INSIGHT: What Price Litigation?

While the financial recovery has helped to boost the SME community, many companies are still struggling to manage cash flow due to late payment and bad debt.

Changes to be introduced in April will make it more onerous than ever to recover that money through the courts, raising questions about whether smaller businesses will be able to litigate in future at all.

The Government has decided to increase court fees for cases above a value of £10,000, with the introduction of fees based on 5 per cent of the value of the claim. This sharp increase has been criticised by the Civil Justice Council and many senior judges who argue that it will most likely restrict access to justice.

New higher fees being levied for the use of civil courts are still generally recoverable if and when a company wins its claim for damages, but payment of these higher fees upfront will be an obstacle to bringing a claim in the first place for many.

It places SMEs in a Catch 22 situation: non-payment means that there is cash missing from the business but to pursue payment they have to find the cash to pay court costs up front.

The financial impact of this compounds changes that have already been implemented to regulate use of no-win-no-fee arrangements. Rules brought in to prevent mainly personal injury solicitors from recovering huge success fees and insurance premium costs from defendants in personal injury cases have also been applied to civil litigation.

This means that companies pursuing a claim through the courts using a conditional fee agreement with their solicitor must now pay their own solicitor’s success fee and any After the Event Insurance from the amount awarded by the court. This makes this particular model less attractive generally.

The problem for most companies is not the deduction of the success fee from the court’s award but the exposure to financial risk and the cash flow implications of the upfront costs. 

It will discourage many from pursuing litigation and make an out of court settlement a more attractive option for the claimant. For the defendant, however, there is little incentive to settle out of court because the risk that the claimant will advance cost-prohibitive proceedings is so much lower.

The upshot of all of this is that the deterrent for late or non-payment is negligible thanks to the reduced risk of enforceable legal action.

So what’s the answer for companies that do want to pursue a claim for non-payment? It is important to try to avoid the costs of litigation if you can by ensuring your terms and conditions of business are up to date and incorporated into contracts that are as ‘bomb proof’ as possible.

However, if litigation is necessary, you need to speak to solicitors that are experts in the field and can advise you of the best options available to you and help extract payment from your bad debtor as quickly and cost-effectively as possible.

And for the legal sector? We must now adapt our pricing structures to assist our clients and make litigation more affordable and less risky for small businesses because proper recourse to legal action is in the best interests of both SMEs and the wider economy.

For more information or advice about pursuing litigation, please contact Christopher Burke on 0161 638 3977 or email christopher.burke@pearsonlegal.co.uk

Also in this issue of Insight

• New starters - Carolyn Richardson and Sarah Major
• An open invite to our Property Pitfalls Forum
• Meanwhile use and empty buildings
• Court fees and litigation costs
• Shared parental leave update

 

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Please note that the information and opinions contained in this article are not intended to be comprehensive, nor to provide legal advice. No responsibility for its accuracy or correctness is assumed by Pearson Solicitors and Financial Advisers Ltd or any of its members or employees. Professional legal advice should be obtained before taking, or refraining from taking, any action as a result of this article.

This blog was posted some time ago and its contents may now be out of date. For the latest legal position relating to these issues, get in touch with the author - or make an enquiry now.