As in businesses of any size, there comes times when SMEs get into disputes with other businesses – whether over contracts gone wrong, goods not being delivered or just unfair dealings – and more often than not, they will be facing off against a larger foe with deep pockets to match.
It becomes a modern-day David vs Goliath. The big business Goliath has the money to hire the best legal counsel to put themselves in the best position to win the case. On the other side of the table, the SME doesn’t have the money to commit to the legal proceedings when the cost and time for case is undetermined at the outset.
How litigation funding can help
This is where litigation funding can assist. Such funding is a tool to create symmetry between the Davids and the Goliaths of the business world. If used effectively, litigation funding creates an equal playing field.
The SME market is often under-serviced by litigation funders. The larger funders can focus their attention on “cherry picking” cases that offer them the best commercial return for the capital they deploy. However, this is slowly changing. Recently SMEs have been given a greater choice as litigation funders have emerged who place more focus on the SME market, supporting loans typically between £250,000 and £2.5m.
5 top tips to consider before using litigation funding
Exploring the available litigation funding options on offer? Here’s what you need to know:
Best litigation funders will tailor a solution
As the cost and length of the case are undetermined, many funders will provide a tailored commercial solution or solutions that the client will decide on, based on their own set of case circumstances and commercial objectives. The finance proposal they make will often take into consideration the size of loan required, the prospects of success, the expected case duration, as well as the potential settlement that could be returned. In theory, there could be a typical market rate relevant to specific models, each case is financed in isolation and not currently subject to specific limits.
Funding covers a range of costs in the lifecycle of a case
Many funders offer finance that encompasses the element of “own” legal costs not deferred to case conclusion by their law firm’s conditional fee agreement (CFA), all disbursements and, in some circumstances, the advance costs of an after-the-event (ATE) insurance policy.
The ATE policy provides indemnity against the risks of a losing case and the need to repay borrowed capital and the potential for adverse costs. Some litigation funders do not require the use of an insurance policy, though they may require a substantial percentage share of the awarded settlement in return for taking on this risk.
The litigation funding market is self-regulating
The market has gone to a huge effort to self-regulate in the absence of specific legal regulation in terms of providing commercial loans for the purpose of pursuing a legal dispute.
In fact, numerous large funders that focus predominately on multi-million-pound cases have gathered together to form the Association of Litigation Funders, thereby adhering to a voluntary code of conduct.
You should expect to be treated fairly and with transparency in relation to how much a litigation loan will cost – and especially whether that cost is proportionate to the settlement you will receive if you succeed in the case. But it is always advisable to seek independent advice when considering a litigation loan, both in terms of advice on the terms of the loan and any inherent risks.
Seeking legal advice
Legal professionals are always obligated to act or advise in the best interests of their client. Crucially, this includes making them aware of the alternative ways of financing the legal costs of their case and potential funders who could provide the right finance.
This doesn’t mean promoting one funder over another but should mean detailing the options for the client to decide which funder is suitable in their specific set of circumstances.
Communication is key
Here at Quanta we are increasingly seeing funders take a proactive approach to all the parties involved in the litigation process to make sure that the approved cost schedule and communicated milestones remains consistent with the terms and expectations that were agreed at the outset.
All parties are obligated to maintain regular communication of case progress and disclosure so that it is clear that litigation finance remains suitable and still viable. However, litigation funders are not permitted to influence the outcome or settlement of case (which is part of a complex “champerty” legislation, which restricts any third party holding a commercial interest in a legal dispute).
Simon Dawson is a managing director at Quanta Capital