2020-02-29
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How funding can reduce exposure to risk

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Posted by Gemma Carson on 12 November 2019

Gemma Carson Partner - Head of Dispute Resolution

The costs of litigation can be substantial and the potential costs exposure in the event the claim is lost can be the reason good claims are not pursued.  A working example of how funding solutions can reduce a litigant's cost exposure is set out below.

Conditional fee arrangements, backed by insurance, can be better understood by clients if they are explained in terms of the likely overall financial outcome if the case is won or lost.  The basic principle to focus on is that the less the claimant invests financially in the case, the less they get back when the case is won.

A practical example

  • A client with an annual turnover of £1.5m has a contract dispute worth £750,000.
  • The company is rapidly expanding and needs all available capital to invest in expansion.
  • Litigation is a distraction from business as usual and the directors don’t want to invest money in it.
  • The directors are also concerned about the potential liability for costs if the dispute is litigated.
  • The solicitors have estimated £350,000 in respect of their owns costs.
  • It is likely that the opponent’s costs will be a similar level (£350,000)

Funding the claim privately, on an hourly rate basis (no funding arrangement in place)

If the claim is successful and the court awards £750,000 in respect of damages and £250,000 towards the claimant's costs (being  a typical level of recovery where the claimant's costs total £350,000) the likely financial outcome would be as follows:

  • 1 million received
  • Less £100,000 irrecoverable costs and expenses
  • Less £250,000 costs recovered and payable to claimants solicitor
  • =£650,000 overall recovery

If, however, the claim is lost, there is no damages recovery and the claimant is left with the total bill for their own legal costs and expenses of £350,000 plus a likely bill of £250,000 towards their opponent's costs and expenses.  A total loss of £600,000. Many claimants would understandably shy away from this potential costs exposure.

How funding arrangements can limit your exposure to risk

If a Full Conditional Fee Agreement and After the Event Insurance is used the outcome on win or lose would be altered as follows:

Win

  • 1 million received
  • Less £100,000 irrecoverable costs and expenses
  • Less £250,000 costs recovered and payable to claimants solicitor
  • Less success fee of £50,000
  • Less ATE Premium of £100,000
  • =£500,000 overall recovery

Lose

  • No Damages received
  • No costs due to solicitor in respect of your legal costs
  • Insurance Premium may be self insuring meaning nothing is payable
  • Insurance Premium meets the costs ordered to be paid to the other side
  • Insurance Premium meets your disbursements and expenses
  • = £0 liability

The more you put in the more you get out

By putting in place appropriate funding, a claimant can potentially reduce their financial liability should the claim fail.  Whilst the use of funding arrangements reduces the amount ultimately received if the case is won, it is the price of protection should you lose.

Businesses would often prefer to buy off the risk of losing by accepting a lesser amount on success. The cost of buying off that risk in this example is £150,000, significantly less than the potential financial exposure of £600,000 in the example where no funding is utilised. The directors can still use their available money to expand the business and have the litigation funded. The alternative is that the claim is not pursued because the financial risk of losing is too great and could be damaging to the business.

About the author

Gemma Carson

Partner - Head of Dispute Resolution

Gemma specialises in commercial litigation and has a wealth of experience in dealing with all types of commercial contract dispute.

Gemma Carson

Gemma specialises in commercial litigation and has a wealth of experience in dealing with all types of commercial contract dispute.

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