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Third parties take the strain off the cash flow in a dispute

For a price – and a hefty one – third party funders will back you in a dispute and take away the headache. By Alastair Young

Experience tells us that when cash is tight the number of disputes often increases sharply. Parties are no longer willing to take a hit and write claims off but are rather committed to the recovery of sums owed.

When times are tough, cash counts, and claims will be pursued. But the litigation process is long, costly and unpredictable. It may take months or even years for claims to conclude and only at that point will the successful party have a prospect of receiving the money due.

Many businesses cannot commit to paying large sums for legal and other professional fees month after month. In the current economic climate of financial uncertainty businesses will certainly be exercising caution when it comes to expenditure.

The good news is that there are a number of options for funding litigation to ease the pressure. An increasingly popular solution for cash-strapped businesses is third party litigation funding. This is where a third party, usually an investment company, will agree to cover all or part of the costs of the litigation in return for a percentage of the proceeds, should the claimant be successful.

Major benefit

This can be very appealing for businesses, as it provides a means to fund litigation that otherwise a business might struggle to find the resources to support.

Further, if the case is lost and the business is liable for the other party’s costs of the litigation, the third party funder will usually agree to pay these as well.

A major benefit for businesses is that by removing the ongoing liability for fees for the life of the litigation, contingencies do not have to be made in the financial forecast to allow for the cost of the litigation.

Usually the unpredictability of expenditure associated with litigation makes forward financial planning difficult. It is not easy to plan how much litigation will cost as it is unpredictable and very much dependent on the issues of the case.

But parties are likely to be liable for solicitor’s fees, barrister’s fees and in some circumstances expert’s fees. Third party litigation funding takes away this headache for businesses and ensures that there are no nasty surprises regarding additional costs.

Money in the pot

It will also be agreed at the outset with the Third Party Funder what proportion of any eventual winnings will go to them.

The recent Office of Fair Trading enquiry represents a potential opportunity that may interest the investment companies offering third party litigation funding. In the event that the OFT establishes that certain companies are liable for breaches of competition law, this will open up the way for third parties who have suffered losses as a result to bring claims.

These are likely to be attractive to Third Party Funders as the breaches of competition law have already been established by the OFT; all that would need to be demonstrated was that another business has suffered a loss as a result of this breach.

It is worth noting that, although the companies offering funding are risk-takers, generally only cases with good prospects of success will be taken on. Litigation is inherently unpredictable and risky, so the funder will only want to fund a case with merits. Also, cases where eventual awards are going to be substantial are more attractive to funders, as these awards justify the risk.

In addition, the other side must be in a position to pay if you are successful. Funders clearly do not want to fund litigation only to find out at the conclusion of the matter that there is no money in the pot to reward their risk.

Unsurprisingly, the offer of funding does not come cheap. It is not uncommon for Third party litigation funders to take upwards of 25 per cent of the eventual winnings, sometimes even 50 per cent.

It is also important to remember that legal and expert’s fees are not the only costs when involved in litigation. Management time will be lost preparing for the trial.

Employees may be required to be witnesses and will have to give statements and attend court if it gets to trial.

Furthermore there will be regular dialogue between the business and lawyers to collate the necessary evidence.

Although third party litigation funding may remove the financial burden of the litigation it will not remove the costs to the business in terms of time.

Alastair Young is director of the construction department of law firm HBJ Gateley Wareing

Make dispute insurance part of your risk protection

If your company is perceived to be vulnerable in defending a contractual or cash flow position then someone may put this to the test. The following kinds of problems may be experienced:

• Payments being withheld by main contractors, causing cash flow problems for subcontractors

• Contentious or spurious claims on non-performance or final payments by the client or contractor to reduce or avoid the final payment

• Multi–party lawsuits to delay payment in the knowledge that some businesses, which are due payment, may not survive.

As part of a risk protection programme, contract disputes insurance provides the following protection:

• Financial – policyholders’ legal costs are covered with regards to arbitration, county and high court costs and opponents’ disbursements, for a fixed premium

• Operational – policyholders can continue their ongoing activities knowing that operations will not be drained of cash whilst a contract dispute is being resolved

• Emotional – time, effort and resources are less strained as the contract dispute becomes a professional issue, for which there is tangible support, rather than an all-consuming one.

The insurance market has evolved to provide a combination of before-the-event and after-the-event cover, which effectively means the policyholder pays one fixed premium to cover the entire legal process.

This also means insurers are protected against large losses, so this will be a normal part of an annual insurance programme and a company’s risk protection programme rather than a one-off.

Robust contract dispute insurance protection enables you to emerge successfully from a contract row and possibly avoid the dispute escalating in the first place.

James Garratt is managing director of UK & Global Insurance Brokers