Managing the cost of your dispute

Litigation funding is often hailed as the most effective risk transfer tool to finance a claim. However, for many businesses that simply isn’t the case. This may seem like a counterproductive statement for a funding specialist to make so let me explain.

If a business is to capitalise on the potential asset they hold in the shape of a good legal claim at a time when boards are increasingly focused on managing legal spend, it is vital that inhouse lawyers identify the most cost-effective way to engage external counsel and to protect themselves against heavy costs in the event of a loss.

The key to finding the most cost-effective route to bringing a dispute lies in identifying whether the overriding fee objective is to relieve the cashflow burden of paying legal fees or whether the real priority is to reduce or remove the overall cost risk.

Managing the cost of bringing a dispute. That’s what litigation funding is for isn’t it?

The answer is yes, and no. When sourced and structured appropriately, litigation funding serves a vital role in aiding companies to bring their dispute. Its primary purpose, however, is to provide cash to pay legal fees. It does, of course, manage the cost in the event of a loss given that the funding is usually provided on a non-recourse basis, but this cost management feature comes at a hefty price in the event of a win. Other products provide the same cost management in the event of a loss but for a smaller price, albeit some without the cash flow benefits. Funding is, therefore, not necessarily the most commercial option for every business.

Funding is an excellent tool, and often the only one available, for businesses that have a good claim, don’t have the funds to pay the fees or want to take the dispute ‘off balance sheet’ yet cannot negotiate an appropriate risk sharing retainer with their law firm. This may be, for example, because their lawyer of choice is unwilling to risk their fees or because of regulatory obstacles. It’s also a great choice when disbursements need to be paid during the life of the case. Even if your external lawyers are acting on a risk sharing retainer, it’s a big ask to expect them to pay money out for your disbursements too. Some will but others won’t.

Funding is also a great solution for businesses seeking to monetise an actual or prospective award giving access to a portion of their potential future winnings during the life the case. There are several reasons why a business may choose to monetise their claim. For example, they may be suffering from litigation fatigue or they may be at risk of going out of business whilst their bet the farm claim is working its way through the dispute resolution process. There is a growing trend towards enabling companies to use a single claim or a portfolio of disputes as collateral to raise funds not just to pay legal fees but also to cover other operating costs. For some companies, this can be the difference between survival and ruin.

In this fast-changing environment, real time knowledge of current market dynamics is essential.

While litigation funding has gained profile over the past few years, other options exist that can provide a more commercial route to cost certainty where cashflow is not the main concern.

So, what other choices are there?

If a case is suitable for litigation funding, it flows that it could be appropriate for your external lawyer to handle under a risk sharing arrangement such as a damages-based agreement (DBA). It makes sense to discuss this possibility with your lawyer and, if they are not willing to offer a risk retainer, to consider shopping around to find a lawyer that will. This can often be a partner specific rather than firm specific preference. Many reputable firms offer risk sharing retainers and so there is rarely a need to compromise on quality. Indeed, funding and insurance products have been developed to sit behind law firms to facilitate their ability to offer such retainers whilst reducing their risk to a more palatable level.

If a traditional retainer is in place, or where a partial conditional fee agreement can be agreed, own side’s fee insurance may be available to bridge the gap in the risk transfer strategy by covering the element of the fees the claimant remains liable for.

Own fee insurance (a form of After the Event insurance) can be tailored to reimburse the business for an agreed percentage of legal fees and disbursements if the case is unsuccessful. Many lawyers are not as familiar with this concept as they ought to be and rush to discuss funding instead. Alternatively, they confuse this insurance with adverse cost insurance, which is a separate form of cover designed to remove the risk of having to pay the other side’s costs. The premium for such insurance is usually expressed as a percentage of the amount insured and can be staged to allow for discounts to the premium if the case settles early. The premium is often only payable in the event of a successful recovery and is usually a fraction of the cost of funding.

Where necessary, funding and insurance can be combined and/or can sit alongside whichever fee arrangement has been agreed with the external law firm to help the business to meet its fee objectives.

Given the range of tools available, a sensible starting point is to identify whether the key objective is to relieve the cash flow burden, to manage the risk or a combination of the two. From here a suitably knowledgeable advisor ought to be able to present you with a selection of options based on your core needs summarising how each option will affect your net recovery in the event of a win. It’s a simple and quick exercise to conduct but could save months of dead-end market investigations.

In this fast-changing environment, real time knowledge of current market dynamics is essential. The cost of different retainers and funding and insurance combinations can vary enormously.