Should investors be concerned about defamation claims brought against a company in the English courts?

When negotiations are taking place for the sale and purchase of any business it is far from ideal for there to be unresolved litigation. It can give rise to open ended liability in terms of damages and costs; eat into senior management time as the case progresses towards trial; and, be the subject of much media interest during the trial stage (with a particular emphasis on the documents that have been disclosed, and, in the performance of the witnesses during cross examination).

Whilst an appropriate contingency can be set aside for the likely financial costs involved, what the actual reputational impact will be on the company cannot be predicted with absolute certainty. What is clear is that even with changes to defamation laws in England since 1 January 2014, potentially making it more difficult for corporate claimants (see below), England will remain an extremely important jurisdiction for reputation protection.

What might be the cost to a losing company?

Whilst monetary damages may pale in comparison to the losses resulting from damage to a corporate’s reputation if it does nothing to address false allegations, damages and legal costs are nevertheless likely to be of interest to any would be investors. Damages in English defamation cases are typically capped at an amount in the region of £275k-£300k (a far cry from US style damages but still substantial). It should be noted that the upper level of damages will likely only be awarded in the most serious of cases.  However, the total amount payable by a losing party in litigation in the English courts can increase significantly where special damages are claimed and succeed; such as where a specific contract has been lost as a result of a defamatory allegation.  In such cases those losses can also be claimed from the defendant (with, in theory, no upper limit).  In practice, awards for such quantifiable loss are likely to become commonplace given that corporate claimants are now required, under the Defamation Act 2013, to argue that a defamatory allegation has caused or is likely to cause them serious financial loss.

Furthermore and importantly, it is usual practice for the court to order a losing party to pay the legal costs of the winning side (or at least a potentially very high proportion of those costs).  Defamation cases tend to be complex and expensive, which means that the total costs payable by a losing party can greatly outweigh the amount won in general damages, sometimes tenfold. For the parties however, cases are usually not about money, they are about reputation, and what price would you put on yours?   

In short, investors should not take the financial and reputational costs of libel litigation lightly; however, sometimes leaving a false and damaging allegation unchallenged can be far more expensive to a business in the long term than dealing with it head on, and investors need to think long term.

FURTHER READING:  Gideon Benaim of Michael Simkins’ reputation protection team contributed to an article for Bloomberg which appeared in The Washington Post and Businessweek on 10 February 2014 on a defamation case brought against Forbes by Prince Alwaleed bin Talal.  The article can be read HERE.

I contributed to an article for Bloomberg which appeared in The Washington Post and Businessweek yesterday on a defamation case commenced last year against Forbes by Prince Alwaleed bin Talal.  The article can be read HERE or HERE.