Litigation funding – Is your business sitting on a golden egg?
It’s almost inevitable that businesses will occasionally find themselves involved in disputes over such issues as commercial contracts, negligent advice from professionals or even shareholders themselves falling out, writes Irene Dallas of Dallas & Co Solicitors.
Because of the perceived costs and risks of pursuing a legal resolution, businesses sometimes write-off the losses associated with such disputes or settle for a much smaller figure than ideal.
It doesn’t have to be this way. You are probably familiar with the use of insurance and financial tools to manage costs and risks across a wide range of business activities, such as invoicing, IT spend, fleet management, property and such like. This allows firms to shift risk off the balance sheet, frees up cashflow and allows for faster growth. There is no reason for legal costs to become a hindrance, as they too can be insured and financed.
To put it another way: Should a potentially good case, with a likely financial recovery, be left to wither on the vine because of a lack of funds? Or should that case be pursued to settlement with professional funders and insurers taking on 100% of the risk, for typically around 30% of any reward?
From the perspective of an SME, the ability to shift litigation risk off the balance sheet can allow for cases to be pursued vigorously (rather than on a shoestring) to settlement without the fears of legal costs spiralling, or the dread of losing and having to pay the opponent’s legal bills too.
Practical example:
An SME has a claim of £500,000 against its opponent (green bar on the left, net of costs). The SME has been told that its legal bill could be around £200,000 if the case runs to
trial (black bar on left), and that the opponent is likely to spend a similar amount. If the case loses the SME could therefore face a bill of £400,000 or more (red bar on left)
On the right, an alternative funding model allows for the case to be pursued for a fixed fee of £50,000 (black bar on right), giving the SME absolute certainty over costs. Insurance and funding is used to bridge the gap, taking on 88% of the risk for around 35% of any financial recovery.
Instead of ‘gambling’ £400k to potentially recover £500k, the SME is now risking just £50k for £325k.
The SME has complete flexibility to either increase its commitment, and therefore take more of the recovery, or reduce its commitment but give away a large share of the recovery.
Crucially, the business can now make an informed decision about the level of cost and risk it is comfortable with, and begin any legal proceedings with absolute certainty from the outset.
A further advantage of using funding and insurance is the change in negotiating position. If your opponent perceives you as unwilling or unable to fund a case all the way to conclusion, they may feel they are in a strong negotiating position. If, however, you inform them that you have external backing and that you can go ‘all the way’ without financial consequences to your business, then suddenly you are the one in the driving seat. The defendant may now decide it’s better to settle
quickly rather than trying to financially outmuscle your deep-pocketed backers.
To conclude, it may be worth thinking commercially about legal issues, just as you do about other aspects of your business. A financial recovery through litigation can be a helpful cash injection to your business, and if it can be achieved without cost or risk, then what’s stopping you?
If you would like more information, contact us at Dallas & Co Solicitors. We have worked closely with a number of funders and are happy to discuss with you the most appropriate solution for your potential claim.
Dallas & Co Solicitors is a niche commercial litigation and international dispute resolution practice, for more details go to the website or call Irene Dallas:
0118 976 7500
