Authored by Christian Doherty

The consequences of getting litigation wrong are clear: the business is exposed to unnecessary and hazardous risk, executives are distracted by the process and the financial downsides of an unsuccessful claim are only too real. So how can businesses make sure they protect themselves from the worst of the risks? What role should the financial director (FD) play in assessing legal strategy, and what should a good general counsel (GC) bring to the table to make sure costs are kept under control in case litigation does become a real possibility?

Different companies will take different approaches – for some it's a question of internally bridging the gap between finance and legal, while for others techniques such as third-party litigation funding come into the mix as a means of mitigating both financial and legal risk.

Understanding both the legal and financial implications of a particular strategy is vital if the business is to protect itself from the worst risks. Indeed, according to exclusive research conducted by Legal Week Intelligence over half (64%) of in-house respondents polled say their litigation spend has increased over the past two years.

It's vital, therefore, that finance and legal come together to ensure that litigation is properly handled. For FDs, the need to work closely with general counsel to understand the potential pitfalls of any legal strategy is paramount. But our survey shows that this doesn't always happen: only 44% of those polled confirmed that the FD (or fellow senior finance manager) was always consulted. That may be as a result of time pressure, or the FD not at ease with legal matters. Whatever the reason, the disconnect is a concern.

Robin Brown is FD of United Biscuits. He has been intimately involved with several legal proceedings as part of his job, one in particular that threatened to end in significant litigation.

"Back in 2005, we had a big flood at our Argyle biscuit factory, one of the biggest biscuit factories in the UK," he recalls. "As a result, with the factory temporarily under water, and out of production for quite an extended period of time, it had a big impact on our sales in the market."

"We had a business interruption policy with our insurers so obviously that brought us into an involved process of running a claim under the insurance. As a result I was heavily involved in working on that, together with our head of legal." Brown says his focus fell very much on the detailed work of getting the right advisory

support to help the business, "So we used an independent advisor to help with loss assessment and advise us how the whole process would work," he explains. "They helped us look at how much it might cost to litigate the claim and how the insurer would look at it to make sure that we got the best position possible on the insurance cover."

In addition to insurance advice, Brown also engaged KPMG as forensic accountants in order to validate United Biscuits' position and its own assessment of the impact which the flood had had on the business.

"That was a lengthy and quite tortuous process and at the end we felt we had a big claim and the insurers were trying to loss adjust it down," he remembers. "But after quite a bit of negotiation (and once it got to the point where we were running presentations in London back to the other insurers up the chain who were also involved, trying to explain to them what was happening) we ended up taking legal counsel that we were prepared to litigate on this particular subject if we needed to."

It's a familiar story for many FDs, who, faced with an uncertain outcome in a legal proceeding, turn to the legal team for help and advice not only on the technicalities but also on the possible financial risks in proceeding.

For Andrew Magowan, GC at online fashion retailer Asos, the issue is also familiar. In his view, when these situations arise, the GC role must encompass a firm grasp of the financial impact of any potential litigation.

"I'm an initial screener, so I may kill certain ideas that various members of my department might have if I don't think there's enough in them. Certainly I'm not going to push them forward without being aware of their potential impact on the business, not just from a cost perspective but also the outcomes of it," he says. And those outcomes are not just financial – there are the potential PR risks, not to mention the drag on precious management time. "I don't go ahead with anything without making sure that they're aware of it and to be honest, if it was big enough, I'd even want to take it to the rest of the execs and quite possibly the plc board just to check that they're alright with it," Magowan says.

The GC is at pains to point out the difference in approach depending on whether the company is defending an incoming claim, or launching an outgoing action. "With an incoming claim there is not a lot you can do," he says. "You are there and you've got to deal with it. But launching an outgoing claim is a voluntary choice, you engage in something that could be a huge distraction in terms of time that you don't have, so to do it is about way more than just numbers."

Of course, many FDs are taking a safety first approach to litigation, with risk uppermost in the mind. However, while this makes sense in the majority of cases, there are times when a different approach is called for. As the Legal Week Intelligence research shows, 56% say 'yes, frequently' or 'somewhat frequently' that the costs of litigation has resulted in not pursuing a meritorious claim.

Critically, it is in managing budgets that the GC can really add value to the finance team. That is backed up by the Legal Week Intelligence research. Of the in house GCs polled, the vast majority confirmed they worked with the finance department to provide a budget before starting any new litigation. Encouragingly, almost 9 out of 10 reported they stuck to the budget and stayed within the limits set.

However, there is a flipside to that: the research also shows that 28% of respondents say their external counsel never come within budget and only 8% say they 'always' come within budget. Indeed, more worryingly, 14% do not even set a budget. It is in scenarios like this that financial risk can rear its head, and where solutions such as third-party litigation funding can offer a way of mitigating the worst of the risk.

For his part, Magowan is clear that the GC should take the lead in the process of assessing potential downsides of litigation. "That should be my number," he says. "It should be me telling them and convincing them that it's the right number and I quite openly talk to them about what we should be fighting for and what we shouldn't be. They expect me to bring them a very reasoned and clear rationale of what it's going to cost in terms of fees."

This sentiment is supported by the Legal Week Intelligence research. The need for clear understanding of the possible financials is clearly desirable, but despite this, many in-house lawyers report that finance directors have blocked meritorious claims citing cost risks. 56% said this had happened to them on occasion, a worrying statistic considering the potential upside of pursuing a meritorious claim.

But what does Magowan need from his finance counterparts in order to successfully run a claim? "The flipside is I need to understand exactly what they need from me in order to be allowed to run it. I don't see how you can leave it to them. I'm paid to assess that. It's my head on the block if it goes wrong, it's the way it should be so it has to work like that."

The GC explains that, as a well-known fashion retailer, Asos can sometimes land in the crosshairs of rivals, facing (usually frivolous) accusations of copyright infringement over certain designs. In the past that would often force the legal team to spend time and money arguing over the matter with the claimant; strategy not only expensive in terms of fees but also exposing the company to significant brand risk, when all it would take is a competitor or supplier to post on social media complaining of bullying tactics from the big bad fashion giant.

Now, it's different. "When I came in and told the team, I don't care whether we're right or wrong or not; what does it look like? If it looks dreadful and we get out of it and then it's a matter of how much it will cost to defend using lawyers. And often it's as simple as saying, as long as I offer the person less than the possible fees then it makes sense."

So while the GC is balancing the probabilities of successful litigation, Brown is firmly of the belief that the FD brings a unique viewpoint to the debate. "I think for us it's more about understanding what is the quantum and what's the balance in terms of probabilities, (not that you'll ever get that so clearly spelt out by a lawyer)," he says. "And it's also trying to get some sense of the strength of our case and therefore are we going to get the payback from going through that."

So what does that mean in practice? Brown says that the disciplines must work closely together, but with a clear division of duties. "I think as FD you end up being an interested layman to a certain extent. Of course you're part of the conversation, which allows you to get a sense from the conversation in the room and the tone.

But ultimately that's why you employ a litigator: to take a look at the strength of your argument to come back and give you a perspective on what's the best approach for a claim based on the facts they've been provided with as to how likely you are to succeed. In the end you're asking people for their professional judgement and then deciding internally based on that whether we think we need to go there."

Indeed, Magowan points out that establishing the GC's financial bona fides can make that conversation a more productive one. "I'm not interested in the legal principle," he says. "That's what external lawyers are for. I'm in it for what's the most effective result for my business and my finance guys, the rest of my business colleagues I think know that that's what I am."

Of course not all GCs may feel quite so sure-footed in delivering financial risk assessments – which has led to a growth in external advisory as well as litigation funders who can step into the breach and underpin any litigation strategy.

Both Brown and Magowan agree that in an uncertain arena – litigation is never a sure thing - what the FD needs from the GC is a rational, clearly set out assessment of the positive, and more importantly, the negatives and the potential impact on the business. "I'm not really interested in winning an argument, I never really have been," says Magowan. "It has to be about what's the most effective thing for the business overall."

Originally published in Funding In Focus, November 2015

general counsel, Asos

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.