People often tell me that litigation is a “black hole” and that no-one emerges from it as a winner – except the lawyers.
As Head of Thomson Snell & Passmore’s Dispute Resolution Department, you will not be surprised to hear that I disagree with this. We pride ourselves on providing our clients with outstanding service, and part of that service must be (and is) advising them of what is in their best commercial interests bearing in mind the situation they find themselves in. Businesses and individual clients end up in disputes over all sorts of matters, whether wanting to take action against another party or being on the receiving end of a claim. Whatever the dispute, we will take matters on a stage by stage basis with each client, providing a clear budget for the cost of each stage and a recommendation as to whether the likely benefit of undertaking the next stage of the work justifies the cost. For example, a client with a large potential claim may well be advised to incur the cost of instructing us to review the papers and provide our initial advice in a meeting. If our advice is that the prospects are relatively poor, we may advise that it is worth our being instructed to write a letter of claim and to put forward the best case that we can but that if this does not lead to early negotiations and a settlement whereby the client comes out with some money in his pocket (net of legal fees), the case then be taken no further. Or where a client is on the receiving end of court proceedings that have already been issued and the prospects of defending successfully are poor, we would probably recommend filing a Defence which puts forward the most robust arguments possible, so as to build up a negotiating platform, and then either seeking to negotiate, to mediate or putting in a “Part 36” offer so as to shift the costs risk to the opponent if that offer is unreasonably refused and the case proceeds to trial.
But what if a client cannot afford to pay for the work that we have recommended, even though the cost-benefit analysis makes sense? Or what if a client can afford it but does not want to put its own money at risk? Once court proceedings have been issued (but not before), there is an extra layer of risk too, namely that the losing party can normally be expected to bear about 2/3rds of the winning party’s costs as well as their own. Clearly this extra layer of risk is taken on board when we provide our cost-benefit recommendation, but the client may not want to bear that risk or the risk as regards its own costs.
That is where 3rd party funding comes in. Where a client has a good claim worth 4 – 5 times the total amount that the client is likely to have to spend on our legal fees and other expenses associated with the litigation (ie experts’ fees, a barrister’s fees, court fees and insurance etc), calculated up to trial, we are likely to be able to offer a risk-sharing arrangement which involves ourselves and a 3rd party funder. The normal set-up would be that the client pays 30% of our fees as the case proceeds (and 90% of that is covered by the insurance so that if the case is lost, the client’s net exposure for costs is 3% of our fees) and the 3rd party funder pays another 30% of our fees as the case proceeds, together with all expenses. We put the remaining 40% of our costs at risk, so that if the case is lost, we do not get paid for that 40%. As this is “non-recourse” funding, the 3rd party funder writes off its entire investment if the case is lost and the insurers will meet the client’s liability for the opponent’s costs.
The downside? If there is a court award of damages or a successfully negotiated settlement, the funder will take its investment and somewhere between another 120 – 200% of the amount it invested in the case from the damages / settlement sum. We will take the remaining 40% of our costs and a success fee (no more than 100% on that 40%) from the damages / settlement sum, and the client receives the rest. This should be at least 50% of the overall damages / settlement sum.
So there is a price to pay, but if the client’s appetite for risk is very low and/or the client does not wish to put its own resources at risk to pursue a good claim, there is a way in which the client can still recover a good proportion of the claim value. We call it “virtually risk-free litigation.” Assuming the costs are proportionate to the value of the claim, it means that our clients can have access to top quality barristers and experts and that they can demonstrate an ability to meet their opponent’s costs if a security for costs application is made – so a true David and Goliath claim can be run all the way at minimal risk to our clients.
None of the scenarios described above are a “black hole” where money just disappears into the pockets of the lawyers, and the clients are the losers. On the contrary, our clients’ commercial interests are paramount and all these scenarios are designed very much with that in mind
Nick Horton is a Partner and Head of Dispute Resolution at Thomson Snell & Passmore LLP. He can be contacted on 01892 701313 or firstname.lastname@example.org