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You are here: BAILII >> Databases >> United Kingdom Journals >> Some Reflections on the Woolf Interim Report URL: http://www.bailii.org/uk/other/journals/WebJCLI/1996/issue1/ogus1.html Cite as: Some Reflections on the Woolf Interim Report |
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Copyright © 1996 Anthony Ogus.
First Published in Web Journal of Current Legal Issues in association with Blackstone
Press Ltd.
The law and economics literature has generated major insights on how to render civil justice systems more efficient. Drawing on it, the author critically examines some of the key features of the Woolf Interim Report. The need to constrain lawyers' incentives to escalate costs is paramount and some shift away from the adversarial culture to judicial management is desirable. But care must be exercised in designing new procedures if the changes are not to be self-defeating. There is also a danger of over- optimism regarding proposals for encouraging alternative dispute resolution (ADR). More generally, legal costs will remain a problem so long as professional self-regulation is allowed to imposes fetters on competition. The Woolf Interim Report (Woolf, 1995) is a very valuable document in its succinct statement on the objectives of a civil justice system, on the failings of the present approach and its (to English lawyers) radical proposals for reform. In this short paper, I shall critically examine some of its key features, drawing on the economic analysis of legal procedures which has given rise, in recent years, to a very rich literature, particularly in the USA.
- Two Key Themes: Excessive Cost and the Adversarial Culture
- The Woolf Solutions
- Judicial Management
- (a) Rule exploitation
- (b) Control v incentives
- Case Allocation, Encouragement of Settlement, Use of ADR
- Transparency of Costs
The stated goal of proportionality of costs implies that, in economic terms, there is an optimal level of accuracy in the application and enforcement of legal rules (Kaplow, 1987). Since accuracy is increased by the employment of skilled advocates and judges and the provision of factual evidence (aided by discovery) and, where relevant, non- legal expertise, that is the point where the marginal cost of these inputs matches the marginal benefit. The problem is to define and quantify the benefits of accuracy.
The greater accuracy of judicial decisions has important social effects: it enhances the goals of legal rules, for example, the deterrence of undesired behaviour by rendering more certain the legal consequences and thereby also encouraging the settlement of claims (Posner 1973; Landes and Posner 1979).
The value of increased accuracy to the parties themselves is more complex. Judged at the time of the decision, it would seem to give rise only to distributional effects: one party's loss is matched by the other's gain (Tullock 1980, p 73). Moreover, once the event which generates the dispute has occurred, the party whose case is weaker has presumably a preference for less accurate decision making, since that would increase her chance of winning. The more important economic consequences have their impact on the parties ex ante. Accurate decision making rewards those who, on the basis of an investment in acquiring knowledge about the law, order their behaviour accordingly (Kaplow 1994). The private value of accuracy should be that which the parties would have attributed to it behind a Rawlsian-type veil of ignorance, before the dispute- generating event, not knowing what will be the relative strength of their case (Landes and Posner 1979, p 254).
The preferences which potential litigants have regarding the accuracy-cost trade-off in adjudication and the availability of suppliers to meet those preferences can be analysed like any other market for the provision of services (Landes and Posner, 1979). Clearly there is, in our society, some degree of competition between different dispute-resolving services: if the two disputing parties prefer, they can, instead of proceeding with litigation in the ordinary courts, opt for arbitration, mediation or other forms of ADR. And it is a reasonable inference that their choice will, to a certain extent, depend on how they trade off the quality of the different services against the prices charged. But the analogy between markets for ordinary commodities and for dispute-resolving services is limited and it is necessary to explore why.
First, the market has a monopolistic character in the sense that there is a single institution, with ultimate and residual power to enforce the law, to which either party may resort if dissatisfied with alternatives. Within that system, the procedural rules are largely determined by the suppliers - the judiciary, ancillary staff and practising lawyers - who have no obvious incentive to devise those rules to meet the private preferences of individual litigants. Indeed, they may have an incentive for rules which conflict with those preferences if such rules would confer financial or non-financial advantages on them.
Secondly, dispute resolution as a commodity has the highly singular feature that it is sought and purchased by two (or more) parties whose interests in the outcome are diametrically opposed: if one party wins, the other loses. This fact, combined with the adversarial culture in the legal process, means that the parties are locked into a classic Prisoner's Dilemma situation: rationally each would prefer a low cost solution but each knows that the more she spends, the greater will be her chance of victory (Cooter and Rubinfeld 1989, pp 1078-82; Baird et al 1994, ch 8). Moreover, what one party spends will influence the spending decision of the other, with an obvious spiralling effect on legal costs.
Thirdly, these very problems are exacerbated by the principal-agent problem typically affecting the relationship between the litigant and her lawyer. The principal - here the client - is normally poorly informed regarding both the prospects of success and what may be called the lawyer's production function: the extent to which those prospects may be enhanced by additional time and effort devoted to the case. In other contexts, the usual method of constraining the principal-agent problem is for the contract to contain some term which generates incentives for the agent loyally to pursue the principal's interest. But here the very reverse is the case: since lawyers are typically paid by the hour (or day) they are motivated to prolong the process and add to the client's costs. The use of the contingent fee in the USA, and the arrival of the conditional fee in the UK, may partially solve the problem for plaintiffs (but not defendants). Since these devices shift the risk of losing from the client to the lawyer, the latter has a stake in the outcome and will not wish to deploy extra effort, where this will not materially increase the chances of success.
It should be noted that neither device provides the perfect set of incentives. Under the contingent fee, the lawyer is motivated to reach an early, and perhaps inadequate, settlement for the client since he bears all the costs of further work but gains only part of the benefit (the difference between the amount settled and the amount of damages awarded by the court) (Miller 1987). Under a conditional fee, the lawyer who takes on a strong case for the client has the opposite incentive: he knows that, provided he wins, all the cost of his additional effort is borne by the client.
(1) greater judicial management of the process including, notably, tighter and properly enforced timetables and a greater control on discovery and the use of expert evidence (both of which have an escalating effect on costs);(2) the allocation of different types of cases, normally determinable according to the amounts at stake in the disputes, to different sets of management rules;
(3) the encouragement of early settlements and resort to ADR procedures;
(4) a greater transparency of legal costs.
Some caution should nevertheless be expressed as to the likely success of the proposed change. If problems currently arise because lawyers have incentives which, to some extent, conflict with those of their clients, what will motivate judges to reach more satisfactory outcomes? The utility function of judges remains a largely unexplored topic in the law and economics literature, but it is surely rash to assume that it invariably coincides with the maximisation of social welfare. If, as is recorded in the Woolf Interim Report (pp 27, 166), there is inadequate enforcement by judges of the current Rules of the Supreme Court relating to, for example, timetables and limiting discovery, why should attitudes change if new rules are formulated? A tentative paper by Macey (1994) in the public choice tradition hypothesizes that judges' self-interest is enhanced by controlling the procedural agenda, which is certainly consistent with the Woolf proposals, but also by limiting their work effort and adopting strategies likely to persuade the government to increase the allocation of resources to the judicial process, which may not be.
I cannot, in the context of this short paper, consider the detail of how the increased judicial management might work. There are, however, two general and related aspects which deserve mention.
"[s]uch exploitation is endemic in the system: the complexity of civil procedure itself enables the financially stronger or more experienced party to spin out proceedings and escalate costs, by litigating on technical procedural points or peripheral issues instead of focusing on the real substance of the case" (Woolf 1995, p 27).
What is here described is but one instance of a more general phenomenon. Lawyers have an interest in complex rules not only because the latter may be manipulated to benefit their clients but also because they generate an increased demand for lawyers' services (White 1992). Although one general objective of the Woolf Report is that the rules of procedure should be simpler (Woolf 1995, p 21), there is a real danger that an increase of judicial control will only be effectively achieved by precisely the opposite: a dense set of complex rules.
The encouragement of settlements and use of ADR as alternatives to high-cost, high- quality litigation might seem to be uncontroversial. The expectation that institutional changes promoting the alternatives will be effective and that, in aggregate, there will be net gains in social welfare may nevertheless be over-optimistic.
One problem is that the theoretical analysis cannot yet provide reliable predictions on how and when parties decide to settle rather than litigate. Although there is a large literature elaborating and applying formal models of economic rationality to this issue, the likelihood that, in the bilateral monopoly situation, parties will engage in strategic bargaining has meant that there is a "black box", the contents of which cannot be determined by traditional economic analysis (Miller 1987, p 193). Exponents of game theory have been attempting to fill the gap but the models used have relied on restrictive assumptions and, as yet, there is little consensus among the exponents on what application of the models reveal (Cooter and Rubinfeld 1989, pp 1078-80).
Secondly, while intuitively it might seem appropriate to assume that use of ADR procedures significantly reduces the cost of dispute resolution, there is no empirical evidence which unambiguously supports this. Indeed, in a study commissioned by the Lord Chancellor - admittedly on a perhaps idiosyncratic area of legal disputes regarding custody or, and access to, children - I and some colleagues found that though mediation procedures reduced by some degree the cost to the parties of the dispute, the savings were insufficient to cover the cost of providing the services (Ogus et al 1989; Ogus et al 1990). One possible explanation for this (disappointing) finding is the distinction - insufficiently recognised in the Woolf Report - between dispute settlement and dispute resolution (Davis 1988, pp 98-9): the former indicates only that the dispute has been (perhaps only temporarily) terminated; the latter, that it has been terminated permanently, to the satisfaction of both parties. ADR procedures may be relatively stronger on settlement than on resolution. These observations have important implications for the quality/cost trade-off; they suggest that the quality variable should take account of the longer-term consequences of the procedures.
A third reason for not treating the Woolf proposals with undue optimism arises from the relationship between legal costs and the propensity to litigate. Economic theory suggests (Landes 1971) - and it is supported by empirical studies (Priest 1989) - that there is an equilibrium level of court caseloads and costs. If the cost of proceedings in a particular court is high because, for example, hearings are subject to considerable delay, the effective stakes of the litigation to the parties are reduced and, at the margin, this will deter some from litigating. Conversely, if the costs are reduced, that will encourage more to litigate. The obvious, but depressing, implication of this for the Woolf proposals is that if they are successful in reducing court costs, that very fact may induce more parties to avoid settlement and ADR and resort instead to the courts.
As we have seen, the Woolf Report recognises that the hourly (or daily) method of paying lawyers creates an incentive for them to prolong the process and earn increased profits - the principal-agent problem. The hope is expressed that a combination of greater transparency and greater certainty as to the form litigation will take (a consequence of other reform proposals) will encourage more lawyers and clients to make fixed fee agreements (Woolf 1995, p 200). Some degree of scepticism may be appropriate here. The core problem, in my view, is not so much inadequate information, but rather the array of technical and cultural restraints on competition which afflict legal services. In a key passage, Lord Woolf admits this.
"It is...the case that market forces, which in other contexts have acted as a restraint on prices, operate rather weakly in relation to the supply of professional legal services. Factors associated with high charging are to be found in this field: notably, the restrictions on access to the market and the regulatory controls over practice, considered necessary to maintain proper professional standards and the integrity of the legal system" (Woolf, 1995: pp 199-200).
Presumably, Lord Woolf considered that entering this minefield would exceed his terms of reference, because he does not explore the matter further. This is understandable, but regrettable. As I have attempted to show in another paper (Ogus 1995), self-regulatory systems, of which the codes of conduct of the Bar Council and the Law Society are prime examples, do generate significant rents for practitioners. But that tendency can be checked if some degree of competition is introduced between such systems. With proper safeguards, that should force the regulators to meet consumer preferences, without abandoning professional integrity.
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