Financial costs main disincentive for litigation

The main reason companies choose not to pursue what appear to be strong cases during commercial disputes is the financial costs involved, according to a new report.

The report, Companies in Conflict, was conducted by law firm Eversheds and seeks to explain what drives large organisations into disputes, how those disputes play out, and what makes the difference between winning and losing. It involved 82 telephone interviews with general counsel or senior legal decision-makers at the companies that took part.

As well as citing the financial cost involved and the financial risk of losing at trial as the biggest disincentive for pursuing “what appears to be a strong case”, companies also said the recovery of financial loss was the primary reason for engaging in commercial disputes to begin with.

The protection of the company’s reputation was also cited as an important factor, with almost a fifth of companies considering this the most important factor of all.

Contractual issues were found to be the most typical source of conflict, with regulatory matters also leading to disputes.

In terms of dispute resolution for those responding with a particular case in mind, litigation was ultimately used in 37 per cent of cases, while negotiation between the respective parties and their lawyers was the method used in a quarter of cases.

Mediation and arbitration were each used in 18 per cent of cases while negotiation between the respective management teams alone was employed in 3 per cent of cases.

As the main considerations for a potential litigant are cited as the financial risks and rewards of the process, the ability of the law firm to “evaluate and quantify such risks and rewards as early and accurately as possible is vital”. To this end, “experience and problem-solving dominate” the important factors when using a law firm.

Companies said they needed to know the firm has a track record in similar matters – and similar types of dispute resolution – but also that their lawyers can adapt to the nuances of the case. “No disputes of the size studied here can be handled with a standardised product, and agile and probing brains are a prerequisite,” said the report.

During preparation for a case “time is money”, according to the report. “General counsel want to know as quickly as possible what they are confronting. It is expected that firms must be able to process available information and make strategic recommendations in tight timeframes.”

The report also explored the importance of different factors on cases should a dispute result in litigation or arbitration. It found there was a “stringent demand” among companies for “scrupulous work in the preparatory phase, followed by convincing performances from external lawyers at trial or during arbitration”.