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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.

Suggested Citation

  • Kirstein, Roland & Rickman, Neil, 2001. "FORIS contracts: Litigation Cost Shifting and Contingent Fees in Germany," CSLE Discussion Paper Series 2001-04, Saarland University, CSLE - Center for the Study of Law and Economics.
  • Handle: RePEc:zbw:csledp:200104
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    File URL: https://www.econstor.eu/bitstream/10419/23113/1/2001-04_foris.pdf
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    References listed on IDEAS

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    1. Kathryn E. Spier, 1994. "Pretrial Bargaining and the Design of Fee-Shifting Rules," RAND Journal of Economics, The RAND Corporation, vol. 25(2), pages 197-214, Summer.
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    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 1205-1220, September.
    5. Roland Kirstein, 2000. "Risk Neutrality and Strategic Insurance," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 25(2), pages 251-261, April.
    6. 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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    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

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

    JEL classification:

    • K41 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Litigation Process
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory

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