| |

Court approves legal fees of "USD35,000 per hour."

Editorial Staff

Mexican company Grupo Mexico S.A.B. de C.V. is more than a little peeved. Its US subsidiary Americas Mining Corporation applied to the Delaware Supreme Court for "re-argument" as to legal fees in the case of Americas Mining Corporation, et al., v. Michael Theraiult, as Trustee for the Theriault Trust, No. 29, 2012. The court said "no" and in doing so has demonstrated the conflict of interest inherent in contingency fee ("no win, no fee") arrangements.

Grupo Mexico General Counsel Mauricio Ibanez is incensed. He says "This ruling sets a dangerous precedent, if not a new high for court sanctioned legal fees in a derivative action. Excluding the defendants shares, it represents an award of 80 percent of the benefit obtained for their clients. On an hourly basis, it comes to USD35,000 per hour. This is an unwarranted transfer of wealth from the shareholders of a publicly traded company to plaintiffs' attorneys. It turns the well established legal principle that 'those who profited from the litigation should share its costs' on its head and sends a clear if disturbing message to plaintiffs' attorneys they can be made wealthy by an award out of proportion to the benefit they actually win for their clients."

It's not as if Grupo Mexico is strapped for cash. It's the largest mining corporation in Mexico and the world's third largest copper producer.

But even so, the rates do seem somewhat excessive, on the face of it.

However, it's not the whole story - though the whole story isn't easy to find.

It appears that the lawyers in the case took it on on a contingency fee basis on the understanding that they would receive a percentage of the value recovered. Unfortunately, it appears that the value recovered included a sum in damages plus a substantial number of shares. The lawyers included the value of the shares when calculating the percentage; the company wanted to include only the amount of damages. The value of the shares was significantly greater than the amount of damages, leading to 80% of the damages being soaked up in legal fees.

It seems that the biggest issue here is not actually the fact that the contingency fee produced such an extraordinary figure but rather to draw attention to the inherent conflict of interest between lawyer and clients in contingency arrangements. Clients assume that lawyers handing them a contract are being even handed. But it's not like that at all: the door is open for a rapid settlement at a high figure which results in a distorted hourly rate. But at the other end of the scale, cases can run on for years and the hourly rate eventually applied is low. Courts would not allow the lawyer to demand a greater share in such circumstances therefore it is not surprising that the Court denied the company's application to reduce the share.

It's even less even-handed: lawyers are allowed to withdraw from a case if it's turning into a loss making proposition yet clients are not allowed to dump the lawyer while negotiations are at an advanced stage and walk away without paying for the representation. Therefore there is not a true equality of position.