Pursuing legal action for a contract dispute 

Contract disputes can be a real headache for SMEs; especially when the other party has more financial and legal clout: so how can you make sure you're best prepared for the struggle ahead?

Contract disputes are one of the most common problems SMEs confront. No-one would say they are ever easy, but they become particularly difficult when there are disagreements between differently sized companies.

All too often, SMEs come up against larger companies that perceive them as a soft touch; ignoring terms in contracts that don’t suit them, simply because they believe an SME won’t spend money on legal action. It’s not surprising that people think this, because business owners generally have limited resources.

No matter how good a contract claim is on its merits, litigation is of course risky. It’s known to absorb time and money, and risks rendering the balance sheet highly unattractive to owners as well as to potential investors. Sometimes, it’s easier to let people get away with breaching contracts than trying to put up a fight.

Before surrendering at the outset however, it’s important to consider all the options. The assumptions about how hard it is for SMEs to pursue contract claims certainly make sense if claims are pursued in the traditional way.

>See also: Company law – transparency and accountability

Old funding models for litigation demand that businesses take all of the risks themselves, paying for everything from lawyers’ fees to court expenses upfront in the hope that a judge finds in your favour, or the other side backs down beforehand. “No Win No Fee” was an improvement, and in a limited way it is (SMEs may no longer have to pay lawyers unless they win).

However, businesses remain seriously exposed: court fees, counsel and expert witnesses are not usually covered by “No Win No Fee” and if a case is lost, the opponent’s legal costs may have to be paid too.

In most business situations, a cost/benefit analysis is conducted before undertaking new projects. When it is done prior to litigation, taking these factors into account, it’s hardly surprising that people have been deterred from pursuing their, meritorious claims.

A commercially viable approach to litigation?

However, it’s now possible for SMEs to pursue their contract claims in more commercially viable ways:  third-party litigation funding lets SMEs turn claims from being liabilities to ‘contingent assets’.

By sharing a percentage of their prospective compensation from their claim – a number that varies, but typically between 10% and 30% – with an alternative finance provider, SMEs can simultaneously pursue their case and insulate their firm against the possibility of failure.

Litigation funders can assume all financial responsibility for legal fees. SMEs thus attain full control over the degree of risk they take on: they can let a funder take on all the risk and pay for everything, or they can invest a fixed fee in return for a higher share of the compensation if they win.

Funders are also better placed to ensure that SMEs get the best lawyers for their contract case. Contractual disputes come in different shapes and sizes. One of the main kinds of dispute SMEs face is the so called “battle of the forms”: this happens when it’s not clear which companies’ standard terms have become the final, agreed upon contract.

Favourable interpretations

Another frequent issue is that different parties interpret the contract in different ways (that best suit themselves!). These subjects sometimes call for different lawyers with expertise in specialist areas such as IT or intellectual property. If a company is in the tech space, they’ll have different requirements to a manufacturing business. So how do SMEs know which lawyer to go to?

Not all lawyers are the same, and their ‘usual’ lawyer may not be appropriate. But, unsurprisingly, lawyers aren’t likely to be upfront about their lack of expertise if they’re likely to get paid anyway! A litigation funder, meanwhile, only gets paid if the client is awarded damages, so they have a vested interest in ensuring the claim is pursued by the best lawyers (at the funder’s expense) in the best possible way.

>Related: Employers split over future of tribunal fees

Perhaps most importantly, litigation funding also takes care of the accounting issue. Potential investors won’t see a disastrous balance sheet: there will be no monthly outgoings on solicitor fees which impact upon EBITDA. Instead the accounts will show a contingent asset – a lump sum representing the potential damages you may be awarded in the event of a successful claim. Business owners (and interested investors) now have a potential windfall to look forward to, with no downside risk.

However SMEs decide to pursue their contract claims, the range of funding options available ensures that going to law can be a commercially sensible option and not merely a luxury. Further, SMEs have no reason to be cowed by an opponent just because they are bigger and more powerful. Now more than ever, SMEs will know that contract claims will be decided fairly and on their merits; not through the size of their opponent’s bank balance.

Michael Lent is a director at commercial litigation funding specialist, Annecto Legal.

Further reading: Perils and pitfalls in negotiating commercial contracts

Praseeda Nair

Praseeda Nair

Praseeda was Editor for GrowthBusiness.co.uk from 2016 to 2018.

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