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Managing Litigation: Cash (flow) is King

Ed Starling, Partner at Wedlake Bell, addresses what CFOs and FDs need to be aware of regarding litigation and different funding options that are available to them

The headlines paint a worrying picture about the British economy, with Brexit, general election(s) and trade wars having an impact. Uncertainty also tends to lead to a rise in disputes. Whether it be a contract dispute, performance issues, shareholder or partnership dispute or professional negligence claims against an adviser, they all necessarily involve a lot of hard work, preparation, management time and indeed cost. In some circumstances, disputes can be used strategically to get a competitive advantage over competitors.

There is no point pretending that litigation cannot be a long and costly process – it can. No matter the amount of careful preparation, strategy and management there are many areas that are not in your direct control. Even using tools and strategies to resolve a dispute as quickly and as cost effectively as possible so that management and staff can get back to the day job, cannot help predict the outcome and cost of the legal case very difficult.

However, if  a dispute is unavoidable, one of the key concerns of the directors and finance team is the cost of the litigation. This could involve not only the party’s own solicitor and barrister but also potentially expert witnesses. In the absence of insurance, you also need to factor in the provisioning for a lost case and the risk of having to pay the winning party’s costs. To respond to the uncertainties, the legal market is becoming more open to other funding options that move away from the traditional hourly rates model. Even the court system has changed in order to promote proportionality and cost-effective access to justice.

Options for funding a legal case

So what are the broad options for funding a legal case (whether as the claimant or the defendant):

  1. Paying the legal advisers on an hourly rate. This was (and in many firms is) the traditional model. It works in the sense that you get what you pay for but it does not assist clients in trying to manage their budgeting and cash flow forecasting especially as it is often very difficult to forecast the costs of a piece of litigation. Despite this, legal advisers are able to offer fixed fees, caps or other options for funding where the lawyers share the risk with the client. Some stages of the litigation are easier to model than others and therefore it does give some scope for agreeing and obtaining certainty of cash flow for relevant stages. One size doesn’t fit all and it may be that in a piece of litigation you may have different arrangements for different stages.
  2. “No-win no fee” arrangements. These are operated under Conditional Fee Agreements (CFAs) and can take a number of different forms. However, the basic premise of a “full” CFA is that the client only pays the solicitor (and possibly barrister) if there is a “win” – i.e. the case settles or it is successful at trial.  If there is a “win” the legal advisers would usually be entitled to an uplift on their standard fees as the quid pro quo for not being paid for the ongoing work and taking a risk in fighting the case on behalf of the client. Whilst this model is often associated with personal injury and PPI type claims, they are widely used in some very sophisticated and complex litigation and if the legal advisers are experienced in operating these types of cases, they can be a really useful tool for clients to pursue litigation (with little impact on cash flow). But, this is not just an option if cash flow is an issue, it is still a sensible tool to spread the risks of litigation and frees up available resource for the wider business.
  3. “Discounted” or “Partial” CFA. This is a variant of “no win no fee” arrangement where the legal adviser gets paid a certain amount of their ongoing costs and the remaining costs are “on risk” and will only be paid if there is a “win”. For example, the arrangement might be that the lawyer is paid 50% of their usual hourly rate on an ongoing basis. The remaining 50% that would normally be charged is “on risk” and will only be paid if there is a “win”. The legal adviser will also expect an uplift as a quid pro quo for taking the case, but typically the uplift would be lower than a full CFA because the adviser is taking less risk (being paid 50% of their fees in any event and irrespective of the outcome of the case).
  4. Litigation funding. This may involve a sophisticated litigation funding outfit or indeed any party interested in funding litigation. This is increasingly used, although it is not as widespread as in the US. The number of specialist providers has increased significantly over the last five or so years and there are some very interesting products. Of course, the litigation fund is not funding someone else’s litigation out of the goodness of their heart – they will expect a return on capital which, depending on the merits of the case, can be significant. However, it does present a different option for funding litigation and taking the cost outside the usual budget process.

At the very least, these are all options that should be considered in a potential dispute. Push your adviser to consider and explain all the options and if the shutters come down, get a second opinion from someone experienced in these funding models.

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