Benefits of Treating Commercial Litigation as a Corporate Profit Center

Posted: 2 May 2019 Last revised: 16 May 2019

See all articles by Rupert Macey-Dare

Rupert Macey-Dare

St Cross College - University of Oxford; Middle Temple; Minerva Chambers

Date Written: March 31, 2019

Abstract

Benefits of treating commercial litigation (including international arbitration and competition litigation) as a corporate profit center (rather than a corporate cost center).

Commercial litigation between opposing parties often looks, at first glance, like a sub-zero-sum game. One party’s eventual gain will typically be the other party’s eventual loss, before additional explicit legal and litigation costs and any wasted damages and funding costs are subtracted, and before implicit extra managerial and risk costs are incurred.

A corporate chief legal officer will not necessarily be in a firm’s top management team, and the firm’s in-house lawyers will typically work as salaried advisers viewed as separate from the main core business, so they can look like and be accounted for in the company management and statutory accounts as corporate costs, and internal lawyers may also look like and be treated as a typical corporate cost center.

Traditionally when such firms use their bargaining power to hire external lawyers for commercial litigation, then the law firm chosen is often the result of a competitive pitch tender based primarily on pricing (subject to a given quality delivery threshold) where that pricing is either an all-in price or based on a time-cost formula e.g. different hourly billing rates for different categories of lawyers. Once again this make the external lawyers look like an external cost center, with costs to be minimized, ceteris paribus.

Together this can make all commercial litigation look like a cost function for a large corporate.

More recently however, the advent of 3rd party litigation funding, where funders generate profit by investing in external legal cases for a share of any award achieved, and litigation insurance such as after-the-event insurance, and law firm funding such as conditional fee agreements, contingent fee agreements, debt based agreements and equity investment are all clear examples of viable profit center approaches to corporate litigation for specific cases.

Generally in the economics of the firm, a conditional profit maximization strategy is different from (and produces different numbers from) a conditional cost minimization strategy. Economists talk of the “paradox of thrift” or colloquially being “penny-wise, pound-foolish”. Specifically this means that the corporate strategy that focuses on controlling litigation legal costs is likely to produce less expected legal profit, and more resource mis-allocation, than one that focuses on maximizing expected corporate legal profit, particularly when the cost and benefits scales are mismatched in high value litigation.

This raises the question of how the side that loses or is likely to lose can maximize any expected corporate legal profit? The answer to this, illustrated with examples, is for each side to reframe the problem with respect to its own worst possible case outcome threshold, and ask how can it maximize the expected shadow corporate legal profit above that threshold? So legal profit here is a different but related concept to corporate accounting profit.

N.B. The expected profit inefficiency of a corporate taking a litigation cost minimization strategy can be further magnified by additional behavioral economics and behavioral finance factors and market and information imperfections.

The same argument applies, mutatis mutandis, to other areas where litigation costs may be minimized such as UK legal aid funding.


Keywords: litigation, dispute resolution, international arbitration, economic optimization, competition, anti-trust, behavioral economics

JEL Classification: K41, K33

Suggested Citation

Macey-Dare, Rupert, Benefits of Treating Commercial Litigation as a Corporate Profit Center (March 31, 2019). Available at SSRN: https://ssrn.com/abstract=3363754

Rupert Macey-Dare (Contact Author)

St Cross College - University of Oxford ( email )

Saint Giles
Oxford
United Kingdom

Middle Temple ( email )

Middle Temple Lane
London, EC4Y 9AT
United Kingdom

Minerva Chambers ( email )

London
United Kingdom

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