Litigation funding: War chest

The downturn has proved a fertile environment for the rise of litigation funders. James Delaney examines the evidence

Few lawyers can have escaped the publicity surrounding ­litigation insurance and funding in recent years. Numerous high-profile cases have been cited in the legal press heralding the revolution that has occurred in the use of litigation risk transfer products across the complete ­spectrum, from modest level civil dispute to heavyweight commercial litigation.

In the commercial arena, The Innovator One group action, run by Addleshaw ­Goddard, was probably the largest ­combined litigation insurance and funding package of 2008, but it is likely to be ­exceeded in 2009.

In the civil litigation arena, the Corby Group Litigation represents a clear ­demonstration that the Government’s ­intention of encouraging the private sector to substitute the public’s legal aid spend is working. After all of the test cases ­surrounding conditional fee arrangements (CFAs) and after-the-event (ATE) ­insurance over the past decade, this is one of many clear examples of access to justice being facilitated efficiently by the private sector.

The Atomic Veterans Group case, which recently succeeded on the ­limitation trial, is another demonstrable example of access to justice at its best. Absent of ­litigation insurance and quite likely one of the largest CFAs to date, the vets would never have had the opportunity to bring their cases, even to a first instance limitation trial. And so the list can go on.

While there is no pure statistic as to the percentage of litigation supported by litigation insurance or funding, it would be a brave person to argue that there has not been a significant paradigm shift over the past 24 months, most notably in the ­commercial litigation sector.

The credit crunch has sparked an ­opportunity for litigants to apply pressure on lawyers for alternative billing options. Some firms have taken it upon themselves to aggressively market the notion of transferring litigation risk; City firms such as Addleshaws, Mishcon de Reya and Norton Rose have all received press attention for their creative approaches. Outside the Square Mile there are numerous regional heavyweights ­sporting similar approaches, including ­Pannone and Ward Hadaway.

Irrespective as to whether firms choose to publicise their willingness to embrace and promote the modern risk-sharing options, the truth is that even those keeping their heads below the parapet of publicity are not immune from the cultural shift. We have seen countless examples of how determined firms can win new business tenders by ­slashing charge-out rates. Magic circle firms are not immune from this; nor is this a ­phenomenon restricted to UK firms within this economic environment. There is no sign that such predatory pricing is abating.

Those firms keeping themselves abreast of the risk transfer market will be aware that simply discounting rates as a principal tactic is not necessarily the best tactic, either in terms of providing value to the client or indeed profitability to the firm. Litigation insurance in particular has seen a much wider take-up across the range of commercial litigation, including in IP, international arbitrations, banking litigation, shareholder disputes, competition cases and more. The availability of deferred premiums and those contingent upon success (regardless of the level of cover) makes this is a very attractive hedge for a number of clients. Cover will typically insure the client’s adverse cost ­exposure, but also their own expenses, including the counsel’s fees. Approached properly, a proportion of cover for own-side solicitor’s fees is also potentially available.

Assume, for example, client X is offered a discounted rate of 40 per cent by their lawyers (more common than many may think). Compare this with client Y, who is offered a 30 per cent discount from their lawyer’s fee, together with an itemised and regularly updated cost schedule, as well as a complete hedge on their adverse cost risk, their own disbursements and 50 per cent of the non-discounted element of their lawyer’s fee. The premium cost to client Y is only payable if the case is successful. Client Y may well feel more satisfied with the ­funding structure than client X, despite a lower ­discount on normal hourly rates.

Whether firms have chosen to embrace the risk transfer market or not, one thing is clear: the economics of litigation is ­becoming the focal point for many ­litigants, regardless of their financial size. Any ­successful business relies on understanding the needs of the customer; for lawyers these customers’ motivations ought to be ­apparent, but if they require any reminder to discuss options then they can be referred to Section 2.03 of the Solicitors Code of Conduct. The code provides a stark ­obligation on the need to understand ­available risk transfer options so they can be discussed with all litigants, be they impecunious clients, blue-chip clients, claimants or defendants.

Those who are sceptical about the risk transfer market developing at pace are most likely relying on outdated or inaccurate information. In difficult economic times certainty and value are on the wish list for any purchaser of legal services. While Lord Jackson’s review may or may not alter the shape of the current market in years to come, it would be a foolhardy sceptic who believed clients’ desire to obtain certainty and hedge risk is merely a phase, or indeed that the private sector will cease to be the major resource for those seeking such ­protection.