While some aspects of litigation funding have failed to take off, the sector shows signs of good health
Do you have any early indications of the popularity of damages-based agreements (DBAs)?
Susan Dunn, head of litigation funding, Harbour Capital: Yes, and they are all about how unpopular they are. Even the most entrepreneurial firms we know are not using them because they are riddled with uncertainty. If better drafted they would be more widely used.
The lack of clarity about the ability to take on hybrid DBAs – whereby the client pays some of the fees and the law firm bears the rest in return for a share of the fees – is especially disappointing given that the working party recommended they be allowed.
Matthew Reach, head of legal, Argentum Litigation Services: The early indications are that DBAs have not been well-received by practitioners. It seems that confusion as to whether hybrid DBAs are acceptable and concerns over enforceability generally have dampened enthusiasm, at least for the time being.
Lawyers appear reluctant to step into the unknown when the financial and reputational consequences of getting it wrong can be severe. Some commentators suggested that the introduction of DBAs would be damaging to third-party litigation funders, but we have seen a surge in third-party funding applications since 1 April.
Jonathan Barnes, director, Woodsford Litigation Funding: We’ve not seen any interest at all. The most high-profile issue, from the lawyers’ perspective, has been the uncertainty as to whether hybrid DBAs are permissible. However, there are other significant hurdles. How do you deal with the inherent conflicts of interest with the client? A DBA may be a good financial solution for both parties at the outset but what if it’s not the right deal for the client as the claim evolves? How do you mitigate the risk of a third-party costs order as the ATE insurance market moves away from fully contingent/
deferred premiums? How do you allay any capital adequacy concerns the client and/or the SRA may have?
Nick Rowles-Davies, consultant, Vannin Capital: The general feedback on DBAs has been negative. Most practitioners seem to take the view that they are viable only in a limited number of cases.
Additionally, most lawyers’ appetite for taking on the extra risk involved in this type of retainer is limited. Lawyers have not suddenly become less risk-averse. In fact, given the economic conditions, cashflow remains the preference over an enhanced, deferred payday.
That said, there are certain cases where the mathematics and risk work for the client and the law firm. The difficulty is the uncertainty caused by the drafting of the DBA regulations and the perceived bar on hybrid DBAs. When this is clarified they may be more attractive.
Andrew Langhoff, CEO, Burford Capital UK: The idea of DBAs was well-received by most UK firms, but the regulations promulgated last spring to implement them were complicated and unclear.
As a result, while we believe many firms have a keen interest in undertaking DBAs the take-up has been slow and will only accelerate once the regulations have been clarified. It is our hope and expectation that this modification of the regulations will take place in the autumn.
DBAs, once clarified, will present an ideal vehicle for firms to share the risks and rewards of litigation with their client and/or a funder.
As more third-party funded cases hit the courts are you happy that clients understand the system, particularly following the implementation of the Jackson reforms?
Dunn: Even the most allegedly sophisticated clients find the process of litigation arcane and somewhat impenetrable. It is incumbent on their lawyers to explain the process carefully yet few do, whether through fear of patronising them I don’t know, but they must do better at managing expectations, not just of Jackson but the process overall.
Reach: It’s fair to say that litigants are becoming more familiar and comfortable with the concept of third-party litigation funding but we are probably still some way off the point at which you could say they understand the system.
The process of educating clients fully on the operation of third-party litigation funding can only really gain momentum if lawyers fully understand it too.
More litigators are getting to grips with third-party litigation funding and developing an appreciation of how it can benefit them and their clients, but there’s still work to be done in this regard. The task of educating lawyers on funding options is something we are tackling head-on.
Barnes: Yes. As Lord Justice Jackson noted in his final report, funded claimants are “generally commercial or similar enterprises with access to full legal advice”. That has not changed and the code of conduct adopted by the members of the Association of Litigation Funders (ALF) has brought further clarity. For example, the code sets out and circumscribes the circumstances in which a funder may terminate the funding agreement.
Rowles-Davies: There’s still a significant task in front of third-party funders to educate clients as to the benefits of third-party funding and the opportunity it provides to insulate against risk. The Jackson reforms remain largely unknown outside the legal profession, but obviously the need to explain their effect on litigation and the costs to a successful claimant as regards success fees and ATE premiums provides a further opportunity to explain the benefits of funding to clients.
While the advent of DBAs was predicted to provide competition to funders from lawyers, uncertainty over the regulations has meant there has been little impact. The difficulty funders and clients face is lack of awareness of funding on the part of a number of lawyers.
Langhoff: Law firms in the UK, and in London in particular, are now up-to-speed on litigation funding and we are seeing enquires from all quarters. And, while third-party funding was not directly affected by the Jackson reforms, changes in the legal landscape including the non-recoverability of ATE insurance and advance budgeting are increasing the market for funding.
Moreover, the debate surrounding the reforms shone a bright light on the broader topic of litigation costs and the economics of trying cases. In that respect it was helpful in making people more receptive to litigation funding. As is well known, the Jackson report unequivocally endorsed the practice of third-party funding, a sentiment that has now been echoed and reinforced by Lord Neuberger.
Are investors still wanting to put money into litigation funds?
Dunn: Investors want to invest in those with a demonstrable record and there are not many that have that. Like any investment type, an investor wants to know the people they are investing in have been around the block and learned lessons along the way. Some are attracted to litigation funding because they think they can make quick, easy returns, but litigation is not quick and you have to have excellent underwriting criteria and experience to succeed.
Reach: We are finding that the demand for opportunities to invest in litigation is stronger than ever. Third-party litigation funding was probably thrust to the fore sooner than expected because more traditional asset classes were suffering as a result of the financial crisis. It appears that investors still see long-term value in this uncorrelated asset class, which has the potential to yield substantial returns.
Barnes: Yes. Funding litigation is a high-risk business and is not, therefore, right for many investors. However, funders with the right infrastructure and who can deliver commensurate returns in the medium to longer term will continue to attract capital.
Rowles-Davies: Litigation funding is an expanding asset class and the funds available for the industry are increasing every year. In the UK there is around £500m available for investment. That’s a significant sum but still far less than the demand for litigation funding.
There are new funds and funders springing up in the UK market, but the number joining the ALF has not increased much. Litigation funding remains an area where investors believe there are significant profits to be made.
While that is true, the investment in funding should not be seen as a quick way to turn a profit. Litigation is unpredictable and the only sensible way to make a sustained profit is to adopt a long-term portfolio approach that allows for the inevitable losses as well as successes.
Langhoff: We have seen demand for our publicly traded shares and regularly attract new investors. Our investors are attracted by our size, our diversification and the quality of our team.
Is litigation funding gaining traction outside the UK and US?
Dunn: Harbour has been particularly privileged to create a lot of jurisprudence about funding across the common law world. There are now judgments, some at Court of Appeal level, in favour of funding as a result of our funded cases in New Zealand, Canada, the British Virgin Islands (BVI), Hong Kong and Jersey.
It would seem odd now for a judge to say a case cannot proceed simply because it is funded, especially where that funder is a member of the ALF. What justification could there be for doing so?
Reach: A substantial part of our business relates to the Australian market where third-party litigation funding is far more established than in the UK. I have also observed third-party litigation funding gaining momentum in other jurisdictions, such as South Africa.
Third-party funders are also learning to adapt to the demands of their customers and the conventional case-by-case funding model now shares the shop window with other innovative products such as portfolio funding and investment via the ABS structure.
Barnes: Yes. The Australian market is probably older and in some ways more developed than both. Arbitration is international and attracts funding. The law is developing and there is interest in other jurisdictions.
Rowles-Davies: Litigation funding developed in Australia. The UK market is maturing, and in the US funding remains in its infancy, given the size of the potential market. In Germany and the Netherlands funding has been used for some time and the market there is reasonably established, particularly in the field of cartel actions.
The use of funding elsewhere in the world is increasing. There have been recent, favourable decisions on the use of the concept in the Channel Islands and Canada. The Cayman Islands and the BVI have endorsed funding contracts as legal and not offending rules on maintenance and champerty.
The international arbitration world continues to make significant use of litigation funding. The relatively high legal fees and large awards provide an arithmetically beneficial environment for the industry.
Langhoff: In addition to our growing book of business in the UK and US we are regularly approached to provide funding in Europe, South America and Asia.
While we are intrigued by the opportunities such jurisdictions provide and have made investments where appropriate, we favour common law jurisdictions where our in-house team of underwriters can use their experience to assess cases.
The litigation finance markets in the UK and the US are still largely untapped and present excellent opportunities. We have, since our inception, been involved in financing international arbitration, including investor-state disputes.