If you’ve ever been involved with a dispute or litigation, the chances are that your solicitor has talked about taking into account the litigation risk. So, what is litigation risk?  

It is often made up of several factors and will vary depending upon the nature of the dispute and the stage that proceedings have reached. On a wide interpretation, it is made up of all of the factors that need to be considered when deciding whether to issue or defend proceedings or whether to continue with proceedings that are already in progress. This article provides an overview of the main points to consider:

The Unknown   

Only 3% of cases that are issued in the courts reach trial. A substantial element of those claims fall out of the system because they are, for example, simple debt cases and the debtor pays up. However, a good number of cases proceed through the court system for some time before a settlement is reached. It is not uncommon for cases to settle on the doorstep of the court and it has even been known for parties to reach a settlement after the trial has taken place but before the Judge delivers his judgment.

What prompts a party to settle a claim they have pursued or defended before court? There are, of course, the obvious issues such as the merits and bumping up the value of the claim in the hope that this will result in a higher settlement. However, there is also the fear of the unknown.

Every claim contains an element of the unknown and this is the fundamental element of litigation risk. It is the risk of what might happen at trial. It may be that your star witness does not perform well. It may be that a document is produced at the last minute that is damning to your case. It may be that the judge simply prefers the evidence of the other side’s witnesses to yours or agrees with their interpretation of the contract terms. There is also the possibility that the Judge simply gets it wrong; it does happen.

Parties need to consider the unknown and factor it into their decision making process when considering whether to issue or settle proceedings. Usually, this involves trying to put some measure of financial value as to how much you are prepared to spend or reduce your claim by in order to  "buy off" the risk of losing at trial.

Costs

Litigation has always been expensive. Traditionally, a successful litigant used to recover about 60% of their costs, which is not a very high proportion when you take into account the fact that you have won your case and, ideally, should not be left out of pocket.

In 2013 new rules were introduced which means that, in some cases, it is now even more expensive. This is because the court has obligations to ensure that the costs of litigation are proportionate to the value/importance of the claim. In some cases, successful litigants are being deprived of significant amounts of costs even though they have been reasonably incurred due to proportionality. This is another factor that should be taken into account when considering the litigation risk; the likely costs that you will incur that will be unrecoverable whether you win or lose.

A party should also take into account the potential costs liability it would face if it lost at trial. Not only would it have its own costs to bear but a proportion of the other side’s costs as well.

Time

Time is often considered one of our most precious commodities. Not only is litigation expensive but it is also time consuming. Time will need to be spent liaising with and providing instructions to your solicitor, gathering information and documents and attending trial and other hearings.  Litigation is almost always retrospective. Sometimes, it is better to draw a line under an issue and concentrate on the day job of running a business and keeping it moving forward.

Reputation

Litigation can sometimes attract publicity and not all publicity is good publicity. In the 1990s McDonald’s won a claim that became known as the “McLibel” case. McDonald’s pursued libel proceedings against the authors of a damning leaflet. However, instead of protecting its reputation and brand McDonalds ended up doing more harm to it as the litigation generated such negative publicity.

Relationships

Litigation often results in the breakdown of relations between the parties. Often, if there is a prospect of working together in the future it is better to try to work issues out on a more informal basis, such as mediation.

Conclusion

Not all of these factors strictly fall into the definition of litigation risk but they should all be considered. Sometimes, a party will consider that it is not worth the risk in pursuing legal proceedings and will drop their claim or seek to pursue it through other channels, such as mediation. In other instances, it may be worth a party trying to assign a notional financial value to the litigation risk it faces. This can assist in settlement discussions as a party will factor buying off the litigation risk into any offers that it is willing to make or accept. Of course, sometimes the best option really is to proceed full steam ahead towards trial.