Towards a more self-financing courts system

November 11, 2013

When Boris Berezovsky sued Roman Abramovich for £3 billion in the British High Court, it must have puzzled many onlookers. Why were two Russians – both billionaire oligarchs with fortunes made in the wake of the dissolution of the Soviet Empire – arguing in London about contracts negotiated in Russia, concerning Russian assets and Russian companies?  As a spokesperson for the eventual victor put it, “we appreciate that to many people, this case has been a uniquely Russian one and should therefore have been heard in the Russian court system. Nevertheless, Mr Abramovich has always had great faith in the fairness of the English legal system and is both pleased and grateful for today’s outcome.”

Legal tourism of this kind is a great boon to the UK. It keeps London’s nicest hotels full to capacity with international entourages and advisers. It offers great rewards for our brightest and best commercial lawyers, with retainers often running into the tens of millions of pounds. And it provides substantial revenue for the government, which charges large fees to reflect the size of the sums in dispute and the wealth of the foreign parties who are using our courts to suit their own commercial or personal objectives. Except, it doesn’t do the last bit. In fact, the government was able to charge Berezovsky and Abramovich just a couple of thousand pounds for the privilege of using our legal system – a derisory sum for a £3 billion, three month case.

Businesses and wealthy individuals don’t come to our shores to litigate because our court fees are so low. They use English courts because our system is rightly perceived as being resolutely fair, and because our canon of commercial law is arguably the best-developed and most comprehensive of any country in the world. That’s why, of all the countries in the world, 30% of parties specify London as the preferred seat of arbitration in international commercial disputes, with Geneva the next most popular destination, on 9%.

Given the massive pressures on the Ministry of Justice’s budget and the substantial savings required of the courts service over the next three years, it’s becoming increasingly clear that the system, as currently constituted, is unsustainable in the long term. Policy Exchange is currently conducting a major piece of research on court reform, and we believe that the time has come to try to maximize the competitive advantage we hold in the legal services industry and, by turns, increase the amount of revenue for the public purse.

One way to do this is to make sure that court fees at the top-end of cases more accurately reflect the true costs of providing the service. In the Abramovich and Berezovsky case, this is likely to have been in the tens of thousands of pounds. Doing so would be straightforward – simply meaning court fees being set retrospectively, after a case is finished, rather than at the start. Reforms to this effect could also be secured within the constraints of Treasury rules, which stipulate that the government cannot charge users of public services more than the true costs of delivering the service.

A more ambitious option would see government charging fees based on a small percentage of the size of the sum in dispute (though at a much higher rate than the 0.00006% charged in the case above). Not only would this raise more revenue, but it would also open up exciting new business development opportunities for the courts. With strong incentives to generate income, the courts might employ teams who would work with international law firms to encourage foreign parties in new markets such as the Middle East and Asia to come to the UK to settle their disputes. This could raise tens and even hundreds of millions of pounds for the courts, and would see a part of the service afforded much greater commercial freedoms – perhaps including spinning out of the public sector to form a new commercial organisation – in part to circumvent Treasury rules. This would not be an attempt to ‘privatise’ the courts service, but rather an important exercise in protecting the criminal and civil justice systems from unnecessary and painful spending cuts.

A set of new incentives such as these could also lead to more radical thinking. For instance, in a globalised world, why should international parties need to physically be in London for their case to be heard?  A new courts organisation could access larger markets if it set up technology-enabled ‘Embassy Courts’ with English commercial jurisdiction, in cooperation with host countries.

Of course, there is a risk that raising court fees too far could reduce Britain’s competitive advantage in the legal services industry and thus deter companies and individuals from coming here in the first place. And it must be borne in mind that for every case that goes to court, many more will be settled beforehand. Quite rightly, our law firms want to keep all of this business, but even the best lawyer would struggle to argue convincingly that a sensible increase in fees at the top-end of commercial litigation would severely impact on the marketplace.  In fact, done well, new efforts to promote English commercial litigation could increase income for legal services in London.

So reforms in this area do not come without their risks. But the potential benefits – not least for making the entire courts system more self-financing – could be huge. And it must be right that while the government takes difficult decisions on services for the poor, such as legal aid, it also looks at every other service that the state provides and seeks to maximise its value for the taxpayer.

Together with vital new freedoms for the courts, raising fees at the most lucrative end of commercial legal services will help to put the courts system on a secure financial footing for the future and will help to protect other vital public services. Doing so will also provide exciting new possibilities for exporting a high-quality public service across the world, at a time when the government desperately needs to think creatively about how to maintain services when there’s less money to go around.

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