No business wants to be involved in litigation. It is almost always a significant drain on time and resources, with uncertain outcomes and unforeseen consequences. However, sometimes it is unavoidable. This article considers a few litigation pitfalls businesses should avoid if at all possible, when considering or conducting commercial litigation.
NOTE – this article applies only to the UK legal system, and is not intended as legal advice. Commercial litigation is a very complex area of law and is continuously changing. Businesses should take specialist independent legal advice if litigation is being considered or is ongoing. This article is intended only to flag potential issues to consider and ask advice about from a commercial lawyer in relation to your individual circumstances.
Table of Contents
Legal Costs
Legal costs for commercial litigation can be incredibly high, often exceeding the amount of the claim itself. Consequently, there are several issues relating to costs that businesses should consider.
Cash Flow
The court process is fixed in both time and scope. Court deadlines must be respected and the process will march on regardless of whether or not a business has a cash flow problem at any stage. Understand from your lawyer at the outset a clear timeline with expected costs at every stage.
If your business may not be able to meet the cash flow requirements at any stage consider other options such as fee arrangements with your lawyers. Make sure you understand exactly what the terms are of any such fee arrangements – for example ‘disbursements’ are often not included in such arrangements and can be substantial in themselves (these include items such as court fees, barrister’s fees and expert witness evidence).
Costs Estimates
Although your lawyer may not be able to give you a precise confirmation of legal costs (either for the whole claim or any particular part of the case), they should be able to give you an estimate of costs based on their experience and the facts of your case.
It is often desirable to get fixed costs wherever possible, to give certainty and allow for proper budgeting. Even if these can’t be obtained for the claim as a whole, it is still usually possible to ask for fixed costs for specific pieces of work within the claim (such as drafting a letter, or making an application).
In circumstances where a fixed cost cannot be given for a piece of work, ask for a costs estimate. On accepting that your lawyers proceed with work on the basis of the estimate given, make it clear that any significant deviation from this estimate must be communicated to you and approved by you prior to them proceeding with the work – and specify what ‘significant’ means (e.g. 10% higher than the estimate).
Costs can quickly spiral out of control – for example, one business we know was given a costs estimate of £3,500 for a piece of work, then received a bill for nearly £11,000 after the work had been completed.
It is usually safer under all circumstances to assume a ‘buffer’ of additional costs whenever being given a costs estimate – more often than not the estimate is exceeded.
‘Double Bubble’
The standard scenario is that a party to a dispute instructs lawyers, and once it gets to court proceedings, those lawyers additionally instruct barristers.
Although arguments will be run by lawyers that they are fulfilling separate roles and there is no (or little) duplication of work, from personal experience it has become clear that using both a lawyer and a barrister is much more expensive than instructing a ‘direct access barrister’ alone – direct access barristers are essentially barristers who will accept instructions directly from clients, rather than through a lawyer (as is traditionally done).
If you investigate this option, make sure to find out whether or not the barrister is able to have ‘full conduct of litigation rights’ so that they can perform all legal aspects of a claim. Some direct access barristers do not have these permissions – in such circumstances you can only use them where you are a ‘litigant in person’ (more on this later) or additionally have a lawyer acting for you.
Being ‘Trapped’ with a Lawyer
Bear in mind that a significant proportion of the costs you incur will relate to your lawyer familiarising themselves with the case, and keeping up to date with it on an ongoing basis.
It is not by any means unheard of for businesses to be dissatisfied in some way with the legal services they are receiving, but feel trapped into remaining with their existing lawyer due to the costs and time consequences of instructing new lawyers.
Although you can never be sure of the performance of a lawyer until you actually instruct them, try to choose well, look for service guarantees and keep a ‘emergency fund’ in your pocket if at all possible, so that you can switch lawyers if necessary and don’t feel obliged to ‘throw good money after bad’ in the event that the service you receive is disappointing.
Adverse Costs
‘Adverse costs’ means the costs of the opposing party in a claim. In other words, that in addition to your own costs, you can also be liable for the other party’s costs under various circumstances.
The rules around liability for adverse costs are complex – both in terms of when they apply and in terms of how much of actual costs incurred they apply to – make sure you discuss these with your lawyer in detail.
For example, as well as being potentially liable for adverse costs in the event that you lose a claim overall, there are various stages prior to that where you can also be liable for adverse costs, such as if an interim application to court is made in which the other side is successful.
Recoverability of Costs
Do not assume that if you win a case you will recover all (or even some) of your costs. Again, the rules around costs recovery are complex. For example, on the small claims track you will usually (although not always) not be able to recover your own costs, but equally you will not be liable for adverse costs.
As you go up the levels through fast-track and intermediary track to multi-track (each ‘track’ essentially dealing with different claim amounts and complexity of claims), various differing rules apply to costs recovery. Under some you will only be able to recover fixed levels of costs (usually low levels), regardless of the costs you actually incurred. Under others for example, you will only be able to recover a percentage of costs incurred. It is almost unheard of to recover 100% of costs incurred under any circumstances.
For example, under the multi-track the losing party typically pays a percentage of the winning party’s costs, often around 60% to 70% under the ‘standard basis’. This may however be altered by the court under certain circumstances – for example to ‘indemnity costs’ which are higher than this, or to costs decreased from this ‘standard’, for example where a party’s conduct warrants it in the opinion of the court.
Ensure that you have a very clear understanding from your lawyer which costs regime will apply to your case, the likely costs outcomes at each and every stage, and the risks associated with costs that are particular to your case.
Security for Costs
In essence, a ‘security for costs’ application is where one party to a claim (‘Party 1’) applies to the court to make the other party (‘Party 2’) pay into court (or provide some other guarantee for) the amount of adverse costs that Party 1 would be likely to be awarded in the event that Party 2 loses the claim.
The purpose behind it is to protect Party 1 in the event that Party 2 loses and is unable to pay Party 1’s costs.
For example, say that Party 2 starts a claim against Party 1. Party 2 has no money to pay Party 1’s costs if Party 1 is successful. This means that Party 1 is in a lose-lose situation – if Party 1 doesn’t defend the claim, Party 2 will win by default and Party 1 will have to pay the claim plus Party 2’s costs. If Party 1 does defend the claim, even if they are successful they will not recover any of their costs of defending the claim.
Although appearing to be fair under such circumstances, if an application for security for costs is granted, it can result in problematic practical issues.
First, it ties up a substantial amount of money of the party subject to the security for costs order for as long as it takes for the claim to get to a final decision in court – which can be years in some cases. At best this can affect the day-to-day operations and functioning of the business, and at worst it can make it impossible to continue as a viable business.
Second, if the business subject to the order cannot provide the funds required to be paid into court, the claim is stopped and they are unable to continue. Hence why security for costs is frequently weaponised by parties to a claim – even a legitimate claim with a high chance of winning can be stopped in its tracks just because a claimant can’t meet the requirements of a security for costs order.
There are circumstances under which the court can decide not to grant a security for costs order even when a party is financially unable to meet any adverse costs awards.
Consider for example, where Party 1 fails to pay its debts to Party 2 and Party 2 is likely to win on the evidence. Party 2 starts a claim but is in financial difficulties – not only have they not been paid by Party 1, but in addition they have to fund their own litigation costs. Party 1 tries to weaponise the financial quagmire they have caused Party 2 by using a security for costs order to stop the claim and escape liability. In such a case, the court may decide that it would not be in the interests of justice to grant a security for costs order.
Although there are a number of grounds upon which a court can choose not to grant a security for costs order, it is almost without exception an uphill battle to try to oppose such an application, expensive to fight and highly uncertain in outcome. Always discuss this possibility with your lawyer from the outset, as once you have started the claim there are costs penalties if you have to drop out later on in the process.
Time
Court cases are never quick. Even under optimum conditions it takes between months and years to get a claim through to a final decision. Add to this that the courts service is almost never working under optimum conditions. There are frequently significant delays and mistakes made (creating further delays), particularly in the County Courts.
On top of this, lawyers are frequently (very) delayed in completing work and responding to correspondence. The reason for this often appears to stem from the fact that they take on more work than they can manage, on the basis that they are expecting most cases to settle and drop out of their caseload at some point. When they don’t guess the outcomes and timings well enough, they end up with more work than expected, creating significant delays – which seems to happen most of the time.
Another time issue to factor into your considerations is how much of your (and your business’ time) you want to tie up in litigation. It can often feel that you are putting in many more hours on a case than your lawyers are – you need to decide whether this is the optimum use of your resources. For example, if you can earn more from dedicating those hours to your business than you can by using them to recover a debt, it may be better to draw a line in the sand and move on.
One additional dimension people often forget to consider is that circumstances can change radically over time – your situation (or the situation of your opposing party) can alter substantially in the time it takes to see a court case through to the end. Such changes can radically impact both the course and outcome of the litigation.
To find out more about our Business Coaching for London Leaders, explore our page ‘Business Coaching London’. To discover what Business Coaching options there are in New York, take a look at our page ‘Business Coaching New York’. |
‘Litigant in Person’
Being a ‘litigant in person’ essentially just means that you are representing yourself – in other words, that you have no legal representative acting for you.
There can be advantages to this – not least of these being costs. However, there can also be significant disadvantages – such as not being familiar with legal process.
However, when it comes to commercial litigation, where your business is a limited liability company (LLC) or limited liability partnership (LLP), with the exception of actions under the small claims track, you are unable to act as a litigant in person on behalf of your LLC or LLP (except in extremely restricted circumstances and requiring the court’s permission).
The argument from the courts appears to be that as a separate legal entity which is not a natural person, a company cannot ‘appear’ in front of the court (even through its directors) – in other words, that as an ‘artificial person’ it lacks the right of audience in court – and therefore can only be represented by a solicitor or barrister with rights of audience in court.
What is not clear, is why this principle is not applied under the small claims track, where companies are able to represent themselves through their directors.
In any case, the upshot of this is that for an LLC or an LLP to pursue a claim in court on anything other than the small claims track, it is mandatory for it to instruct lawyers or barristers (and assume the costs of doing so). While this is clearly prejudicial to companies who have genuine claims but are unable to raise the funds to instruct legal representation, such a ground is not sufficient to argue for an exemption to this rule with the courts.
To learn about the transformational impact of the simple leadership skill of consistency when implemented well, take a look at our article ‘The Power of Consistency in Leadership’. |
In Conclusion – Litigation Pitfalls Businesses Should Avoid
There are of course a myriad of other litigation pitfalls businesses should avoid, many of which will be highly specific to the individual circumstances the business finds themselves in.
However, it is hoped that this article provides a starting point from which to give business owners a chance to successfully navigate some common issues encountered. Ultimately, the best option is almost always to avoid litigation wherever possible – but if it has to be, then better to be forewarned and forearmed.
Be very careful with your choice of lawyer and barrister, do your best not to lose sight of the bigger picture (for example by getting too caught up in ‘points of principle’) and consider alternatives to resolving the dispute.
For example, one of our clients was involved in very protracted and costly litigation and making no progress at all. We found a commercial solution for them which settled the litigation, covered the costs incurred by both parties to date and increased the revenues of both parties going forwards. Sometimes the best route is not the most obvious one.
Discover more about great business leadership in our article ‘What Makes a Great CEO?’. Find out how the hybrid of business coaching and business consultancy can benefit your business in our article ‘Business Development Coach’. Explore how to effectively delegate for good outcomes if you are a perfectionist in our article ‘How To Delegate When You Don’t Want To’. Learn how a simple, practical shift in mindset produces radically improved outcomes in our article ‘How Attribution Drives Success’. To explore the role of consultancy services in accelerating growth, see our article ‘Business Development Consultancy Services’. |
About Mary Taylor
Mary Taylor has worked with top executives in many globally recognised brands, from which she has developed a unique understanding of corporate life at the top and the challenges faced by the people there.
Traditional executive coaching is often criticised for lacking bite, failing to challenge ingrained behaviours and leaving behind little in the way of actionable recommendations. Mary Taylor’s approach is very different. She views coaching and consultancy to be much more about real-world problem-solving, addressing difficult issues head on and delivering impactful solutions.
Mary’s academic and professional background includes working as a leader in high-security prisons and as a top corporate lawyer. She is also a qualified psychologist and draws on a wealth of experience to deliver hard-hitting advice and recommendations that have had major impacts on leading organisations across the world.
Mary backs all of her services with a full client satisfaction guarantee. Excellence is the standard: if you are not completely satisfied, she does not retain fees.
To explore how we can support your business journey, Mary offers a free, no-obligation initial consultation. Whether you want to ask questions, discuss your business or explore the options available, she can help provide guidance and clarity.
