Commercial litigators finally embrace alternative funding

Rowena Herdman-Smith

Rowena Herdman-Smith

Demand for alternative funding arrangements in commercial litigation is on the rise, with clients looking for ways to tighten their legal spend.

The use of conditional fee arrangements (CFAs) has traditionally been sniffed at by commercial litigators. In the past they have preferred to leave CFAs to their personal injury (PI) counterparts, but now a small number of firms are looking at how they can best use alternative funding to attract new clients.

Last week Mishcon de Reya signed a delegated authority deal with litigation funding broker The Judge (The Lawyer, 28 September). Under the terms of the deal, the firm has the authority to assess the merit of cases before putting in place a funding package.

The move signals the firm’s willingness to take on more cases on a partial CFA basis. “Solicitors need to better consider their options when it comes to funding,” explains Mishcon litigation partner Rowena Herdman-Smith. “The insurers I deal with are really clever, you get an interesting engagement on how to run the case.”

Traditionally CFAs have been used in the PI market as a tool to help lower-value claims get to court. The insurance pays out if a claimant loses, helping to cover the costs of expert fees and ­medical reports.

Since the beginning of the downturn, however, there has been a notable shift in the number of alternative funding arrangements being used in the ­commercial sector.

Addleshaw Goddard put the spotlight on the market when it put in place a package to fund a £50m claim against London firm Collyer ­Bristow (The Lawyer, 1 December 2008).

The action, which is still being ­pursued, was brought on behalf of 555 investors using a finance package that combined a discounted CFA, £5m worth of litigation funding from Allianz ProzessFinanz and after-the-event (ATE) insurance covered by QBE and Brit Insurance. The brokers were Calunius Capital and The Judge.

As one leading underwriter says: “Solicitors are quite strange in how they behave – as soon as one firm does something like this everyone else jumps on the bandwagon. There’s a herd mentality about it.”

According to Herdman-Smith, ­Mishcon is not following the pack but being innovative by offering a range of funding packages that are being sold to clients under the Mishcon ­Protect brand.
Mishcon clients will have access to pure funding packages or a hybrid of independent funding and ATE insurance. Under the delegated authority scheme, lower-value claims can be assessed quickly rather than the usual three months it could take to get to ­market, thereby reducing legal costs.

Herdman-Smith says the firm will not commit to a 100 per cent CFA, but instead would negotiate a partial agreement. Before that could be signed off, Mishcon partners would need to give their approval, as under a CFA it is the firm that takes on the risk of the case.

There are dangers involved in negotiating such deals. As Herdman-Smith says, the lawyer is not a financial adviser but instead should tell clients of the funding options available. This goes beyond just making clients aware of the Mishcon Protect facility.

According to Mishcon legal director Neville Illingworth-Law, having insurers and funders backing claims “enhances the client position” and can encourage the opposing side to settle.
One leading litigator claims the scheme, much like the independent funding market, is a “flash in the pan” triggered only by the downturn, and will fail to appeal to major corporates, which have the capacity to spend top-end legal fees.

“I don’t think that’s true,” another underwriter says. “There’ve been instances of firms losing clients because they refuse to work on even a partial CFA basis. Mishcon is saying it’s willing to look at all funding options on the table. That could stop clients walking out the door.”

Legal spend is under scrutiny in most in-house departments. While the use of CFAs will not appeal to every general counsel, the instrument is a viable option and one that lawyers need to take seriously.