Last reviewed 2 July 2018

If your business needs to go to court, what are your options when it comes to funding your case? Dave Howell reports.

If your business needs to go to court to defend itself, or to recover unpaid debts for instance, the cost of this action has to be carefully considered. The cost of litigation has continued to rise and paying for the service of qualified solicitors and court costs can easily run into thousands of pounds. Funding this expense is clearly a pressure point for small business owners.

To understand and reform how legal services are provided in England and Wales, the Competition and Markets Authority (CMA) undertook a review to offer recommendations to make the legal services obtainable by individuals and small business more transparent and cost effective to access.

Mike Cherry, FSB National Chairman, said: “Many small businesses could benefit from greater use of legal services, but currently the market is complex and difficult to navigate. Smaller firms can often fail to recognise a problem as a legal issue, or assume a legal resolution to be too expensive, time consuming or risky to pursue. Greater transparency on price and quality of legal services will encourage more small businesses to seek expert advice when necessary. We’re pleased the CMA is now looking to close the gaps in the market we identified, by demanding greater transparency from legal service providers.”

As this review took place in 2016, has it become easier and more cost effective to access the courts and to fund any action that needs to be taken? And does litigation funding offers small business a practical way to manage any legal action they need to take?

Croner-i: Business Essentials spoke with Guto Llewelyn, Associate, Commercial Disputes, Capital Law and began by asking whether it continues to be difficult for small businesses to fund legal action?

“Litigation can be time-consuming and expensive — regardless of the size of your business. But, if you’re a small business, you’re even less likely to want to risk spending lots of time and money on legal action, with no guarantee that you’ll win.

“You could risk financial ruin — particularly if your opponent has big pockets. You might be put off spending (and risking losing) your money on taking them to court. Large firms often have deep pockets — and expensive lawyers — and have a huge financial upper hand. It can be a bit of a David and Goliath situation. But, that’s where litigation funding can come in.”

With civil court costs rising, does this price small business out of the legal system even if they have a legitimate claim to make?

“The costs of litigation can be a real barrier to access to justice. But, litigation funding can be a really good way for businesses with legitimate, decent claims to bring them to court.

“There’s been a surge in third party, or litigation, funding, recently. This means that a financier — usually a large hedge fund — who has no investment in the proceedings, funds the cost of pursuing your claim, in return for a share of the winnings.

“Litigation funding is an attractive option for businesses, for many reasons. Claims are assets. You normally have up to six years to pursue them. There’s no need to leave cash due to your business ‘on the shelf’, when it’s possible to pursue claims without cost and risk.”

What pitfalls should small businesses watch out for when using legal funding services?

“Litigation funding can be a brilliant option — but it’s not without some potential pitfalls: Lots of third-party funders will often employ middle men, like lawyers or underwriters, to second guess the merits of your claim — and this all comes at a cost. Financiers also require a favourable opinion from a barrister (usually paid for by the client) before even considering an application, and then getting their own lawyers to review the claim. Normally, these types of funds will only take on very large claims — so businesses or individuals who have a smaller claim will still be priced out of the market.

“Be aware of ‘no win, no fee’ models that seem too good to be true — they probably are. This model is particularly prevalent in personal injury cases and is often bandied around in advertising campaigns.

“In theory, ‘no win, no fee’ creates better access to justice for people that have good claims but, are unable to pay for them to be pursued. But, you’ll still have to pay for disbursements, such as court fees (up to £10,000 to issue a claim), barrister’s fees (unless they are also ‘no win, no fee’), expert’s fees and an ‘ATE’ (After The Event) Insurance premium to cover the risk of losing and paying your opponent’s legal costs.”

Is accessing legal advice still seen as expensive when compared to accounting or financial advice?

“Legal advice doesn’t have to be expensive. The legal world is evolving. Now, hiring a lawyer doesn’t have to be about them billing you as they go along, implementing the strategy they developed, without any risk to them if it doesn’t work out.

“There are lots of different type of funding models — like third-party funding — that can reduce your legal spend. The legal profession, on the whole, is recognising that it needs to keep up with innovation to remain sustainable. That’s why there are so many ‘LawTech’ initiatives out there — all aimed at working more efficiently.”

Will Brexit have any impact on the cost of accessing the civil courts?

“It’s difficult to say with certainty. But, given the level of uncertainty in the marketplace, businesses and individuals alike want as much certainty as possible — particularly where cost is involved. If lawyers are offering a way of handling their work that offers this, in an innovative way, they will grab it with both hands.

“If lawyers obsess about time — and fail to listen to what the client wants — they will lose business. It will become even more important to agree budgets from the outset. The rest of the business world is used to requesting or having to adhere to fixed fees and careful project management. The legal profession should not be the exception — there are opportunities for lawyers and clients who embrace it.”

The cost of law

Funding any kind of legal case can be an expensive exercise. However, with the rise of litigation funding, the cost of such cases which used to be a major barrier have been somewhat removed. Small business owners should still pay close attention to all the fees and costs they could incur before moving forward with their case.

Ed Challinor, CEO and Business Analyst, Smileworks advises: “Small businesses may find themselves under attack from their better funded competitors who want to cause them headaches and will adopt a “trial by costs” approach or just try to put the frighteners on. When this happens, it can be stressful and sometimes downright frightening. Most people can be reasoned with and meeting with your opponent and looking her in the eye is worth 100 letters — so try to arrange a meeting to see whether the claim is real or fabricated.”

Services such as Money Claim Online do offer one channel for recovering fixed amounts of money. When more complex cases need to be brought, or as a small business owner you are defending a case brought against you, due diligence is vital to locate the right legal support at a price you can afford.

Your checklist

  • Consider carefully any legal action you want to take against another business or individual. Can your issues be resolved through mitigation?

  • Think about the kind of case you need to bring or fight. Matching the right funding to your legal needs is important to gain value for money.

  • Look closely at any “additional costs” of no-win, no-fee legal services. Also, be clear of the percentage of any award you gain that the legal service will charge for their services.

  • With so many litigation funds now available, always use due diligence when choosing which fund to use for your case.