2020-05-14
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Pursuing claims when your business is cash poor

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Posted by Gemma Carson on 13 May 2020

Gemma Carson - Head of Commercial Disputes and Litigation
Gemma Carson Partner - Head of Dispute Resolution

The COVID-19 outbreak has already had a significant impact on the performance of business to business contracts across the country.  The cancellation of events, frustrated supply chains and inability to perform services has left many businesses in a precarious position with ongoing overheads and limited income.

The uncertain climate will mean that many businesses will shy away from disputes and litigation, shelving potentially good claims as a result of cash poor balance sheets and potential fighting funds being diverted to more critical areas of the business. But when directors are faced with stark decisions over their own business’ solvency, it is important that they are aware of all the available options to maximise the cash coming in.  Good claims are business assets and, where funds can be swiftly recovered on those claims, can be a welcome influx of cash.

Getting a third party to finance your claim

Businesses do not need to use their own cash to pursue claims, they can instead use the funds of a third party to pursue it.  In return, the third-party funder takes a cut of the balance recovered.  Whilst this reduces the overall sum received, it turns an otherwise shelved claim into cash.

Third party funders invest in the litigation by funding the legal fees in exchange for a fee (usually a cut of what is recovered). Third party funders’ fees are typically calculated as a multiple of the cash invested or a percentage of monies recovered, allowing businesses to calculate at any one time, what they stand to gain in pursuing the claim or negotiating a settlement.  If the litigation is lost a third-party funder will lose their investment and no sums will be repayable meaning that the financial risk in pursuing the claim is also reduced.

What if the other party is cash poor too?

Businesses that had already performed their contractual obligations prior to the announcement of the pandemic, may now find themselves unable to obtain payment from the other party as a result of cash poor balance sheets across the country. 

Starting court action against a business that genuinely has no cash to pay does not make commercial sense. However, in an environment where businesses will now be prioritising those creditors who ‘shout loudest’, prompt action can be critical and, despite issues with cash flow, many businesses will be insured or may be able to benefit from a parent company bail out.

Strategically, pursuing a good claim through third-party funding, may also benefit your business longer term if it establishes stronger market positions or removes a competitor completely.

It is sensible to take early advice on the merits of your position, to consider what funding might be available if the merits are good, and to take steps to protect your position.

I don’t want to damage the good business relationship

Many parties to a contractual arrangement will have long standing, good working relationships and concerns over the ability to pay, which have only arisen as a result of the pandemic, need not be the cause of a relationship breakdown.  It is critical to communicate regularly with the other party about your respective positions, plans for payment, terms and conditions of payment and what steps each party can take in default.  This may include a mutual agreement to vary the existing contractual payment terms while providing both parties with the certainty required.  There may also be security options which could be explored with the right advice.

Protecting your business

Even if businesses can afford to wait for payment, they still need to be careful not to waive their standard payment terms or ability to demand payment within a specific timeframe at a later date. It should be made clear in writing what the terms of any payment plan will be and the consequences for further default.  This will provide both greater certainty going forward and terms that can be enforced at a later date if necessary.

Businesses that cannot afford to wait, because to do so would risk their own insolvency, need to consider taking steps to force payment.  They need to be careful that other parties are not hiding behind the pandemic as a reason to delay payment to protect their own cash flow.  

The availability of funding

In assessing any potential investment in litigation, a third-party funder will take account of the value of any claim, the prospects of it being successful and the prospects of recovering any monies awarded as a result of the litigation. We are experts in dealing with the funding market and can explain clearly the various, innovative ways in which you can balance risk. You can read more detail about how various funding methods can reduce your exposure to risk on our website. If a claim’s prospects are strong enough, we will find a suitable funding arrangement to enable you to seek redress and manage the costs of litigation.

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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