Litigation funding: turning disputes from a cost centre into a profit centre

Over the past nine months, many businesses have been quietly, at times unwittingly, building up contingent assets, in the shape of legal claims for damages. But in an environment where cashflow is all important, there may be little appetite to expend the time and cost required to realise these assets whose value is inherently uncertain, and may even be negative.

In recent years an industry has grown up around the challenge of unlocking the value of legal claims without the cost or risk traditionally associated with litigating. If you think you have a good claim, now is a good time to explore your options to pursue that claim without taking on unwanted risk and expense.

Pulling the trigger

The economic pressures brought about by Covid-19 have led to an increased incidence of commercial disputes. More companies are therefore facing the decision of whether to litigate, or commence arbitration, in order to protect their rights or enforce claims. The factors to be weighed in reaching this decision will include:

• The strength of the claim: not just the legal merits but also the availability of supporting evidence in order to prove the claim.
• The value of the claim: not just the headline value of the claim but the amount of damages that a court/arbitral tribunal is likely to award.
• The cost and risk of litigation: most claims settle out of court eventually, but by the time they do, the parties' legal fees may be very significant. This expense needs to be funded as the case proceeds. The possibility of having to pay your opponent's costs if you lose the case also has to be factored in. ,
• The likelihood of being able to enforce a judgment: even if you win the claim, if your opponent becomes insolvent, you may not recover the amount awarded.

The effects of the last year have had the twin effects of increasing some of these uncertainties while also decreasing the appetite to take on financial risk. Rather than abandoning good claims, though, many will be looking to the growing range of products and services have been developed to hedge against those risks.

Mitigate the risk

When it comes to litigation costs, there are a number of options available to mitigate the cashflow and risk implications. As we discuss in more detail in this Insight, these include:

• Insurance: Policies are available to cover the risk of being ordered to pay your opponent's legal costs. After-the-event insurance can be taken out after the dispute has arisen, but insurers will want assurance that you have a good (greater than 60%) chance of winning the case, and the significant premium will not be recoverable from your opponent.
• Contingent fee agreements (CFAs): A CFA is a risk-sharing arrangement between the business and its lawyers in which some element of the fees is only payable on condition of winning the case. It is also possible to have a "no win, no fee" damages-based agreement (DBA) under which the lawyers take a percentage of the damages recovered in return for agreeing that no fees are payable if the claim does not succeed, but the use of DBAs is rare.
• Third party funding: Specialist litigation funders will finance all of part of a claimant's costs in exchange for a fee payable from the proceeds recovered from the other side (usually a multiple of the funds provided), often in addition to a percentage of the damages recovered.

In deciding whether to offer funding and, if so, on what terms, litigation funders will look at many of the factors discussed above, such as the merit, value of the claim and enforceability of a judgment. The message from funders through the pandemic has been that funding is available and the market continues to innovate.

In addition to the more established options listed above, litigation funders, insurers and new entrants into the market are broadening their offering to include portfolio funding (which acts like a revolving credit facility, available to fund several on-going disputes) or funding for the enforcement of judgments already obtained. Some are even willing to purchase claims in their entirety; they will then pursue the claims themselves and retain any proceeds recovered.

Don't delay

With all of the other priorities businesses have right now, starting a new claim, with the cost and uncertainty that brings, can be a daunting prospect. But leaving the dispute on the back burner can be detrimental and is not to be recommended. Delay can be fatal as the other party may seek to argue that any breaches of contract have been waived and there may be a risk that the claim becomes time-barred (particularly with corporate disputes, which are often subject to short contractual limitation periods). And with the passage of time, memories fade and evidence can be lost.

If you think you have a good claim, consider taking action now. Treat the claim like any other asset of the business and take action to help you realise its value.  Be sure to reserve your rights expressly while you attempt to resolve the dispute commercially and consider whether you need to bring a claim and agree a stay to avoid any limitation issues.

Taking up third party funding or insurance will reduce the potential upside for the business, but will significantly mitigate or even remove the cashflow and costs risks of litigation. Tactically, it can also put you in a stronger position to settle the dispute if you can show that you have prepared for litigation and reduced your own risk. The effect can be to turn a cost centre into a profit centre for the business, which at times like these can be an attractive proposition.

If you would like to discuss the options for pursuing your claims and managing the risks to your business, please contact a member of the Osborne Clarke Disputes team.