Legal
In Defence Of Litigation Funding

Litigation funding may still be a niche area but it has a number of attractions, lawyers arguing in this article claim.
An area of growing activity in the UK - and in certain
other jurisdictions such as the US - is litigation funding.
One of the attractions, its practitioners say, is that it isn’t
correlated with the wider economic cycle. Indeed, when economic
conditions worsen, litigation to recover debts and deal with
other issues can increase. To discuss litigation funding and
the issues around it is Jonathan Tickner, partner, and Holly
Buick, trainee solicitor, at Peters
& Peters Solicitors. The editors of this news service are
pleased to share these comments with readers and invite readers
to respond. This publication does not necessarily endorse all
views of guest writers. Email the editor at tom.burroughes@wealthbriefing.com
Litigation funding has, in recent years, been touted as an
investment vehicle with the promise of high returns in a low
yield era. Traditionally, large funders backed by institutional
investors have financed high value claims with potential recovery
in the tens or hundreds of millions. Established funder Burford Capital
recently announced a strategic partnership with a sovereign
wealth fund, resulting in an additional £1.6 billion ($2.09
billion) pool of capital for litigation finance investments. (1)
Meanwhile, new entrant Axiafunder has given
individual investors the opportunity to invest as little as
£25,000 to fund cases worth up to £1 million, advertising
potential returns of up to 30 per cent. (2)
Against the background of rapid growth and innovation in the
sector, it is worth revisiting the key features of litigation
funding that high net worth individuals and their advisers should
take into account when considering this as a viable option for
pursuing a legal claim.
The basics
Put simply, litigation funding is a mechanism that permits a
third party, usually a private venture known as a litigation
funder, to provide the financial resources to enable a case to be
brought, in spite of its having no direct interest in the
proceedings. (3) The funder will seek a return on their
investment in the form of an agreed share in the proceeds of the
claim. If the claim is lost, the funder loses its
investment.
The UK leads the way
Increased interest from corporates, with the added incentive of
removing legal costs from their balance sheets, and HNWIs seeking
to avoid the financial exposure of costly proceedings, means that
this type of funding is now firmly embedded in the UK’s
litigation landscape. The industry has grown particularly rapidly
to meet demand from London’s world-renowned centre for complex
and high-value commercial dispute resolution. The UK is believed
to have more litigation funders than any other jurisdiction, with
total assets held by UK funders increasing by 31 per cent to £3.1
billion last year (4) and the largest funder, AIM-listed Burford
Capital, committing a record £1.3 billion for two years running.
(5)
Why choose litigation funding?
The main benefit of litigation funding can be simply stated: many
people will be content to hand over some of their winnings in
exchange for sharing the risk and costs of litigation. In England
and Wales, the so-called “loser pays” rule means that an
unsuccessful litigant will normally pay the winner’s costs as
well as its own. This makes embarking on complex and drawn-out
litigation a particularly risky endeavour. Litigation funding is
invariably used in conjunction with an indemnity for legal
expenses, known as After the Event (ATE) insurance, and may also
be combined with a Conditional Fee Agreement (CFA) under which
the solicitor takes the risk for all or part of the client’s
legal fees if the case is lost, or a Damages Based Agreement
(DBA) that allows the solicitor a share of the proceeds in
exchange for assuming the risk of the legal fees.
While a well-resourced individual might be willing to allot a certain amount to bringing a claim, litigation funding can increase this budget and allow a wider strategy, perhaps pursuing multiple defendants or claims across different jurisdictions. The internationalisation of litigation funding has therefore seen funders building their global capacity, taking advantage of the relaxation of rules preventing third parties sharing the proceeds of litigation in jurisdictions such as Hong Kong and Singapore. Moreover, litigation funding is being increasingly used in group redress and group litigation claims, as well as group shareholder actions.
When does it work?
As well as the removal of a large part of the financial risk,
reluctant litigants may take comfort in the fact that a funder,
having taken an objective view on the case and applied rigorous
cost-benefit analysis, has judged it sufficiently meritorious to
justify a substantial investment. Not all cases will be suitable
for litigation funding; funders deploy their own analyses and
commission reports from expert independent counsel to determine
whether a case is worthy of investment. Factors making
enforcement (the process by which a successful litigant claims
what is owed by the defendant following judgment) more or less
difficult will also be weighed, including the availability of
assets within the jurisdiction or in locations where a judgment
or award can be easily enforced. The funder will also need to be
convinced that the proceeds from the claim, if successful, will
be sufficient to cover their fee and return, and leave a
proportionate sum for the litigant. This latter consideration
calls into question the viability of new funders going after
smaller claims, where the proceeds may not be large enough to
justify the funder taking a share.
Choosing your funder
Given the large number of well-established litigation funders in
London, an individual with a strong case should have no problem
securing funding in a market in which funders must compete to
provide the most competitive terms. The major players have now
built considerable expertise, which can be invaluable to a
claimant. It is also important for potential litigants to
understand the role that the funder will have during the
proceedings, including during any mediation or settlement
negotiations.
While litigation funders are not permitted to exercise control over litigation, it is increasingly common for them to attend mediations or other settlement meetings with clients and their solicitors. The litigation funding agreement should set out the funder’s role in decision-making, and will commonly provide for the funder to be informed of discussions and offers, with some agreements stipulating that offers within a certain range are deemed reasonable and should be accepted. (6)
Don’t ignore the opportunities
With an ever-increasing volume of capital chasing a limited pool
of suitable claims, it remains to be seen whether the price of
litigation funding will fall, or whether new entrants promising
large returns to individual investors will deliver. Leaving the
dynamics of the market aside, litigation funding continues to
represent an opportunity for those with good claims to share the
risk with a financial backer with significant expertise, and one
that individuals and their advisors would be unwise to ignore.
Notes
1,
http://www.burfordcapital.com/newsroom/burford-secures-funding-new-litigation-investments/
2,
https://www.ft.com/content/03921f5e-a49a-11e8-926a-7342fe5e173f
3,
http://associationoflitigationfunders.com/litigation-finance/
4,
http://www.globallegalpost.com/big-stories/uk-litigation-funder-war-chests-hits-record-high-13-billion-39596045/
5,
http://www.burfordcapital.com/wp-content/uploads/2019/03/BUR-31172-Annual-Report-2018-Web.pdf
6, See Clause 11 of the Association of Litigation Funders
Voluntary Code of Conduct
http://associationoflitigationfunders.com/code-of-conduct/