Steve Beahan, Commercial Dispute Resolution partner at Irwin Mitchell, explains why now might be the right time for businesses to reassess their approach to litigation funding.
The economic uncertainty caused by Brexit and the COVID-19 pandemic is undoubtedly putting a strain on many organisations’ balance sheets.
Although our research with the Centre for Business & Economic Research (Cebr) points to a uplift in output by the Spring, many obstacles and challenges remain.
There’s argument that when times are good and the economy is ticking over nicely, businesses are less inclined to litigate. Rather than getting bogged down in complex commercial disputes, management teams prefer to focus on growth.
Through my years as a lawyer, I have plenty of anecdotal evidence to support this theory. The argument that a strong performing business will focus on expansion rather than tying itself into time-consuming legal disputes does stand up to logic.
We’ve certainly seen an increase in activity in recent months. But it’s important to point out that although there’s an increased propensity to litigate during economic slowdowns, many still don’t due to the perceived high cost involved.
Using litigation funding or alternative funding methods generally can turn this on its head. Indeed, one of the many advantages for companies that use litigation funding is that it allows them to structure their balance sheets more efficiently. This helps to limit exposure to traditional borrowings and reduces debt.
This allows complex disputes to be progressed without requiring ongoing funding from the business. It can also open up opportunities to select more experienced and specialist legal support.
Quite simply, this approach can enable more cases to be won and more cases to be pursued.
Also, instead of keeping some money in reserve during the litigation process, management time and capital can be freed up to focus on other areas of the business. This investment in new business opportunities can help support company growth, or allow the management team to focus on overcoming current challenges.
Another attractive benefit and powerful argument in favour of litigation funding is its ability to help reduce risk for an organisation.
Perhaps the most obvious way is that it can reduce the risk of not having to pay a significant amount in legal fees in the event of losing a case on top damages.
But there are other ways litigation funding can help mitigate risk too. One is that it arguably gives businesses greater protection, because other firms are less likely to take advantage of them. This is particularly the case if a competitor or supplier thinks a business is struggling.
If a company is in financial difficulty but has access to litigation funding, it’s less likely to be the victim of hostile opportunism.
Funders do more than relieve corporations of financial risk and cost-cutting pressures. They provide case analysis and help businesses choose cases with the strongest potential for timely and favorable settlements.
Without in-depth due diligence, companies may pursue less promising litigation, while leaving cases with strong potential recoveries on the table.
In addition to Litigation Funding, alternate funding options exist which reduce the risk of litigation to the claimant whilst making it more affordable without the involvement of a third party funder.
Alternate funding arrangements are essentially an agreement between client and solicitor regarding on what terms fees will be calculated and paid as opposed to the more traditional hourly rate model.
Conditional fee agreements, or “no win no fee” agreements, require no fees to be paid by the client to the solicitor until the end of the claim, except in certain limited circumstances, and then only if the client “wins” whether that is by way of judgment or reaching an agreed settlement.
A discounted conditional fee agreement works in a similar way, however requires the client to pay a discounted hourly rate to the solicitor with the remainder of the fees being conditional upon the outcome of the claim.
Damage based agreements have been in the press more recently as the result of a recent Court of Appeal decision regarding early termination payments. A damage based agreement is one where the solicitor’s fees are determined as an agreed percentage of the damages received by the client once the case concludes.
Not every case is suitable for alternate funding, and not every type of alternate funding will be appropriate. Together the client and their solicitor will reach the most appropriate type of funding for the claim in question.
Not all litigation funders are the same. While things like the due diligence process provide valuable benefits, the time a funder takes to review a case can vary.
If you’re looking to go down the road of choosing a litigation funder, don’t rush in. Make sure you spend the time and get to grips with the funder’s internal due diligence process before committing to work with them. Similarly with alternate funding, you need to ensure you fully understand the implications of the funding arrangement you are discussing with your solicitor and what this means for you at the conclusion of your claim.
Litigation funders and alternate funding provides businesses with many opportunities, but they work at different rates and show different levels of flexibility and creativity.
These factors will vary, and some will be more important to you than others. Once you’ve decided to pursue this option, take your time and make sure you choose your option and/or funding partner wisely.
For further information about our Litigation Funding options visit the dedicated section of our website.