Litigation Funding - Is Your Business Getting Enough Information to make the Right Choices?
Stuart Evans, partner and head of commercial litigation, London examines different litigation funding options.
So, you are a manager in an SME and you have been dealing with an important claim relating to your business. You have worked hard to prepare a case which has strong merits, to calculate a range of settlement options that work for you and, vitally, establish that your opponent has sufficient asset value to meet any judgment in your favour should the case have to go to trial. You have, therefore, a viable asset that your business can utilise as an investment to get a substantial return and properly compensated for the problems your opponent has created.
But your business has other things to think about too. You may want to borrow more money to fund an R&D program, recruit key personnel or potential acquisitions in your marketplace. Your shareholders may want to keep the valuation of the business steady for these purposes, or to maintain dividends. A venture into litigation, which will involve risk and ongoing costs and expenses before being concluded, may cut across those objectives, no matter how strong the case. It is therefore conceivable that a claim in litigation may be an asset where the value is trapped, to be locked in either temporarily or, potentially, permanently. So how can that value can be unlocked if you are facing these types of choices?
Third party litigation funding (3PLF) is now permitted by the English courts. 3PLF can be provided to cover a combination of costs and disbursements, including a party’s own solicitors’ costs, expenses such as counsel’s fees and the significant cost of After the Event Insurance (ATE). ATE insures against the risk of an adverse costs award (i.e. a costs award in your opponent’s favour) and can also cover some expenses in the event the case is lost. The ATE premium can be deferred until the end of the case and can also be insured in the case of loss, so that it is only payable if you win. It can be obtained as a standalone or as part of a 3PLF package. Accordingly, not only can 3PLF reduce the risk of litigation for your business, it can also improve its cash flow.
This has further upsides for your business. The reduction in direct litigation spend will result in lower direct monthly and annual cost and a consequent higher level of profitability, improved EBITDA and increased certainty, so that provisions for expenditure that would otherwise have to be made in the accounts of your business can be either reduced or eliminated. With costs exposure also being managed through a funded ATE policy, provisions for costs can also be similarly reduced or eliminated. The case can therefore be progressed without your business being impeded in the exercise of its options also to spend money elsewhere.
Such funding is available at any stage in the life of a case, whether this be the opening review or consideration of enforcement options should you successfully obtain judgment in the case. The case will be heavily scrutinised for its suitability for 3PLF, therefore, plenty of time needs to be set aside before a decision is forthcoming! If your case is successful, either at trial or in an earlier settlement, then there will be a “waterfall” of payments, where the organisation providing the 3PLF will claim a return out of the net proceeds (once costs are deducted), based upon the amounts funded in the case. As a rule of thumb, the bigger the difference between the costs and the amount awarded, the greater your share will be. In addition, as the returns for 3PLF usually have incremental increases over time, the earlier a resolution can be found then your business is likely to take a further proportionately higher amount from the proceeds.
3PLF can be the full a la carte (own costs, all disbursements, ATE insurance) or a “lite” version, e.g. funding just for a £10,000 High Court issue fee. The “lite” approach may suit businesses that believe an early resolution post-issue is likely, or which have a need to manage cash flow in the short term. And 3PLF is one option. Your business can also fund litigation by borrowing from a bank, raising finance from investors and seeking a Conditional Fee Arrangement (CFA) with your lawyers. The CFA can either be “full”, where the firm takes no fee at all if the case loses, or “discounted”, where the firm charges a percentage of its fees as the case progresses, with the balance to be paid only in the event that the case wins. Often a combination of these funding options is used, in the case of 3PLF arranged either directly with 3PLF organisations or with the help of specialist 3PLF brokers or intermediaries, to find a deal that suits your requirements.
Organisations providing 3PLF will be looking to back “winners”, so their due diligence on a case will be carried out with the aim of taking on cases that have high prospects of success, both in terms of liability and quantum. Accordingly, a case that has an 80% prospect of success on liability, but an 80% prospect of a finding of no loss or a token loss, is unlikely to find a home. In the same vein, 3PLF can often require law firms to share risk in the form of a CFA. To do so, the law firm is also likely to want to see high prospects of success before taking on a project that may take several years to come to fruition. Such arrangements can, if agreed, give your business confidence that your case has, in the eyes of independent parties, high prospects of success and that other parties are willing to back that assessment and share in the risk of a loss or delayed payment.
Since the Jackson reforms came into effect, there is also the option of Damages Based Agreements, which seek to recover a percentage of the fruits of litigation. These are still in their infancy.
There always remains, of course, the option of self-financing litigation, where the risk profile, balance sheet strength and cash flow of your business makes this viable, you want full autonomy to run the case in accordance with your commercial judgment or it has traditionally been your preferred approach. If your business has a successful outcome with its case, then if it has self-financed, it can get a strong cash infusion to boost its cash flow, P&L and balance sheet, without deductions for the cost of the funding.
We have focused on businesses with claims, but this should not be seen as a bar to businesses that are defendants considering the option of 3PLF, particularly if it holds a viable counterclaim. The best suggestion for businesses in this position is that they at least ask the question, to see whether a 3PLF package or elements of it might be available.
And, last but not least, whilst we have referenced SMEs in this article, 3PLF is a potential option for all businesses with claims, from the sole trader to the multinational.