If past recessions are anything to go by, current economic troubles will give rise to a significant increase in litigation. Businesses generally hate having to resort to law - but when money’s tight and order books are far from full, legal actions are often a way to get their hands on much-needed cash.
There have always been financial downsides to litigation: businesses know some lawyers can rival builders for the accuracy of their estimates, and if they lose the case, the financial consequences can be huge.
Recently, though, Third Party Funding (TPF) arrived on the scene. It isn’t cost free - the claimant will still have to share part of any damages recovery with the TPF provider - but it’s another way for legal claims to be advanced without putting capital at risk.
Over the past few years, the use of After-the-Event insurance and Conditional Fee Agreements (no-win, no-fee, essentially) in business litigation has grown significantly as a way of dealing with these financial issues with no cost to the business. They allow businesses to insure against the financial downsides of litigation, by transferring their own costs risk (in whole or in part) to their lawyer, and the adverse cost risk to an ATE insurer. The good thing is, there’s no cost to the business – charges are only payable if you win your case, and are then recoverable from the other party.
Unfortunately, these solutions are under threat from the Legal Aid, Sentencing and Punishment of Offenders Bill (LASPO) currently making its way through Parliament. If the Bill is approved, there will be fundamental changes to the way litigation can be funded, which means the costs of CFAs and ATE would have to be met by the business bringing the claim (so representing a potentially significant deduction from the damages).
The economic constraints governing such deductions are also likely to restrict the number of cases in which a solicitor and insurer are prepared to offer such non-conventional funding, leaving many more finance directors with no choice but to get their own cheque book out if they want to bring a case.
We’ll have to wait and see what the final outcome of these proposed changes is, but the Government says it’s strongly committed to abolishing no-win no-fee. The tragedy is that these reforms are all about dealing with perceived abuse in the personal injury sector, but the solution will apply to the entire world of litigation.
The inescapable conclusion is that those seen as having deep pockets (insurers, the government etc) will be able to act with impunity, knowing that many businesses will be unable to afford legal action against them.
There is good news: for a start, the draft legislation isn’t retrospective. While the exact dates still aren’t known (October 2012 is the current best guess), cases where CFAs and ATE are taken out before the law goes live will continue to be recoverable. So, now’s the time for you to look at the cases you might have and see if they are suitable for this sort of regime – before it’s too late.
- Ross Clark is the underwriting director at Firstassist Legal Expenses Insurance