Paying your lawyer whether you win or lose a legal case is not your only option, but most companies are unaware of the alternatives. Mark Beaumont explains how to share the litigation risk.
As a business leader, you're facing tough decisions and moments of uncertainty all the time. In litigation, uncertainty is everywhere and that can mean many more tricky decisions for you.
There is the obvious issue of whether you are likely to win or lose the case, but you'll also face uncertainty around the cost. What will your legal fees be? Can fees change over time? Will you recover all your fees if you win? Will you have to pay the other side’s legal bill if you lose? How long will all this go on for, tying up your cash?
Whether you are contemplating the bringing of a claim or find yourself having to defend one, these questions are hugely important.
Legal fees were once simply the number of hours your legal representatives worked, multiplied by their hourly rate. Win, lose or draw, the lawyers would be paid the same, and the client would take all the risk.
Many lawyers still like to work in this way, but now there are alternatives. Businesses need to be commercially astute in their dealings with their legal advisors. Discuss risk-sharing fee structures such as fixed prices or capped fees. Find out about Conditional Fee Agreements (CFAs) that make legal fees conditional upon success in the case, and Contingency Fees or Damages Based Agreements which, from next April, will allow lawyers to be paid a pre-agreed percentage of any damages recovered.
Explore after-the-event insurance products that cover your opponent’s costs in cases that lose, and the Third Party Funding (TPF) of litigation. There is a rapidly growing market for TPF as it provides a risk-free way to pursue litigation, since the funder bears all of the costs and risks.
The funder will assess your case and make a commercial decision about investing in it. They will look at the damages being sought (usually in excess of £250,000), the likely costs in bringing the action, and the typical time frame for the investment to produce a return (i.e. how long the case is likely to go on for).
If the maths works, the funder will pay every single penny of your legal fees, reducing your exposure to zero. In return for paying and taking all the risk, the funder will seek a share of any damages awarded.
Funding litigation on a non-recourse, off-balance-sheet basis allows businesses to turn damages claims into a valuable asset, which they can access for no cost and no risk.
These are all crucial tools in managing risk in litigation, but not all lawyers will feel comfortable discussing them.
One reason for that is that many lawyers don't understand all the issues around costs and funding. Another is that they may prefer to retain the status quo, where they are paid regardless of whether they achieve a good result for their client. A third reason is that most lawyers are not business people, and can't always appreciate the needs of their clients.
This is despite the new SRA Code of Conduct (the 2011 Code) which focuses on the outcomes for clients and increases the bonus on Solicitors to ensure their clients are well informed.
Solicitors are required by their own Code of Conduct to advise clients on the various funding options available. If they don't they risk a claim of negligence. These claims are increasing at an alarming rate.
If you think your business has a claim or it has been threatened with legal action then there are specialist cost solicitors that can provide independent advice to both solicitors and businesses on the best way to fund litigation. With so many options for funding litigation available, uncertainty about legal costs need not be your concern, and should not be a reason for withdrawing, bringing or defending a claim if you have a strong case.