19 May 2008
The litigation risk transfer market in the UK is evolving at pace. Third-party funding (TPF) has received numerous column inches in recent months. The litigation insurance market, often taking second place in the headlines, has also vastly developed in the past three or four years. So with all these drivers in the risk transfer market, will it result in an upsurge in litigation and, in particular, collective actions?The clients without the ability to finance the interim costs in litigation are the natural fit for claimant TPF and where the majority of claimant funding deals will likely be done. Insolvency cases, actions brought by impecunious clients, commercial clients with limited assets, international arbitrations and collective actions are likely to be the real playground for funders.
The latter area identified is a widely discussed one at present. Risk-transfer options (whether insurance or TPF) will inevitably help overcome the cost hurdle of running mass claims. However, the extent to which TPF penetrates the mass/class action market could be influenced by the debated issue of 'opt-in'- or 'opt-out'-style class actions. England and Wales' legal system does not currently adopt the US-style opt-out approach to class actions.
TPF has yet to make any real inroads in the collective actions run in England and Wales. Indeed, we have already seen such cases turned down by funders because the collective pool of damages is not a large enough ratio to the required legal spend to run the case. It may have been a different story had an opt-out system been in place.
Many of the recent group litigation orders (GLOs) in the UK have been run with a combination of conditional fee arrangements (CFAs) and litigation insurance. Such a system does work, but relies on the willingness of lawyers to act on CFAs with cases that could have a considerable amount of work in progress (WIP) over a prolonged period. The benefit of this system is that damages need not be substantial to secure terms - there just needs to be confidence that costs will be recoverable.
We have brokered arrangements for a number of the GLOs listed in the past five years with legal costs ranging anywhere from £500,000 to £5m-plus. Premiums are typically contingent upon success - meaning there is no premium to pay upfront or at all if the case is lost. Without question a number of clients would not have been able to obtain access to justice without the favourable risk-transfer terms afforded. A distinguishing feature of insurance as opposed to TPF is that the premium is also recoverable, so provided it is reasonably priced the claimants should not have to give up any of their damages. The above being said, and notwithstanding the fact that many claimants have the ability to litigate at no cost to them, few could disagree that, since the introduction of GLOs in 2000, there have been fewer cases listed than expected. In the past three years there have only been 18 GLOs.
A real question mark in respect of mass actions concerns cases where the estimated costs are in excess of firms' CFA comfort zones. In our experience this would normally be in the order of £1m of WIP, although we have seen exceptions. Thereafter, funding becomes more problematic and this is where opportunities arise for funders.
Demand in this context is likely to be relatively inelastic as TPF becomes more of a necessity. Funders would argue that it is better to have X per cent of something than 100 per cent of nothing - which, in the absence of a substitute mechanism to finance such cases, is probably a fair comment.
The emergence of competition law cases, as an example, could be a real stress test for the robustness of the current risk transfer market. A number of funders and insurers have expressed an appetite to support cartel cases and indeed the possible resultant follow-on claims. The legal costs of running such cases are likely to step beyond the traditional CFA comfort zones for many lawyers and thus require a greater call on the litigation risk transfer market to step up to the plate and carry the risk.
Criticisms to the effect that TPF would likely lead to an abuse and fuelling of class actions are unfounded. Funders are not wizards and do not conjure up litigation. Only the wrongdoers can create a liability for themselves. Our experience is that funders are more risk-averse than litigation insurers. TPF is not a quick or easy investment - it is also a high-stakes game. Just one or two significant losses with such cases could spell the end of that funder's involvement in the market. TP funders are only likely to support cases with genuine merit, as there is no motivation to do otherwise. In our view, the question of abuse is less an issue of unmeritorious cases being supported, but more a question of protecting clients' interests by ensuring competition. Absence of price competition could result in clients giving up disproportionate shares of their proceeds - we have already seen variances of tens of millions of pounds between the pricing from funders on given cases. So it is important for lawyers to shop around on all cases, particularly in collective actions where clients will not necessarily receive the same individual attention as they would in single claimant actions. n
James Delaney is director of independent risk transfer brokers TheJudge