What Does ‘Litigation Risk’ Actually Mean in Commercial Contracts in the UK?

If you seek legal action in court, it is essential to consider your prospects of winning the case to ensure you make the most commercially beneficial decision. It is well-known that most cases settle before reaching the final hearing. One of the main reasons for settling a case before the final hearing is to avoid litigation risk. This article will explore the meaning of litigation risk, and what factors you must consider so you can make the best choice for your case.

What Does ‘Litigation Risk’ Mean?

Litigation risk refers to the risks associated with a case getting to the final hearing. Furthermore, it may also refer to various issues that can negatively affect your case. The main elements of litigation risk include:

• the witnesses for your company giving poor performances;
• exposure of damaging documents;
• the judge liking the witnesses for the other side more or finding their evidence more persuasive;
• your case being too radical or complex for the judge; 
• winning the claim but obtaining less money than expected or less than a prior settlement offer; or
• the judge making an unusual decision for unexpected reasons.

Most of these factors involve the judge, the primary decision-maker at trial. You will likely lose if they decide they do not like your company’s case. Unfortunately, it is impossible to predict the judge or their reaction accurately, hence the phrase ‘litigation risk’.

However, not all litigation risk centres around the judge. For example, some will come in financial risk, such as whether you should accept a lower settlement amount now or risk obtaining £0 in future litigation. 

Let us explore a quick example.

Example

Suppose your business brings a breach of contract claim against another company. You are claiming £200 000, and your lawyer speculates a 60% chance of winning.

You receive a settlement offer of £140,000 the month before the final hearing. Your lawyer is likely to advise you to consider this because there is a 40% chance (the litigation risk) of losing and obtaining £0. The litigation risk will accommodate a 40% chance of loss for: 

• the judge’s reaction;
• any last-minute evidence; or 
• risk of witnesses not turning up or giving poor performances. 

Applying 60% to the potential £200,000 compensation amount creates a figure of £120,000 and, absent other vital factors, any figure over this amount would usually more than account for your company’s litigation risk in continuing the claim.

What Else Should I Consider Within Commercial Court Cases?

Your commercial sense should determine how you handle a commercial court case. For example, there may be little financial sense in bringing a claim against another company for breach of a contract worth £80 000 if your lawyer advises that it would cost £20,000 to bring the claim and you only have a 50% chance of establishing potential liability.

In the same way, within any settlement negotiations that crop up during an active court claim, you will typically receive offers below your potential compensation at trial (due to litigation risk). However, the benefits of avoiding a contentious hearing include:

• not incurring further legal fees;
• having the certainty of a fixed date to receive the money by;
• avoiding a public hearing that may risk your company’s reputation;
• having a significant opportunity to do business with that company in the future; and
• avoiding the time and stress involved for witnesses and employees who must appear for cross-examination by a lawyer.

These factors usually nudge companies towards settling most claims before trial within a settlement that is a true compromise for both sides. So, yes, your company may obtain a lower sum compared to the potential compensation for financial loss at trial, but it also avoids the risk of losing and receiving nothing.

Key Takeaways

Litigation risk considers the prospect of success for a commercial claim. It includes the risk of an unknown judge, unpredictable witness performances and uncertainty over whether the legal argument will suit the judge. Therefore, litigation risk is generally the most significant concern to your business when weighing up settlement offers to end legal action before the final hearing. Failing to take into account litigation risk can damage your company’s reputation if you lose the case. Alternatively, your business may win the case yet receive compensation lower than prior settlement offers.

If you need help weighing up litigation risk within a commercial dispute, our experienced contract lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.

Frequently Asked Questions