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Courts, fees, and SMEs: What are your options when litigation is costlier than ever?

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In defiance of loud opposition from the legal community and small businesses, on 9 March the government increased court fees – in some instances, by as much as 600 per cent. Seeking redress is now more expensive than ever. Increasingly, the legal system seems to have a high barrier for entry – one that favours litigants with vast resources over those with more slender means. 

With these hurdles in place, an SME owner could be forgiven for thinking justice ultimately isn’t worth the bother. This is a disturbing development: justice will be undermined as important cases are left unheard.

SMEs need to fight back against trends that would price them out of the justice system. Luckily, there are ways to finance your legal battle (upfront fees included) without leaving yourself out of pocket or with a cash flow problem.

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Traditional businesses have been faced with pay-per-hour (PPH) and No Win, No Fee (NWNF) models. The former is flawed because court cases tend to be volatile and full of variables that need to be examined in exhaustive detail: if you win, and you can afford the fees until this point, this is fine – your opponent will assume the financial burden of this very lengthy process. However, if the case doesn’t end in your favour, you’ll have to pay for everything. 

Fortunately, innovations in the legal funding market mean that businesses now have another option to choose from. Third party litigation funding provides perhaps the best way forward for SME owners looking to take their claim to the next level. It’s simple: in exchange for an agreed percentage of any damages (usually 30-40 per cent), the financier will assume the case and all related costs, from legal fees through to lunch money. Usually, this package also includes After the Event (ATE) insurance, which protects the claimant if their litigation is unsuccessful.

While the financial benefits are obvious, in my experience, one of the greatest advantages litigation funding provides is confidence. People like the idea of pursuing justice, but, unsurprisingly, the threat of bankruptcy and personal ruin in the event of failure often wins out. Bigger companies exploit this, wearing smaller claimants down and bullying them into withdrawing their claim.

If people know they are backed by the resources of a third party, they feel far surer of themselves: the support of others serving as confirmation that they have a strong case. Plus larger opponents know they’ll have to go the distance when a funder’s involved, which is often enough to encourage them to settle.

Third party funding has one further advantage over other models: it better protects your financial reputation. After trials, compensation doesn’t normally come in one neat package: instead, money usually trickles in over time, and court expenses tend to be equally messy. This means that win or lose your accounts can – through no fault of your own – look off-putting to potential investors. But with third-party funding (and ATE insurance serving as a bulwark against failure), all of your expenses are unified as one ‘contingent asset’ – so your day in court won’t put undue strain on your financial reputation. In addition, the contingent liability of paying an opponent’s costs are removed from your business’s balance sheet. 

This is very important for SMEs who might otherwise find themselves in breach of banking covenants/arrangements.

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A hike in court fees doesn’t help potential SME litigants, but the most imposing obstacles to full legal redress are psychological: many people are convinced that the system is unfair, they have no options, and that all lawsuits are as trivial as the ones they see on television. 

Of course, there’s no point in pretending that we have a perfect legal system and that courts always reach the right outcomes – but it’s far too soon to despair just yet. Third-party funding can help you even this lopsided playing field. For the willing claimant, alternative finance provides the money and the credibility needed to rebalance the scales of justice.

Michael Lent is a litigation funding and insurance specialist at Annecto Legal

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