Posted on the 5th November 2014

A business with a commercial claim for damages has a ‘contingent asset’. While realising this asset hasn’t always been practical (as businesses are unable to access legal aid), alternative funding options now enable the pursuit of claims while taking minimum risks and avoiding high legal bills.

This approach means taking a commercial view of claims for damages, and then understanding and combining all the available options for mitigating costs and risks. If done correctly, businesses are able to pursue litigation while taking on very little risk, freeing up vital capital which can be invested elsewhere.

If the ‘contingent asset’ can be turned into cash for your business, at either little or no cost, that can be hugely positive for your firm, and it could be a great return on the time you invest in the case.

You can apply these methods to any claim for financial damages, regardless of the size of your business. To see how alternative funding works in practice, let’s look at an example:

Case study

The chart below shows the risk and return of a business’s claim for damages of £150,000.

2014_11_06_blogchart

Research* shows that claims of up to £200,000 are often not pursued because of uncertainty and costs fears. It is therefore useful to use a claim for around £150,000 as our example.

At the outset it’s always difficult to predict legal costs, as the opponent’s strategy in defending the claim is not known, and nor is whether early settlement is likely. For this example we will assume legal costs are estimated at £60,000 to go to trial, and if the case is lost, the claimant could face a bill of £120,000 (including the opponent’s legal costs).

If the business wins it recovers £150,000 in damages and the court may also award around 75% of the legal costs incurred (£45,000 of the £60,000). The return for the business would therefore be £135,000 (£150,000 minus the £15,000 shortfall in legal costs recovered).

This begs the question: which business would risk as much as £120,000 in order to recover a maximum of £135,000?

To mitigate some of this risk, firms can use After the Event (ATE) legal expenses insurance. ATE will pay the opponent’s costs in the event of an unsuccessful claim, and so it reduces the risk to some degree. As shown in the chart, there’s a corresponding decrease in damages retained because of the cost of the insurance premium, and the litigation still looks like a rather expensive and risky proposition.

In order to make claims of this size viable, and even compelling, we need an alternative that brings the risk down to a negligible level. There are many options available to do this, but let’s look at a mix of deferred fees, third party funding and ATE insurance:

  • to provide certainty, the business caps its investment at, say, £20,000 at the outset;
  • the £20,000 is insured so the business gets 90% back if the case is lost;
  • the real risk is therefore just £2,000 – the business can never lose more than this amount;
  • the litigation lawyers are instructed to work at two-thirds of their hourly rate, with the remaining third deferred until the case is concluded successfully;
  • a litigation funder pays specialist counsel, disbursements and the ATE insurer.

If the worst happens and the claimant loses they still get £18,000 of the initial £20,000 back. The funder and the insurance company pay for everything, including the opponent’s costs, beyond that first £2,000.

If the case is successful, and the court awards £150,000 plus reasonable costs of £45,000 then the returns will be divided along these lines:

  • the business receives its £20,000 investment back in full.
  • the lawyers will get the one-third of their hourly fees which were previously deferred.
  • the litigation funder will get their £43,500 investment back.
  • the remaining £120,000 will be distributed between the claimant, solicitors and funder.

The result: the claimant receives over £80,000 as well as getting all the costs back. For taking on just 2% of the risk and risking only £2,000, the claimant keeps over half the damages.

Recovering over £80,000 by risking £2,000 makes sound financial and commercial sense for most businesses, and this is just one of the options available when considering litigation. As with any investment or business decision, the important thing is to explore all the alternatives and make an informed choice. You should think about how to fund your dispute based upon your financial position, your opponent’s financial position, the size of the claim, the likely costs and duration of the claim, and of course your appetite for risk.

When these factors are considered alongside alternative funding options it becomes viable to pursue good legal claims that might have been avoided in the past, to the cost of your business. And remember, these tools could be used on claims you perhaps ruled out in the past, as the statute of limitation on most actions is six years.

Discover the alternative funding options available to you with Annecto Legal.

*View the research in full in the PDF below:

Annecto Legal SME Research

Download Annecto Legal SME Research (851.4 KiB)