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FORIS contracts: Litigation Cost Shifting and Contingent Fees in Germany

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  • Kirstein, Roland
  • Rickman, Neil

Abstract

This paper analyzes the impact of FORIS contracts on litigation and settlement decisions using a simple divergent-expectations model. A FORIS contract introduces contingent fee arrangements under the British legal cost allocation rule: the plaintiff pays a percentage of his settlement or trial returns to FORIS and obtains coverage for trial costs in case he loses in court; the plaintiff?s attorney receives the standard fee. We take into account the sequential nature of the settlement and trial decisions. Without FORIS contracts, only cases with positive expected value provide credible threats for the plaintiff and thereby motivate the defendant to agree to a settlement. A FORIS contract has two important effects: cases with negative expected value are turned into credible threats, hence a settlement is triggered. Even in positive expected value cases, the settlement result for the plaintiff is increased. According to our results, FORIS should prohibit settlement negotiations before a contract with the plaintiff has been made. The paper argues that FORIS should abolish the non-disclosure clause which prohibits the plaintiff to reveal the existence of the FORIS contract to a third party. -- Das Paper analysiert die Wirkung eines FORIS-Vertrages auf die Bereitschaft zu klagen und zum außergerichtlichen Vergleich. Dabei wird ein einfaches Optimismus-Modell angewendet. Der FORIS-Vetrag erlaubt es dem Kläger, trotz Geltung der Europäischen Prozeßkostenregel (Velierer zahlt) mit den (in Amerika üblichen) "contingent fees" kalkulieren zu können: Der Kläger zahlt einen Teil seiner Erträge aus Prozeß oder Vergleich an FORIS; diese Firma wiederum zahlt die gesetzlichen Gebühren an den Anwalt des Klägers und trägt die Prozeßkosten, wenn der Kunde unterliegt. Das Modell zieht die sequentielle Struktur von Vergleichs- und Prozeßentscheidungen in Betracht. Ohne FORIS-Vertrag wäre eine Klagedrohung nur dann glaubwürdig, wenn der Prozeß dem Kläger einen positiven Erwartungswert verspricht. Nur in diesem Fall wäre der Beklagte zu einem Vergleich bereit. Der FORIS-Vertrag hat nun zwei Auswirkungen: Auch Fälle mit negativem Erwartungswert bieten nun glaubwürdige Klagedrohungen (motivieren also den Beklagten zum Vergleich); in Fällen mit positivem Erwartungswert wird das Vergleichsergebnis gesteigert. Unser Modell ergibt, daß FORIS keine Kunden akzeptieren sollte, die bereits in Vergleichsverhandlungen mit ihrem Prozeßgegner stehen. Wir argumentieren, daß das vertragliche Verbot, die Existenz des FORIS-Vertrages gegenüber Dritten zu offenbaren, kontraproduktiv ist.

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Bibliographic Info

Paper provided by Saarland University, CSLE - Center for the Study of Law and Economics in its series CSLE Discussion Paper Series with number 2001-04.

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Date of creation: 2001
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Handle: RePEc:zbw:csledp:200104

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Related research

Keywords: Contingent fees; British cost allocation rule; Legal Cost Insurance; strategic moves;

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References

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  1. Lucian Arye Bebchuk, 1987. "Suing Solely to Extract a Settlement Offer," NBER Working Papers 2161, National Bureau of Economic Research, Inc.
  2. Roland Kirstein, 2000. "Risk Neutrality and Strategic Insurance," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan, vol. 25(2), pages 251-261, April.
  3. Kirstein, Roland & Schmidtchen, Dieter, 1997. "Judicial detection skill and contractual compliance," International Review of Law and Economics, Elsevier, vol. 17(4), pages 509-520, December.
  4. Gravelle, Hugh & Waterson, Michael, 1993. "No Win, No Fee: Some Economics of Contingent Legal Fees," Economic Journal, Royal Economic Society, vol. 103(420), pages 1205-20, September.
  5. van Velthoven, Ben & van Wijck, Peter, 2001. "Legal cost insurance and social welfare," Economics Letters, Elsevier, vol. 72(3), pages 387-396, September.
  6. Bebchuk, Lucian Arye, 1996. "A New Theory Concerning the Credibility and Success of Threats to Sue," The Journal of Legal Studies, University of Chicago Press, vol. 25(1), pages 1-25, January.
  7. Thomas, Robert E, 1995. "The Trial Selection Hypothesis without the 50 Percent Rule: Some Experimental Evidence," The Journal of Legal Studies, University of Chicago Press, vol. 24(1), pages 209-28, January.
  8. Stanley, Linda R & Coursey, Don L, 1990. "Empirical Evidence on the Selection Hypothesis and the Decision to Litigate or Settle," The Journal of Legal Studies, University of Chicago Press, vol. 19(1), pages 145-72, January.
  9. Neil Rickman & Paul Fenn & Alastair Gray, 1999. "The reform of Legal Aid in England and Wales," Fiscal Studies, Institute for Fiscal Studies, vol. 20(3), pages 261-286, September.
  10. Eisenberg, Theodore, 1990. "Testing the Selection Effect: A New Theoretical Framework with Empirical Tests," The Journal of Legal Studies, University of Chicago Press, vol. 19(2), pages 337-58, June.
  11. Emons, Winand, 2000. "Expertise, contingent fees, and insufficient attorney effort," International Review of Law and Economics, Elsevier, vol. 20(1), pages 21-33, March.
  12. Rickman, Neil, 1999. "Contingent fees and litigation settlement1," International Review of Law and Economics, Elsevier, vol. 19(3), pages 295-317, September.
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