages. It has the advantage of letting the client pay as it goes without accounting for a substantial deduction from any settlement or judgment. Nevertheless, it is an “upfront” payment, made from cashflow or borrowings.
There are then risk-sharing agreements. These are agreements where the solicitors (and barrister, if he/she agrees) share the risk of the litigation succeeding.

Conditional Fee Agreement

An agreement under which the client does not pay legal fees at all (a full CFA) or pays a discounted rate (a discounted CFA) and will only have to pay any solicitors fees, or additional solicitors fees if the case is won. Liability to pay own disbursements and the other side’s legal fees and expenses if the case is lost is usually covered by ATE referred to above. The level of discounted fees and the solicitors’ uplift will depend on the strength of the case as determined by an early risk assessment.

The advantage of it is that it limits outlay throughout the process. The downside is that it incorporates a “success fee” which is a percentage uplift and is only payable if the case is won. The uplift and any ATE premium will have to be paid from the sum awarded.

Damages Based Agreement

Since April 2013 solicitors have been allowed to enter into Damages Based Agreements (DBAs) with the client under which the payment received is calculated as a percentage of the money recovered. The maximum amount charged under a DBA is subject to a cap of 50%.

Third-Party Funding

This is not suitable for all cases but in short, in return for funding the case a professional funding, third party funder pays some or all of the costs of the litigation in return for a significant share of the damages awarded (up to 40%). If the case is lost the funder loses its investment. Third-Party Funding is most appropriate in high-value litigation where the claimant would not otherwise be in a position to pursue a good claim at all or in circumstances where the claim is substantial and the claimant does not wish to allocate resources to it. It is expensive but if the claim would otherwise lapse it is a low-risk option.

It can be somewhat complicated and time-consuming to enter into one of these agreements and it may also involve ATE insurance but Gateley has good links to funders, is independent of them and can advise on the agreement terms and the costs.

Conclusion

In these difficult times, litigation in the shipping and commodities market is an unfortunate possibility. Funding this is likely to be a concern for some time and could prevent good claims being pursued. It is therefore worth knowing that there are options and processes that can minimise the financial and litigation risks involved. The options and recommendations above are just an example and the funding options available can be tailored and combined to suit the merits of a claim and the sums in dispute. They should be discussed early in the process before embarking on what can otherwise be a frustrating process.  

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