Litigation has been perceived to have a negative impact on business resources, taking up room on the balance sheet and avoided where possible irrespective of the merits. The financial risks of litigation can be high. These financial risks coupled with the management time litigation takes up (when such time could be better spent on the day to day running of a business) it is not unsurprising meritorious claims were and are not pursued.
The legal department in most companies is a cost centre and a significant one. The legal department will generally have budget constraints. Keeping a handle on the budget can be difficult particularly where litigation is involved. Costs estimates can be revised several times during the lifetime of a case and if there is a deep pocketed opponent on the other side, running costs up to frustrate the litigation (particularly where the opponent perceives the plaintiff has a limited budget) can be a devastating opponent tactic. Add to this a pandemic which has put considerable stress on a large number of businesses, a business may decide to cut its losses and not pursue even the most meritorious of legal actions.
EVOLVING APPROACH TO LITIGATION
Litigation with the use of funding and/or ATE insurance was a lifeline to some businesses following the Global Financial Crisis in 2007 and it is set to become more so in the present day.
With the Covid Pandemic causing a somewhat unstable financial outlook, the approach to litigation, described above is changing. Government agencies are considering the use of funding and insurance to pursue legal actions. In the past, these agencies would self-fund litigation. However, with budgets under significant pressure all potential methods of saving costs, transferring risk and increasing revenue are under review.
Legal Departments are also taking note, with litigation funding enquires increasing significantly. Where once potential litigation would take up a large part of the legal budget and result in the need to report the action as a liability on the company’s balance sheet, litigation is now being run with the assistance of litigation funders and ATE insurers. Leaving the department’s budget intact and ensuring the balance sheet is not adversely impacted (see below). Any recoveries from the funded litigation is income into the business and why litigation is sometimes viewed as an asset rather than a liability to businesses. Making what was a cost centre into a profit centre.
BALANCE SHEET LIABILITIES
When there is potential litigation on foot, the balance sheet for a company should show an estimate of the financial exposure to the business were the litigation unsuccessful. As part of this estimate, the exposure will include an estimate of opponent costs (the amount you will normally have to pay the opponent if you lose your case). Insurance products can remove the opponent costs exposure and can therefore become an essential tool for Chief Financial Officers in removing the associated costs from the company’s balance sheet.
Ancillary products to the insurance policy, namely a Deed of Indemnity, can also replace a cash payment into court or bank guarantee as security for cost. An ATE (after the event) insurance policy covers the opponent costs in the event you lose your action. As an extension to that policy, a deed of indemnity can be purchased with the aim of replacing the traditional form of security. Whether or not a Deed is appropriate from a financial perspective (there is a fee payable) will depend on the circumstances of the business.
REVIEW UNREALISED CLAIMS
Here is a list of the types of litigation that are predicted to grow:
• Contract breaches
• Workplace agreements – particularly government
• Suppliers and creditors
• Class actions e.g. border force
• Commercial debts
• Patent infringements
LITIGATION FUNDERS AND INSURERS ARE PROVIDING A LIFELINE
The litigation funding industry globally has come under fire in recent times, with articles stating “access to justice has been used as a flimsy cover for lawyers to access more riches.”
However, it is difficult to see how some ‘hard up’ companies would be able to enforce their legal rights and pursue legitimate and meritorious litigation without the cash injection and transfer of risk that is provided respectively by the litigation funding and ATE insurance industries.
The civil justice system is by no means a perfect system (nor are other civil justice systems around the world) but the flaws of the system would be significantly more severe if a plaintiff could not obtain litigation insurance and/or funding to pursue meritorious actions.
“… view litigation as an asset class and, in time, we believe more CEOs and CFOs will do so too.” They continue: “With redundancies and insolvencies skyrocketing in the UK, litigation funding provides an option to bring good legal claims which could help benefit the overall financial position of cash-strapped companies seeking to survive and recover from this awful pandemic.”
If you are interested in discussing how this process could work specific to your business, feel free to make a time to speak with one of our advisers.