Fighting funds

Third-party litigation funders and brokers seem to be flooding the UK market. But what is it about the local market that is causing others to enter the legal arena?

Third-party litigation funders and brokers seem to be flooding the UK market at the moment and the likes of IM Litigation Funding are already well known within the legal profession. But what is it about the local market that is causing others to enter the legal arena?

Christian Stuerwald, head of litigation funding UK, Allianz

In its recent release of a white paper, the Civil Justice Council recommended that “third-party funding should be recognised as an acceptable option for mainstream litigation”.

There now seems to be sufficient political backing for commercial third-party litigation funding. The Office of Fair Trading (OFT) stated in late 2007 with a view to competition law cases: “The OFT takes the view that third-party funding is an important potential source of funding… third-party funding should be encouraged.”

The underlying reason for the existing demand for third-party funding is that, even though highly efficient due to reforms over the past years, the English legal system is prohibitively expensive and highlights the existing demand for third-party funding; the costs of civil proceedings are estimated to be five times higher in the UK than in Germany and other European countries.

The experience of the past five years has shown that the market is big enough for several professional funders, most of which are subsidiaries of insurance companies in Germany.

The move into the UK is motivated both by the fact that London is a centre for national litigation and international arbitration proceedings. National cases offer the chance to combine funding with ‘after the event’ (ATE) insurance products. Arbitration is suitable for funding mainly because the high amounts in disputes justify the high cost and because the parties usually take a commercial approach to the proceedings.

Most of the funded cases will likely settle in accordance with their experience in other countries; they encourage mediation proceedings as they can be a useful tool in this respect.

Mark Wells, co-founder, Calunius Capital

Commercial disputes involve substantial financial risk to those involved.

Own costs and, where applicable, adverse costs are the most obvious financial implications. Of even greater magnitude, there is the uncertainty of outcome itself. For corporate defendants, or claimants, outstanding disputes represent contingent assets or liabilities of uncertain value.

The financial risks arising from sources such as credit exposure, foreign exchange rate fluctuations or commodity prices are routinely considered for hedging. The financial risk of the dispute process should be no different.

The most widely understood area of hedging the financial risks of disputes involves insolvent companies entering into litigation funding agreements to finance claims that may otherwise lapse. This is an important area, but represents only a fraction of the circumstances where the concepts of ‘dispute risk management’ apply.

There is an increasing range of financial institutions, ranging from small specialist operators to large financial conglomerates, that will share in the financial risk of commercial disputes. Each institution has a different perspective and appetite for particular types of dispute risk. This allows disputants to finance the costs, or hedge the outcome, of a wide range of dispute situations.

Indeed, rather than being the last resort for financially stressed claimants, the potential for financial risk sharing should be a first consideration in all dispute situations:

•Not just litigation: ADR mechanisms, such as arbitration and tribunals, are equally suitable for financing or hedging.

•Not just costs: the risk of outstanding disputes can block corporate transactions such as M&A. Mitigating the risk through a hedge transaction can remove such obstacles.

•Defendants and claimants: risk applies to both sides in the dispute.

•Global not local: this is not restricted to UK law or the UK courts – a wide range of jurisdictions can be accommodated, potentially even some emerging markets.

•Not just strong merits: there is the possibility to place early-stage and speculative risk.

•Wide range of underlying matters: essentially anything in the civil domain.

This is a rapidly evolving area of financial innovation – specialised advice is crucial to understanding and evaluating the possibilities for financial risk reduction.

Nina Hall, director, Global Arbitration & Litigation Services

The Courts of England and Wales have understandably been keen to preserve the use of their services without champerty. Rather, the process of civil enforcement of claims arising out of broken commercial arrangements has been protected by the courts from the speculative litigant, or indeed, claimants who are not true ‘owners’ of the wrongs done to them, but mere investors in the wrongs suffered by others.

However, in more recent times, the English courts have chosen a more pragmatic approach to litigation, and indeed to access to justice. The Woolf reforms (embodied in the Civil Procedure Rules 1998) stipulated that all users of the civil justice system in England and Wales should have regard to an overriding objective that included a recognition of the financial position of each party in terms of proportionality.

Fair access to civil justice is not confined to principles of proportionality of financial means, but with the demise of legal aid and the recognition of the insolvent litigant’s position, the funding of claims was an inevitable step for the English domestic courts to take in the past five years.

The bar on funding (without purchase of the claimant’s title) has not to date presented itself in a typical ‘English’ form in the arena of international arbitration work. If the more pragmatic approach to civil justice continues, then recognition of the true cost of pursuit of an international claim may well deter any international tribunal from denial of access to a remedy in international arbitration.

Given that neither procedural or ethical bars are unlikely to either prevent tribunals from considering claims or undermine the funding mandates, the UK market has seen a massive growth in the rise of funds willing to invest in both litigation and arbitration. The number of well-publicised specialist funds has gone from a couple to a dozen in just one year. The number of hedge funds willing to invest in claims along with private investors has also swelled considerably in the past 12 months, not just in the UK but globally.

The interest in the UK market from hedge funds based in the US, Germany and Australia in the latter half of 2007 was as a direct result of the success of some of the smaller UK players. The UK civil litigation process is relatively transparent, and as such investment decisions are arguably easier to make here than elsewhere. International arbitration has also gone through a process of global harmonisation over the past 10 years, which also makes it more attractive for the accurate assessment of cost and outcome.

The increase in the number of funds has also led to the need for brokers. Neither the claimant nor their lawyer has the time to seek out a suitable funding partner from the market, with each fund having its own investment criteria, approach to due diligence and restrictions on the number of cases it can take on in any one year.

Christian Stuerwald from Allianz, Mark Wells from Calunius Capital, and Nina Hall from Global Arbitration & Litigation Services