Mon 28 Nov 2022

We need to talk about litigation funding

Being in the middle of a commercial dispute is rarely a commercial objective. But even with the very best relationships and seemingly robust contracts in place, they happen.

In periods of economic strain or unpredictability, we often see the scale and prevalence of commercial disputes rise. Disputes which arose during pandemic lockdowns are very recent examples of this.

Because taking disputes to court can be expensive, and cashflow is vital, it is important for businesses to have access to funding mechanisms, particularly when other forms of dispute resolution have not been successful. In the current economic context, the need for such funding will be felt all the more intensely today.

Currently, there are some measures businesses can take to help cover the cost of litigating.

There is the option for Scottish solicitors to agree to undertake the legal work on a "Success Fee" basis meaning that the business only pays legal fees in the event the case is successful, but it can be difficult to secure that agreement and there are still potential costs to be covered by the business for things like court fees, or experts. So, these arrangements are not a "one size fits all" solution.

The other option is litigation funding. “Litigation funding” refers to when a third party without financial connection to, or interest in, a case funds the cost of litigation. The funder's return comes if the litigant is successful, and the funder takes a portion of the money that is recovered through the process. South of the border, the litigation funding market is booming.

With such a ripe litigation funding market in London, and the UK being home to a multi-billion-pound industry, it is easy to assume that Scottish companies are readily able to tap into this pot of financial backing.

But this is often not the case.

Whilst there is some litigation funding available in Scotland, experience suggests that London’s litigation funders have high thresholds for the value of the commercial litigation. However, the commercial disputes in Scottish courts are often not of a high enough amount to bring these larger litigation funders on board.

The implications of this could be significant. The longer it takes a business to resolve a commercial dispute, the greater the burden on the bottom line. If we cannot support our businesses with access to funding solutions, they will slow down, which could cause further challenges for our economy to overcome.

Yet, for investors looking at the Scottish market, litigation funding may also grow in appeal in the coming years. With the Scottish courts now allowing “group proceedings”, commonly known as class actions elsewhere, it's likely that funders will be attracted to the potential value - and therefore potential returns - of those cases.

Indeed, in late 2021, it was reported that the litigation funding market had reached £2bn in the UK and many believe that a steady rise in class action lawsuits in the English courts is contributing to this. For investors, if group proceedings do follow that trend in Scotland, we could witness the same effect. 

If this happens, we may begin to see better opportunities for businesses to secure the backing required to fund litigation, providing a welcome boost and improvement to the business environment.

But the longer this takes, and the longer we have to wait for litigation funding solutions, the more Scottish businesses will bear the burden of disputes, creating a knock-on effect to our productivity and output.

So we must start to talk about litigation funding; the resilience of Scottish businesses could be at stake.

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