Enterprise litigation: What you should know about the costs

What is the average cost of a lawsuit for companies?

A Litigation can be extremely costly, as it involves legal and court fees before, during and even after the actual process. Apart from pro bono work, lawyers are not free in Germany or in any other country in the world, at least not in civil and commercial matters. To conduct a lawsuit, the parties must hire lawyers who charge an hourly fee, with hourly rates ranging between 200 and 700 EUR. These vary by law firm, number of lawyers involved, complexity of the matter and other factors. The costs of a lawsuit include lawyer and court fees, and the subject matter of the dispute also contributes to making a lawsuit more or less expensive for the parties. All in all, a lawsuit costs thousands of euros, and it is the goal of every company to avoid it. A deep understanding of the economic impact of litigation can certainly help prevent litigation.

What is the difference between lawyer fees and court costs?

Although the two terms appear similar and are often used as synonyms, there is a difference between attorney fees and court costs. Knowledge of this difference is essential as it helps to provide clarity about the overall costs of a lawsuit. There are two important terms that must be differentiated in this context:

court costs: This includes the costs of filing, filing, hearing, conciliation, court proceedings, etc. Court costs are collected by the competent court and are different from legal fees, which are part of court costs. A party may apply to be exempted from paying attorneys' fees under certain circumstances, which depend on the particular jurisdiction but are generally due to a proven lack of economic resources. Court costs are not harmonised at European Union level but are set by national legislation and therefore vary from one Member State to another.

court costs: In order to litigate, the parties must hire a lawyer who charges a fee, unless such a lawyer takes on the case as pro bono work. In general, attorneys' fees are calculated on an hourly basis. For processing a case, lawyers charge an hourly rate, which depends on the seniority of the lawyer handling the case. Experienced lawyers charge a higher hourly rate than lawyers who are still at the beginning of their careers. The total cost of legal fees therefore depends on the number of hours the legal team works on a case. On the other hand, lawyers usually incur certain costs for their clients: the so-called expenses. Attorneys' fees and expenses are collectively referred to as court costs. As a rule, at the end of a lawsuit, the losing party bears the costs (attorneys' fees and expenses) of the other party, regardless of whether it was exempted from paying attorneys' fees. However, this is decided on a case by case basis. As a rule, the court has discretion to determine the percentage of costs to be borne by each party and the amount of costs that the prevailing party can be reimbursed.

What is included in the process costs?

Even though every lawsuit is different and the specifics of each case must be taken into account, the legal fees in a lawsuit generally include preparatory activities, investigations and investigations, Negotiations with the other party, the actual legal dispute and appeal. Therefore, the costs of a lawsuit depend primarily on how many stages the dispute must go through in order to reach a solution. Most disputes go through the following stages:

Preparatory activities: In this phase, one party makes a claim against the other. As a rule, the dispute is notified in writing, regardless of whether it concerns a breach of contract, damage caused, an unfulfilled obligation, etc. The plaintiff's lawyer contacts the defendant and asks him to correct the complained conduct. Depending on how the other party reacts, this could mean the end of the lawsuit or lead to the next phase.

Investigation and research: At this stage, lawyers conduct a thorough investigation of the dispute. They analyse in detail and in great detail the causes of the dispute, the facts, the legal basis and the applicable law. The lawyers collect the necessary evidence for their client, including the search for case law, witnesses, documents, etc. Which evidence is required depends on the particular dispute. At this stage, lawyers also develop the legal strategy that is most suitable for their clients. This is the most expensive phase, as researching and planning the legal strategy is very time-consuming, which results in more working hours for lawyers and, as a result, higher fees.

Negotiation with the other party: In this case, lawyers from both parties try to find a solution between them to the dispute that benefits their respective clients. If it is not possible to resolve the issue through negotiation, the only thing left is to go to court.

litigation: At this stage, an application is filed with a judicial authority. In the lawsuit, the parties determine what claim they have against the other party, what right they have and what they want from the other party. As soon as the defendant receives the claim, it must respond. This is followed by the evidentiary phase, during which the parties present the evidence to support their claim. Finally, the judge decides who is the prevailing party.

vocation: After the judge has ruled on the case, there is another possible stage in the process. The losing party, who in this case is referred to as the appellant, has the right to request a higher court (appellate court) to review the decision of the lower judge of another instance. The appellate court reviews the case files and the evidence presented and decides whether the decision of the lower court judge was correct or not. The filing of an appeal does not set aside the decision of the lower instance unless a request to that effect is granted.

Average hourly rates

The average hourly rates vary significantly depending on the country. The United Kingdom (UK) tops the ranking with an average hourly rate of 700 euros per partner hour for litigation, while in continental Europe it drops to up to 600 euros per partner hour. In Germany, a partner in litigation requires an average of 400 euros per hour, 300 euros less than their colleagues in the UK. However, the gap between German and British associates is smaller because the difference between their Hourly rates are around 120 euros. It should be noted that this is a general guideline and the costs depend heavily on the profile of the law firm and the complexity of the matter.

What can lead to litigation?

It is fundamental for a company to know the main causes of litigation in order to avoid potential lawsuits. Even though the risk of legal claims depends heavily on the company's activities, the most common causes of disputes and related lawsuits for companies are the following:

Contract breaches: Contracts are the most important tool for companies to define a business relationship between partners, contractors, vendors, and customers. The contracts specify the rights and obligations of the parties. Although most contracts are drafted in such a way as to prevent any liability as far as possible, they cannot always avoid legal disputes, as non-compliance with contracts cannot be foreseen at the stage of contract drafting. However, poorly formulated contracts can increase the likelihood of a lawsuit, which results in high attorneys' and court costs for the parties.

Disputes between shareholders: The members of the company or the shareholders cannot agree on how to run the company. In addition, shareholders could misuse company funds, violate their fiduciary duties, or commit other abuses. All of these situations can lead to litigation. Well-formulated and clear statutes help to alleviate these causes of conflict.

Confidentiality: Legal action is often taken against a party that is bound to secrecy to prevent confidential or sensitive information from being shared with third parties. Contracts in which the scope of confidentiality obligations is clearly defined not only protect the company but also prevent future legal disputes.