One of the more serious consequences of the pandemic will be a wave of business litigation. However, strong arguments and credible evidence are not enough to win a dispute. It also takes resources to pursue a lawsuit, and soon that may be particularly difficult to come by.
The whole economy under pressure is preparing for the consequences of the pandemic and drastic steps taken by states to combat it. One of the more serious consequences of the current, extraordinary situation will certainly be a wave of business litigation.
Professionals outdo each other in listing the reasons for businesses to litigate in the post-pandemic reality. Disputes arising from non-performance of commercial contracts due to force majeure or an extraordinary change of circumstances are the first that come to mind. In addition, there are bankruptcy disputes, insurance disputes, and disputes over financial contracts. Different types of consumer disputes and disputes for personal data security breaches, the effects of cybercrime or breaches of collective consumer interests are also to be expected. The reaction of states and businesses to a crisis situation may also lead to disputes concerning infringements of competition law, state-aid rules, and so on. A crisis always creates a temptation to secure one’s position at the expense of other market players by means of anti-competitive collusion, abuse of market power, acts of unfair competition, or preferential treatment from state authorities.
Companies’ management boards and legal departments are already collecting arguments, gathering evidence, and preparing form letters. However, in the whole situation, we should not forget about the need to set aside free funds for a lawsuit. The costs of the proceedings are not small and have recently been increasing.
Exemption from court fees
In the case of disputes before the state courts, businesses in the most difficult situation will be able to count on the state to cover their upfront court costs. But such a possibility will be available only to those who need it the most. The practice of recent years has shown that courts are reluctant to provide legal assistance to businesses. When deciding on an exemption from court fees, the courts scrupulously scrutinise the business’s finances, assessing whether the lack of funds results from prodigality or imprudence.
If the case is not pending before a state court or the business’s financial situation does not justify an exemption from costs, financing must be sought. Obviously, the funds for lawsuits can be borrowed. But they have to be repaid regardless of the outcome of the case. In the near future, it will probably be more difficult to obtain loans, and certainly such capital will be much more expensive than it has been.
Therefore, it is worth remembering about service providers who, although they are still quite exotic guests in Poland, are more and more interested in our market. We are talking about litigation financing funds. Recently, there was a lot of talk about them on the occasion of the expected wave of disputes over indexation of road contracts. Anglo-Saxon funds dealing with third-party funding were interested in investing in these disputes.
Third-party funding, or more broadly litigation finance, is a range of financial services for the parties to court disputes. In its simplest form, the service of litigation financing consists in the financing body providing the party with funds to cover the costs of pursuing its claim in court, in exchange for a share in the proceeds. Usually the financing body does this on the basis of an investment rather than a loan (non-recourse), which means that, if the lawsuit is lost, the amount lent by the financed body is forfeited and is not reimbursed by the beneficiary. Of course, the financing party should assess the risk by thoroughly examining the claim, and will expect an appropriate rate of return. However, when the amount of the party’s claim is sufficiently large and the claim itself sufficiently strong, the financing conditions may be attractive to both parties.
Various less-typical varieties of this service are also available. For example, it is becoming increasingly common for funds to finance not individual claims but entire case portfolios. Some institutions also offer a service not consisting in covering the costs of the dispute but providing the business an agreed amount it can use in any way. In return, the financing body gains the right to participate in a specific claim or, more often, numerous claims the beneficiary holds. This service is particularly useful for businesses with a large number of claims in their assets which, although legitimate and well proven, are valued low in the accounts due to the expected length of time, labour intensity and uncertainty of the necessary proceedings. This may prove salutary especially for companies with liquidity problems. It allows them to release the value frozen in claims, not properly reflected in the financial statements, without assigning them to a third party. The purchase of disputed claims is also a form of litigation financing.
Management of the financial risks of proceedings in transactional projects
Litigation finance also consists of a variety of insurance products. In the current market situation, it is worth mentioning one particular category of such products: litigation buy-out (LBO) insurance.
Under LBO insurance, the insurer, in exchange for an agreed premium, assumes the risk of a specific judicial dispute or disputes (undertaking to cover the opponent’s claims if they are upheld). This may prove particularly useful in transactional projects carried out during the economic turmoil. In such a difficult period, it is particularly likely that the company to be the subject of the transaction will be entangled in serious legal proceedings. The associated risks or discrepancies in their assessment may prevent the parties from closing the transaction. In this situation, the certainty that this type of insurance may provide can overcome this obstacle, as long as the premium expected by the insurer fits into the transaction budget.
Litigation financing is a complex project
In times of economic difficulties, the demand for litigation financing services will certainly increase. In Poland, for a long time to come, these services will not be as widespread as in other countries due to the serious shortcomings and problems of the Polish judicial system and the resulting unpredictability of court proceedings. However, these services have been well received in international arbitration and, in any arbitration case, it is worth considering whether it would be worthwhile to use the services of a fund to finance claims. Nevertheless, also in court cases, it is worth considering whether using the services of a specialised fund is the answer to problems with financing the proceedings.
In any case, cooperation with such a fund is demanding. First of all, it is necessary to reliably, and at an early stage of the case, explain to the foreign fund all the legal and factual aspects necessary to assess the legitimacy and chances to enforce the analysed claims. Therefore, it is useful to know foreign legal systems, especially common-law systems. It is in that legal culture that the litigation finance market has developed the most. It is also necessary to be able to manage the case efficiently at the earliest possible stage (immediately establishing the full facts, and gathering and assessing evidence, including interviews with potential witnesses). The sooner a business knows and considers all available methods of financing the proceedings, the better the chances that it will be possible to conduct them efficiently and optimally from a financial point of view.
Stanisław Drozd, attorney-at-law, Łukasz Lasek, adwokat, Dispute Resolution & Arbitration practice, Wardyński & Partners