Posted on the 7th September 2017

Commercial disputes worth between £100,000 and £1m: How do you fund them?

There is a general assumption among many dispute resolution lawyers that lower value disputes cannot be funded by anyone other than the client.

Clients pursuing litigation are therefore forced to take on considerable costs and risks, as well as a huge amount of uncertainty over what those costs and risks really are (or could be). Alternatively, the client does not pursue the case, and writes off their losses: The solicitor is unable to help the client and the only winner is the defendant, who no longer needs to answer for their actions.

This is frustrating, and one of the reasons that Sally Dunscombe and I set up Annecto Legal back at the start of 2013 (almost five years in now – where has the time gone?!).

There are options for clients seeking to pursue cases between £100,000 and £1m, and they just require some thought and a good knowledge of the available options in the market (the same tools can be used for larger cases too, and can make litigation funding cost a fraction of x3).

We’ll look later at an £800,000 claim with estimated costs of £200,000 where the client gives away 85% of the costs and risks – but keeps 65% of the recovery.

Questions to consider

One of the first things to consider is the financial position and the appetite for risk of the parties involved:

  • Is the defendant in a financial position to satisfy any judgment/settlement?
  • Is the client willing to contribute anything at all? [perhaps they would contribute if they knew a) it was a fixed amount and b) it would increase their return from any recovery made].
  • Does the legal team have a willingness to put ‘skin in the game’ in the form of discounted conditional fee agreements?

Discounted conditional fee agreements are useful when the lawyers are billing the client less than a court would likely allow as an hourly rate for the work: The lawyers can bill monthly, and still seek to recover a higher rate from the Defendant upon success (I often hear that these ended back in 2013, with the Jackson Reforms: They didn’t!).<

A practical example of funding a lower value commercial dispute

So, once these questions have been asked and answered, what next? Well, you will need to estimate a budget to take the case all the way to trial. It doesn’t have to be too detailed, but it will need to reflect your expectations of what the case might be likely to cost (based on the type of dispute, the number of documents, witnesses etc).

This is a breakdown a solicitor recently sent me, asking for suggestions on funding:

  • £800k damages claim.
  • Estimated £200k adverse costs to trial.
  • Estimated £200k own costs to trial:
    • £30k own disbursements
    • £75k counsel
    • £95k solicitor (65%/35% discounted CFA so £61,750 funded)

You could approach a litigation funder for the full £200,000 but at x3 that would cost £600k plus the original £200k and then ATE on top, so well over the actual damages claimed!

What is an alternative for funding lower value commercial cases?

The real risks on this claim are the £200k of own costs plus the potential £200k of adverse costs, should the claim fail. The potential ‘upside’ is £800k.

Should the client risk £400k to potentially get £800k? (Would you?)

What follows is a detailed breakdown to show how insurance and disbursement funding can allow lower-value claims to be financed in an economical way (it gets a bit ‘numbery’ so feel free to skip to the final paragraphs if that’s not your bag!).

ATE insurance

We will take out after-the-event (ATE) legal expenses insurance to cover:

  • Adverse costs risk of £200,000
  • Own Disbursements estimated at £105,000

Total limit of indemnity (LoI) required = £305,000
(by insuring own disbursements we will be able to fund them for a much lower cost – rather than using non-recourse third party litigation funding).

The cost of the ATE insurance premium will be staged, deferred and contingent so the client only pays if & when a successful recovery is made. The stages will be as follows:

Settle pre-issue:

  • The cost is 10% of the LoI (10% of £305,000) = £30,500.

Client pays £30,500 for ATE if it successfully settles pre-issue

Successfully going to trial

  • Post-issue: 15% = £45,750
  • Disclosure: 25% = £76,250
  • Pre-trial: 30% = £91,500
  • Trial: 40% = £122,000

Client pays a total of £122,000 for ATE if the case goes to trial and wins.

If the case loses the client pays nothing for the ATE or for the opponent’s costs.

Disbursement funding

Now that the disbursements are insured, we can arrange funding at much lower rates than those associated with typical third party funding:

  • 40% if settle within 12 months (so pay back the £105,000 plus £42,000 to the funder)
  • 65% within 2 years (£68,250)
  • 90% within 3 years (so pay back total of £105,000 + £94,500 if win within 3 years)

Funding solicitor’s fees

The Solicitor could act on a hybrid/discounted conditional fee agreement (CFA) where they are paid a portion of their fees monthly, with the rest deferred until a successful conclusion of the claim.

Let’s assume the Solicitor needs 65% of the fees paid monthly, with a further 35% deferred to conclusion and an additional 35% as a success fee (a reward for taking on some risk).

The funding needed for the Solicitor is 65% of £95,000, which is £61,750. If the client can fund this then I suggest they do: the client is getting to litigate the case for £61,750 which is more manageable than £200,000.

If the client is not able to finance this, then non-recourse litigation funding at between 150% and 300% returns could be explored.

What does the client get at judgement/settlement?

  1. If this cases goes to trial and wins within 2 years then the client pays:
    • ATE = £122,000
    • Dibs = £68,250 (funding costs)
    • CFA = £33,250 (assuming 100% uplift on deferred solicitor fees)
    • TOTAL = £223,500

    Assume costs recovery of 70%, leaving a £60k shortfall:
    £800k minus £283,500 = £516,500 which is 64.6% of the recovery to the client.

  2. If the cases settles for £450k (including costs of £60,000) after 6 months then the costs would be:
    • ATE = £45,750
    • Dibs = £42,000 (funding costs)
    • CFA = £8,000 (best guess of success fee on costs after 6 months)
    • TOTAL = £95,750 (plus £60k legal costs)

    The client gets £294,350 net, or 65.4% of the recovery.

To summarise:

The real risks on this claim are the £200k of own costs plus the potential £200k of adverse costs, should the claim fail. The potential ‘upside’ is £800k.

Should the client risk £400k to potentially get £800k?

The option above reduces the Client’s costs and risk to approximately £60k: The client takes only 15% of the risk but keeps 65% of the recovery.

The position could even be improved further with clever use of discounted CFAs and P.36 to maximise inter partes costs recovery.

Mark Beaumont is one of the founding partners of Annecto Legal Ltd, an FCA-regulated broker of ATE insurance and funding. Annecto provides free guidance around all aspects of insurance and funding, as well as in-house training for fee-earners and insolvency practitioners.