Can You Afford to Fight? Rethinking the Cost of Commercial Litigation
Litigation is inherently expensive. For many businesses considering litigation, the question is no longer “Do we have a good claim?” It is also “Can we afford to pursue it?”
For a business with a potentially valuable commercial claim, the cost of litigation can be a significant barrier. But what if the business does not have to fund all of that cost itself?
That is where third-party litigation funding can provide an interesting alternative.
Third-party litigation funding involves an independent funder financing some or all the costs of a case, usually in return for an agreed ‘success fee’, often a portion of the proceeds recovered. For a plaintiff with a strong commercial claim but who does not want to commit significant capital to pursuing it, litigation funding can be an attractive proposition.
The position in Northern Ireland
Third-party litigation funding is much more established in England and Wales than it has historically been in Northern Ireland.
However, the Northern Ireland Civil Justice Review recognised third-party funding as a potential alternative source of litigation funding and highlighted its potential to facilitate access to justice.
Conditional Fee Agreements (CFAs), commonly known as ‘no win, no fee’ arrangements, and Damages-Based Agreements (DBAs) are not permitted in Northern Ireland in the same way as they are in England & Wales. This has created some uncertainty around the availability and use of third-party funding.
There is an important distinction, however, whereby third-party funding shifts the financial risk of litigation to an independent funder in return for an agreed fee or share of the recovery. CFAs and DBAs, by contrast, shift the cost risk to the law firm.
Therefore, whilst third-party funding is not commonly used in this jurisdiction, they are permitted and enforceable pursuant to the Access to Justice (Northern Ireland) Order 2003.
For commercial disputes, I think there is considerable potential. There are businesses with potentially valuable claims that simply do not want to take the financial risk of funding litigation themselves. There are also businesses that could afford to fund litigation but would rather deploy their capital elsewhere.
Litigation funding potentially gives both groups another option
What are the benefits?
The most obvious benefit is the ability to pursue a claim that might otherwise have been difficult to pursue because of the costs involved.
A business may have a claim worth millions of pounds but be unable or unwilling to spend hundreds of thousands of pounds in legal fees and disbursements to pursue it. Funding can allow the business to pursue the claim without having to commit that capital itself.
There can also be a cash-flow benefit. Even a well-funded business may prefer to keep its cash within the business rather than tying it up in litigation for several years to resolve. Funding can effectively turn litigation costs from an immediate business expense into a cost payable from the proceeds of a successful case.
There can also be a strategic benefit. A funder will undertake its own assessment of the merits and economics of a case before committing its money. Obtaining funding requires a plaintiff to demonstrate that its case is sufficiently strong and that the potential recovery justifies the investment.
Funding is not free
The obvious downside is that the funder expects a substantial return. If the claim succeeds, the plaintiff will not receive the entirety of the damages recovered. The amount payable to the funder will depend on the funding agreement, but the funder’s return can represent a significant proportion of the recovery.
That means funding needs to make commercial sense. A £5m claim is not necessarily a good funding opportunity if the likely costs are £3m and the chances of recovery are uncertain. Equally, a £500,000 claim might be very attractive if the costs are relatively modest and the prospects of success are strong.
The Plaintiff also needs to consider the relationship with the funder. The solicitor’s duties remain owed to the client, but the funder will naturally have an interest in how the litigation progresses. Funding agreements therefore need to deal carefully with issues such as settlement, control of the litigation and what happens if the case changes materially during its lifetime.
After the Event Insurance
After the Event insurance (ATE) is another important consideration. One of the major risks of litigation is not simply paying your own legal costs. If you lose, you may also face a significant liability for your opponent’s costs. ATE insurance can protect against that risk.
Where litigation funding is being sought, it is often the case that a funder will want ATE insurance in place to provide protection against an adverse costs order. That makes sense from the funder’s perspective. If it is prepared to put substantial sums into a case, it does not want the investment exposed unnecessarily to adverse costs.
For the plaintiff, ATE can therefore provide an additional layer of protection and make the overall funding package more attractive.
However, ATE insurance can also be costly depending on the context of the claim, and consideration should be given to this alongside the funder’s costs.
It should also be noted that ATE premiums are typically unrecoverable in the jurisdiction of Northern Ireland.
Is it right for every case?
Absolutely not.
The costs of funding, the costs of ATE insurance, the strength of the claim, the likely recovery, the anticipated duration of the litigation and the risks involved all need to be considered carefully.
Litigation funding should not be viewed simply as a solution for a claimant who cannot afford litigation. It can also be a commercial tool for managing risk and capital, allowing businesses to pursue claims while limiting the amount of their own money exposed to litigation.
If a business has a strong claim, significant potential recovery and a desire to limit the amount of its own capital exposed to litigation, third-party funding may be worth exploring.
As litigation becomes increasingly expensive, I suspect we will see more businesses in Northern Ireland asking not just “Can we win?”, but “What is the best way to fund the fight?”.
Litigation funding will not be appropriate for every case, but for the right dispute it can provide an alternative way of managing the financial risk of litigation.