How to litigate commercially

Introduction

Litigation is often a last resort for most businesspeople. It is time consuming, expensive and uncertain. Your lawyers will probably give a claim with “good prospects of success” no more than a 60% chance, and never more than 70%.

Litigation is risky, outcomes are unpredictable and if you lose you could be on the hook for your own (substantial) legal fees and the opponents’(substantial) legal fees. The legal industry is not known for its dynamism and commercial approach, however, there are now products available to litigants which allow them to partially or completely “de-risk” their litigation. There is of course a cost to these products, and they are not available to all, however, often the cost can be fully deferred (i.e. nothing is paid unless and until you win).

Lawyers strive to eradicate risk from their clients. Commercial people turn risk into profit. You cannot litigate without risk. But you can limit and share the risk and financially align all the stakeholders (including the lawyers’) interests.

Below we aim to explain some of the options which may be available, which allow litigants to mitigate and hedge their litigation risk, and to think about their litigation opportunities as potential business assets rather than uncertain liabilities.

After the Event Insurance (ATE)

Usually in litigation, the loser pays the winner’s legal costs. Insurers saw the need for a product to protect against this risk. As a result, specialist underwriters emerged who understood the legal market and litigation risk.

There are different types of ATE. The most common form provides cover against the other side’s costs up to a set level of indemnity if the insured loses their claim. The premium is usually fully or partially deferred until the claim is won, and naturally, cheaper if you are willing to pay some of the premium upfront.

Often, ATE providers stage their premiums to encourage early settlement, as insurers want to mitigate their own risk exposure and recognise that the longer a claim is litigated the greater their exposure and the greater the risk.

You can use ATE to cover some or all of your exposure against adverse costs. You can even use ATE to cover some of your own disbursements.

The ATE premium is the insured’s liability, and it (except in rare cases) cannot be recovered from the other side. ATE is also relatively expensive compared to other types of insurance products. Typical premiums for claims which run to trial can range from 30-60% of the level of the cover required. Unlike other insurance products, which are often obtained to protect against a future risk which may never arise, ATE provides cover when the potential exposure (to the other sides costs) has been triggered, so the risks to insurers are considerably greater.

Some ATE insurers also offer disbursement funding to pay expenses such as court fees, expert fees etc. These loans usually incur interest, but, again, the principal and interest are only repayable if the claim is successful. The creation of disbursements funding facilities has made it easier for lawyers to take on claims “at risk” (under no-win no-fee agreements – see below) by removing the need to cashflow such expenses.

Litigation Funding / Finance (LF)

LF is an arrangement whereby a third party pays the costs of the litigation in exchange for a return on their investment if the claim wins. The UK market has expanded rapidly, it was non-existent 15 years ago, today it is worth over £2billion.

This is usually the costliest means of funding litigation. Typically, a funder will be looking for a return on its investment of x2 – x5. This means that most funders are unlikely to seriously consider claims below the £5million damages level.

Contingent Fee Arrangements

Commonly known as “no-win no fee” arrangements, these are mostly associated with road traffic incidents and personal injury claims. However, they are regularly used for commercial claims by sophisticated legal services users. Essentially, they are arrangements where the lawyers (often both solicitors and barristers) only get paid if the claim is successful, and in exchange for the risk they take on, get a success fee on top of their normal fees. There are 2 different types: Conditional Fee Agreements (CFAs); and Damages Based Agreements (DBAs).

CFAs, whereby the lawyers get paid for the work they have done plus a success fee of up to 100%. The lawyers “upside” is therefore capped at double their incurred fees. So, if a settlement proposal is received early in the litigation, the overall cost to the claimant is likely to be modest.

As the claim progresses, and the time costs increase, so does the contingent liability. However, the cost is only actually paid if the claim is successful and assuming your lawyers have given you an accurate estimate of fees before the claim commences you will know your maximum liability at any particular stage in the litigation. It is also likely to be much cheaper than LF, which requires investment multiples of all the money invested of x2-x5.

DBAs on the other hand are arrangements whereby the lawyers receive an agreed percentage of the damages recovered from the other side. The maximum percentage solicitors can charge under a DBA is 50% of the damages.

Our approach

At SMB, when a client comes to us with a potential claim, we consider carefully the options which may be available, and our client’s risk tolerance. We will consider the likely cost of the litigation compared to the potential reward and the prospects of success. Only then will we know whether the claim makes commercial sense.

If a client is happy to pay for their legal costs as the litigation progresses and is willing to accept the risk of a potential adverse costs order, then that is the cheapest option overall (assuming a win!).

Often, however, a client is either unable to afford the litigation or wants to hedge some or all of the risk. In which case, assuming it makes commercial sense, SMB will offer a CFA or a DBA, perhaps backed by an ATE policy. This aligns SMB’s interests with our client’s and is more attractive than LF. It also allows greater flexibility around settlement, as there are fewer interested parties.

For larger claims, which we estimate will go on for longer period (usually more than 18 months) we may suggest a partial CFA or DBA, with some of the costs met by the client or a third party funder. This mitigates both the lawyers risk and the risk to the funder, whether that be the client or a LF provider. It also increases the likelihood that a claim is commercially viable, as the overall cost is reduced when compared to a claim which is fully funded by LF.

Summary

Your lawyer should always advise you on the funding options available to you if you are considering litigating. If your legal team do not feel equipped to advise, consider consulting a specialist regulated ATE and funding broker who will have a better view of the market and the different options available.

Always question why your lawyer is reluctant to shoulder some of the litigation risk. Larger firms often do not need to be competitive or commercially practical to attract clients, as they trade on their name and size, and smaller firms may find it difficult to shoulder the costs risk and cashflow issues caused by acting in a contingent basis. However, time spent satisfying yourself that you have considered the funding options available is rarely wasted and many prefer to instruct lawyers who are willing to put their money where their mouth is.

This is a guest blog which contains the views of the author and does not necessarily represent the views of the IoD.