A law firm can budget costs through mapping out billable hours, and a quantum expert can assess the amount of damages that can be claimed. However, a commercial client can find valuing a dispute more complicated because of the diverse viewpoints of internal stakeholders. The CFO may take a purely financial view in terms of investment over time and likely return, while the commercial side of the business may be more worried about competitive advantage or reputation. In-house lawyers must mediate the various approaches, balancing the potential outcomes (through a win, loss, or settlement) against financial considerations, while also managing expectations within the business.
Faced with the need to assess the “worth” of a dispute holistically, there are three touchstones we use in a litigation finance transaction. A funder, much like a CFO, will focus on the financial assessment of a case. Yet we must also evaluate the claimant’s commercial considerations to properly model settlement drivers and likely outcomes outside of the binary win/loss after judgment. These touchstones are not always easy to apply, but they should be helpful for other in-house lawyers trying to bridge that divide in perspective between different stakeholders. Ultimately, this may help them to support the decision-makers within the business in assessing whether a particular piece of litigation is “worth” it.
- What is the commercial rationale for the litigation?
There are many drivers and objectives behind litigation, and these often go beyond the monetary claim value. A claimant may want to establish a particular interpretation for industry-standard documents or to obtain an injunction against a competitor. Similarly, a defendant may need to fight for its reputation or market share above all else. Points of principle and issues of business strategy abound, but they should be articulated objectively at the outset if possible. If success is not a particular number, what is it and why?
A clear-eyed recognition of motivations is essential in mapping out what success looks like, whether it is achievable through litigation, and how much it may cost (financially or otherwise). Even the maligned subjective drivers, like the desire for a “day in court” or simple commercial rivalry, should be recognised and interrogated. Assessing the non-financial motivations and risks for a business when executing a litigation strategy, and approaching a case with all stakeholders aligned, makes the process smoother. This is applicable in deciding whether to bring or defend a claim, but also in defining the parameters for settlement and, ultimately, assessing whether the litigation met its objectives.
- How much will my business win?
The damages at stake in a case are always important, but assessing the monetary value is not as simple as “I have a claim for £10 million and therefore I expect £10 million if I win.” If a claimant has a claim worth £10 million, for example, a £3 million settlement offer may seem low. But what if the claimant only had a 50% chance of winning the case? Or what if half the damages depended on a novel legal point? And would the settlement offer seem so low if it was going to cost £3 million to litigate the case to a conclusion?
Final judgments come at the end of a process after many risks and opportunities have come and gone. Appraising the monetary value of a dispute, particularly at the outset of proceedings or during settlement, means scrutinising the value of potential costs and rewards, but also analysing the risks of whether they will eventuate. Parties should consider a structured statistical analysis, and that means examining potential outcomes from a financial and legal standpoint and assigning probabilities. To take a simple example, if there is a 50% chance of losing the case on jurisdiction, then that will significantly impact the chances of winning overall. Assuming the claim is successful on jurisdiction and there is then a 60% chance that it wins on the merits, the overall chances of getting all the way to a successful judgment are a fraction of that 50% chance of winning jurisdiction. In fact, it would be only 30%. That risk analysis can be multiplied out to take account of a range of potential decisions or outcomes. The principal point, however, is that valuing a dispute needs to involve an analysis of the possibilities and probabilities. That is not to say that there is no art in the science of valuing disputes, but a hard-headed consideration of the chances of particular outcomes will lead to a much better appraisal of the dispute’s “worth” at a particular point in time and stress-testing what a “walk away” sum looks like.
Part of that analysis will obviously focus on damages. At the outset of litigation, an initial expert review of the quantum can help in stress-testing the numbers. Yet it is important to be realistic about how likely it is that a party will win (or lose) those amounts and what points they need to win (or lose) to get there. That is why considering a range of damages, and a weighted range of damages, can be useful in valuing a dispute. Moreover, it is also important to remember the time value of money. The net present value of any potential damages is a particularly important consideration in the early stages of significant litigation. A payment of £10 million in settlement now is worth more than a payment of £10 million in four years’ time when proceedings have concluded. Depending on the cost of capital, interest rates, or other economic considerations, a “below par” settlement today may be worth almost as much as a successful judgment further down the line.
- How long and how much?
The archetypal CFO refrain is “How long and how much?” but it is a question that must be answered to the extent possible. Parties should have a hard-headed discussion about the costs which are likely to be required and when they must be paid. The process of costs budgeting in large parts of London’s court system can help with those considerations in appropriate cases as parties have to come up with detailed, staged budgets setting out recoverable costs. However, as with a damages assessment, parties should also consider the time value of money in anticipated costs, and the probabilities involved in particular scenarios or contingencies.
Moreover, legal expenses are not the only costs to consider. In-house counsel will be very aware of a litigant’s internal opportunity costs. Running litigation means not doing something else, and it also means deploying resources that could be used elsewhere. There are internal costs to consider, but also internal risks to map onto the litigation. What if a key witness leaves the company? How likely is that to happen and how much could it “cost” in terms of outcomes? Or does the likely outcome outweigh these risks?
As with many aspects of a dispute, none of this is easy. However, an analysis of the risks and the value of costs and rewards is worthwhile to give the key stakeholders within the business, as well as external service providers, a holistic picture of the dispute. It can help all parties to work together with a common understanding of the company’s objectives and will lead to a much better view of whether a dispute is “worth” it or not at a particular time. Sometimes, winning really isn’t enough but it’s better to know in advance.
This blog was written by David Walker and Emily O’Neill of Deminor, a sponsor of LIDW21.