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Litigation Funding

You know the story. Along with the phrase, ‘the cheque is in the post,’ there is nothing quite like the term ‘commercial litigation’ to turn most people’s faces to a definite whiter shade of pale. Commercial litigation is an expensive, deeply unpredictable, resource intensive and risky business, so much so that a significant number of companies shelve the idea of pursuing a claim before even investigating the options.

Sometimes, however, a business will have no choice but to get involved in litigation because it may be in a position where it cannot afford not to pursue a claim – indeed, its very existence may depend on securing the damages due to it.

But then it gets tricky. Once a decision has been made to litigate, the costs of litigation- law firm, barristers, experts, court fees and insurance to pay the other side’s costs if you lose- need to be paid. Depending on the complexity of the case and the volume of evidence involved, a business can expect to pay anything upwards of £100,000 (and a great deal more if the matter proceeds to trial) simply for the services of their solicitor to pursue a claim of £500,000. That’s a big dent in your profitability for the year and we all know what implications that has for shareholders, covenants and exit valuations.

In addition, claimants usually underestimate the timescale involved (litigation takes an average of 18 months to conclude) and the degree to which their involvement is critical to success. Lawyers will require senior managers to assist in the preparation of the case whether by providing detailed witness statements or helping the lawyer to understand the relevance of certain key documents. All of this is a big distraction and means time away from the core business.

Most claimants will have heard of lawyers who are prepared to undertake this work on a Conditional Fee Agreement, a so-called ‘No Win No Fee’ deal. On the surface, this would appear to provide a solution to the problem of costs. The lawyer agrees to work for ‘free’ until the claim is successful whereupon he will extract his fees plus an uplift from the resultant damages recovered. If the claim fails, the client will have no fee liability to the lawyer and the risk of having to pay the other side’s costs will be covered by virtue of a specialist “After The Event” insurance policy. The problem is that although this model is prevalent in the consumer end of the legal market (slips, trips, road accidents etc.) where cases are relatively straightforward and usually settle before trial, it is less attractive to law firms in commercial cases due to the significant costs’ risk they are being asked to bear and the potential for things to go wrong. Even if a claimant is fortunate enough to find a firm willing to take a ‘punt’ on this basis, the likelihood is that the work will probably be undertaken by a very junior member of staff, whenever their fee paying work allows. You get what you pay for.

There is a solution to all of this, however. Third party litigation finance allows you to bring good quality commercial claims at little or even no financial risk to a business, in return for giving up a pre-agreed percentage of the resultant damages. It can be used by claimants who simply cannot fund the costs of litigation themselves or by claimants who do have the ability to pay but prefer to deploy their cash into other more lucrative projects- and most SMEs certainly fit into one of those categories.

The funder’s success fee can seem high if you enter the transaction with expectations built around bank interest rates. But the key difference is that this is non-recourse money. If the case fails, the litigation funder loses all of the money it put into the case. Litigation finance is effectively an equity investment in the claim.

So how do you access litigation finance? Firstly, you must be a claimant and the case must seek to recover clearly quantifiable monetary damages. Injunctions, defendant cases, libel and divorce are currently outside the mandate of the mainstream commercial litigation funders. These sorts of matters have variable damages regimes or no damages at all and are therefore unsuitable for investment purposes (although there are signs that the landscape is changing).

The opponent must also be in a position to pay in the event of success. There is little incentive for anyone (other than perhaps the less scrupulous lawyer if he is being paid along the way), to pursue claims against businesses who do not have the means of satisfying a financial award of the court.

It goes without saying that your case should have strong legal merits. Litigation funders are serious investors, not reckless gamblers. They are investing other people’s money so they need to be sure that the case in question is grounded in both fact and solid case law. New points of law, clever legal arguments or other speculative litigation will not secure funding. Remember, this is a commercial proposition for all parties and you are in this to secure a commercially acceptable outcome for your business, not make The Times Law Reports.

A quick word on insurance. You should always consider whether you have any pre-existing legal expenses insurance to help cover the costs of your claim. This insurance is often connected to a household or general corporate insurance policy. Sometimes, you may be able to combine this insurance with other funding options where it is anticipated that the insurance cover will not provide sufficient protection for the full costs of the claim. However, the funder will also be able to cover the premium of an After The Event (“ATE”) policy which covers the costs of the defendant which you may have to pay some or all of in the unhappy event that your claim is unsuccessful.

And plan ahead. The longer you leave it the more difficult it will become to persuade a funder to get involved. Don’t bank on your claim settling early. Assume that your case will proceed to trial and budget accordingly. If you do not wish to commit the funds necessary to take the case to court, talk to a litigation funder as soon as possible.

Finally, beware the ‘Loss of Opportunity’ claim. These cases always find their way across a funder’s desk and have usually done the rounds. They tend to involve a claim for lost earnings or revenue which was indirectly brought about by the defendant’s actions or omission. Were it not for the fact that Company B reneged on an agreement to pay Company A the sum of £1 million, this money would definitely have been used by Company A to bankroll a young Bill Gates in his fledgling business venture and therefore the resultant loss is £50 billion at today’s Microsoft share price. There is nothing intrinsically wrong with such claims but there will be a high evidential bar involved including the production of significant accounting evidence. In the UK legal system, damages are designed to put you back in the place where you would have been were it not for the actions of the defendant. They are definitely not intended for claimants to make a profit from the wrong they have suffered.

And that is litigation finance in a nutshell – a way of monetarising a dispute at little or no risk- and something which is of increasing interest to business owners and senior management in the SME community.

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