When corporate clients of any size come to us for advice about a potential litigation or claim, they usually ask two questions. Firstly, they want to know whether they have good prospects of success. Most clients understand that there is never anything guaranteed about litigation and there is inherent risk (we often refer to the wild card element of litigation). However, they want to know that there is likely to be a sensible return on investment.
The second question usually concerns how much it is going to cost. The difficulty in litigation, because so much of the procedure is dependent on the attitude of at least one other third party, let alone the court (for example if hearings are postponed and continued to later dates) it is sometimes simply impossible to predict costs with any real accuracy. In complicated higher value commercial disputes, total cost, including counsel’s fees, will frequently run into six-figure sums.
For smaller businesses particularly, and even for larger businesses, concerned with the effect on cash flow, consideration is often given to whether there are other funding mechanisms available. This blog is by no means exhaustive, but funding is sometimes available in the following ways:
Before the Event Insurance
Businesses should be liaising with their insurance brokers to ensure they have the most comprehensive legal expenses cover possible for the budget they are willing to be paying. The way this type of insurance generally works is for certain categories of claim, legal costs are paid by the insurer, by virtue of the policy taken out prior to the difficulty arising. This is often taken out, as we understand it, along with public liability insurance in the general suite of commercial insurance businesses would require.
Businesses will generally be entitled to insist on using their own solicitor, should that solicitor be competent and be willing to sign up to the insurer’s terms.
After the Event Insurance
The most common type of after event insurance we obtain on behalf of our clients is insurance against an adverse award of expenses (costs). As a general rule, although there are exceptions, if a party loses a litigation they can expect to have the majority of the other side’s costs and expenses awarded against them. After the event insurance works by an insurer agreeing to meet that adverse award of costs up to a certain level. Cases that are insurable, tend to be where the lawyers involved can indicate to the insurers that there are reasonably good prospects of success. In some cases the insurance premium is actually only payable on success. It is important to note that in Scotland it has never been possible to recover the cost of the insurance premium, from the other party in the litigation.
In higher value disputes, litigation funding can be an attractive option. In very basic terms, the funder agrees to pay the legal costs for the case, and in return receives a percentage of funds successfully recovered (in addition to the costs expended). Litigation funding tends to only be of value in higher value cases because funders need to see sufficient return on investment, relative to the money and risk that they are putting in. There can be a fairly extensive due diligence process with litigation funding and it obviously can delay proceedings being raised (issued). It can also be expensive. However, in some cases, particularly where there is an equality of arms or funding ability, litigation funding can be the difference between cases being able to proceed or not.
Solicitors often act speculatively in personal injury actions, but it is less common in commercial actions. However, in certain types of cases (for example where there are excellent prospects of success, or there is simply an argument about how much money is to be recovered) cases are sometimes taken on a speculative (sometimes known as a no win-no fee) basis. In our firm, the way this normally works is that the client remains liable for any outlays and ultimately upon recovery, the fees payable are increased by a percentage, depending on the risk, but typically up to 50%. Firms have to be careful not to take too much on a speculative basis, but we most often are involved on this basis, assisting insolvency practitioner clients who have good claims but simply no funds in a case to pursue a claim.
We are happy to discuss funding options with clients.
Eric Baijal is Head of Litigation at BBM Solicitors: emb [AT] bbmsolicitors [DOT] co [DOT] uk