investment Counsel Corner- Tip of the Month: Litigation Budgets are not just forecasts. They are stress Tests.

One of the most common weaknesses in funding applications is not that the budget is wrong. Litigation budgets are based on estimate and projection. The real problem is when the budget overlooks uncertainties.

Good litigators know why. No lawyer controls how the case will unfold. The opponent may fight harder than expected. The court may manage the case in a way neither side predicted. A budget is, therefore, not a promise about the future. It is a disciplined explanation of what the legal team expects to happen, what could happen, and what the case may cost if it is fully contested.

For a funder, there are essentially three scenarios. First, the planned budget, what the lawyers hope will be needed if the case proceeds efficiently. Secondly, the reserve, what may be required if the defendant contests every sensible point, protracts through applications, and stretches the proceedings to trial, appeal and enforcement. Thirdly, the middle case, the amount a prudent defendant may be prepared to spend to reduce, delay or undermine the claim before settlement pressure becomes real or a trial takes place.

That distinction matters because problems with budgets have different causes. They can arise when a case develops in a fundamentally different way from the assumptions, a new issue emerges, the evidence changes, the law is uncertain, the court orders a route no one priced, or the broad plan was right but the opponent fights certain issues harder than expected.

The most useful budgets make the assumptions visible. Carefully defined contingencies illustrate that thought has been applied. It is preferable that these are not a vague allowance for 'possible further work'. They ideally identify the actual work, a preliminary issue, a third-party disclosure application, an amendment application, a jurisdiction fight, a further expert issue etc.

That is not just technical costs practice, it is also commercial underwriting. A funder needs to know which costs are committed, which are probable, and which are stress-case risks. Disbursements are especially important because they normally have to be paid in cash as the case progresses.

In cost shifting environments, a robust presentation also considers the opponent's costs. The claimant's spend is only part of the picture. A realistic view of the defendant's likely spend helps assess adverse-costs exposure, security applications, settlement behaviour and the economic pressure points in the litigation.

The best applications therefore do not sell optimism. They show judgement.

That is the kind of budget that gives a funder confidence.

-Bob Knock, Investment Counsel