Posted on the 2nd December 2015

Is there a ‘right way’ to fund legal costs and avoid litigation risk?

Litigation funding can mean a number of different things, but in its broadest sense it is the means by which the legal costs of any particular case are paid for. It comes in many guises: whether paid for by the client on an hourly rate basis, by a third party funder (TPF) in return for a share of any monetary award, or by the solicitor under some kind of ‘no-win no-fee’ conditional fee agreement (CFA). It can also include the use of after-the-event (ATE) legal expenses insurance cover to protect the client from the possibility of paying the other party’s legal costs, should a case prove unsuccessful.

Of course, all of these wonderful three letter acronyms (TLAs!) can be used in conjunction with one another, which enables the litigation risk to be distributed and shared amongst multiple parties. It also allows clients to choose an appropriate level of exposure to match their financial position and appetite for litigation risk. Alternative litigation funding is applicable to all sorts of legal claims, from private prosecutions to commercial arbitration.

Calculating litigation risk

In the simplest terms, whoever carries the risk of the litigation costs becomes the de facto litigation funder. But if you have a portfolio of only one case you are not likely to be a very good one! The best litigation funders manage their liability via a portfolio of cases and this is what protects them from the inherent litigation risk that any single case carries on its own.

There is a reason that barristers typically give even the strongest of cases only a 65% chance of winning – each and every case has about a one in three chance of going wrong at some stage. This could be when the defence is served, during the disclosure process, when witness statements are exchanged, when an offer to settle is wrongly rejected, when the judge takes a shine to your opponent or when the main witness suffers under cross-examination. There’s lots that can go wrong, which is why litigation is can be a gamble.

Assessing your options

Despite this, many individuals and businesses pursue cases and are happy (or at least willing) to bear the costs of doing so. There are many more though that balk at spending tens of thousands of pounds, or even hundreds of thousands, on legal fees for common occurrences such as breaches of contract or professional negligence. Pursuing a case to trial is extremely unlikely to cost less that £50,000 to £100,000 in even the most straightforward of cases. Whatever the cost to trial, the risk to the client is double as if they lose they may well have to pay their opponent’s legal fees as well as their own. If the real litigation risk is therefore between £100,000 and £200,000, what would your case have to be worth to endanger that kind of money on a 65% chance of success? There is also the question of whether that is the best use of money – most businesses have a certain expectation of a rate of return on cash invested. Do your investors (whoever they are) want the returns expected of the business, or are they happy with a risky investment in litigation?

Picking the right method of funding your case

So, is the answer to shift all of that litigation risk on to the shoulders of a professional funder? Well, possibly. But it’s also worth bearing in mind that the rewards follow the risk. The client who pays all of the costs (and carries the responsibility for paying the opponent’s fees should the case lose) will also keep any money agreed in settlement or awarded by the court. When a funder steps in to assume all of the litigation risk, they may look for a return on their investment of up to two or three times their money, should the case run all the way to trial. Cash can be expensive.

Litigation funding should not then be looked at purely in isolation. Another consideration should be the nature of the retainer with your lawyers. Are they getting their fees paid as the case progresses, or are they deferring some (or all) of their fees to the conclusion of the case? When cash is expensive, it can be cost-effective to seek deferral of fees rather than just paying them ‘as you go’. It can also be a good test of your case – your lawyer may profess supreme confidence in your case, but does that confidence stretch as far as putting their money where their mouth is?

Litigation risk vs. reward

With a legal team willing to put ‘skin in the game’ and a funder ready to back your case, you may then take a view on what level of litigation risk is right for you: do you invest £10,000? £50,000? More? What impact does your investment have on your returns at the end? Does a small cash injection from you ensure that you keep a much larger share of the potential returns? Or are you wiser to retain your cash and let others take the chance?

The way a case is funded can have huge consequences and should be properly considered. Whatever you choose to do, whether as an individual or as a business (with responsibilities to other stakeholders), you should do so from a position of knowledge and with independent advice. Only then can you rest safe in the knowledge that the course of action you’ve chosen is the most appropriate one for you and your business.

If you are considering litigation and would like to discuss your litigation funding options, or if you’re a solicitor and would like to give the best advice to your clients, please feel free to contact our experts at Annecto Legal.