Litigation funding experts discuss misconceptions around third-party litigation funding, and how funding is affecting the litigation market.
Q: What trends in the litigation market have affected third-party funding in the past 12 months?
Susan Dunn, head of litigation funding, Harbour Litigation: The past 12 months have seen further exponential growth in the use of litigation funding. This time it has been fuelled by large corporates and their representatives, both of which used not to consider that funding was for them.
The intense pressure on in-house legal budgets and the connected pressure on fee income for law firms has led both to engage with litigation funders to understand how they can use funding in their business in the same way they fund all other aspects of their business.
The chief financial officer is attracted to the ability to set the legal budget with greater confidence while making returns on good claims that otherwise would not be pursued because of the lack of guarantee of outcome.
Cartel follow on (competition) claims and shareholder non-disclosure class actions, which large corporates are typically claimants in, have driven the understanding of funding that led them to question why they are not using funding more. We now receive unsolicited contacts from large corporates for information about our business even before a claim materialises.
Our expectation would ultimately be that governmental bodies will consider funding for claims such as tax or asset recovery matters they could not otherwise afford to pursue because of the impact of austerity measures on legal budgets.
Dan Craddock, chairman, Vannin Capital: As various professional reports tell us, corporates around the world are subject to an increasing amount of litigation.
Awareness of litigation funding is undoubtedly rising in the legal profession, but that awareness is now also increasing in other professional fields, most notably among accountants and finance directors. The availability of funding means finance directors are able to pursue meritorious claims that would otherwise not have been pursued because the costs of running the case simply did not justify the risk of a loss. For a professional who deals in the ‘black and white’ of numbers, the inherent uncertainty of all litigation has often been hard to reconcile when evaluating the costs of running a case to conclusion.
Another change driving capital deployment is the funding of international arbitration. It was relatively unknown in 2012, whereas now it makes up roughly 50 per cent of our business and is the fastest growing area for our industry.
Leslie Perrin, chairman, Calunius Capital: There has been a huge increase in awareness of the potential for litigation funding. It’s a global international marketplace, covering large scale international litigation and all types of commercial arbitration where building initial credibility is hard, but results come at an accelerating rate once the breakthrough is made.
“We expect governmental bodies to consider funding for claims such as tax or asset recovery matters”
Litigation funders no longer simply fund the costs of individual cases. They also fund portfolios of cases for major businesses whose solvency is undoubted but who want to manage litigation risk in a commercially rational way. These can be: law firms who wish to able to offer clients fee structures that are contingent on success while maintaining their working capital requirement; the monetisation of existing litigation judgments and arbitration awards; the corporate overheads for businesses involved in what would otherwise be life-threatening disputes; adverse costs, security for costs and fortification of undertakings around injunctions; or assignments of claims in liquidations and in civil law jurisdictions.
Jeremy Marshall, chief investment officer, Bentham Europe: In relation to insolvency litigation the decision to end the insolvency profession’s exemption to the Jackson reforms as of April 2016, meaning that conditional fee arrangement -based success fees and after-the-event [ATE] insurance premiums will no longer be recoverable in proceedings brought by liquidators, administrators and trustees in bankruptcy, should, in theory, result in insolvency practitioners increasingly seeking to engage and enter into arrangements with third-party funders.
Historically, the third-party funding of insolvency claims has generally been limited to smaller value claims (ie damages sought of less that £1m). It is hoped, by third-party funders at least, that the end of the recoverability of success fees and ATE premiums will facilitate a greater level of engagement with the insolvency profession in regard to fundable litigation claims.
In the competition area the new class action regime introduced by the Consumer Rights Act 2015, which facilitates collective proceedings in the Competition Appeal Tribunal for breaches of competition law including opt-out class actions, has piqued certain funders’ interest, although it remains unclear whether the regime will actually move the needle.
From a regulatory perspective, enforcement actions relating to the alleged rigging of foreign exchange markets by various global banks, underway in the English and US courts, have been keenly followed by funders.
With US class actions against global banks well underway the appetite for collective litigation may be growing here in the UK, with further actions in London a distinct possibility. Aside from the potential of forex litigation, Libor-related disputes are playing out before the courts as well as large shareholder-led claims against RBS and Lloyds in the High Court.
Otherwise, funders continue to be approached to fund high-value, cross-border and typically complex commercial fraud cases in both the High Court and arbitration arenas.
Nick Rowles-Davies, managing director, Burford Capital: The most striking trend has been the shift from single-case funding to offering litigation finance across portfolios of claims for use by companies, individuals and law firms. Moreover, we are seeing litigation funding evolve into litigation finance and become a new form of corporate finance. Litigants are using their cases as collateral to secure financing to be used for pretty much any corporate purpose across their business, often unrelated to litigation. More than half of Burford’s commitments are now to portfolios and complex investments.
Q: How has rising awareness of litigation funding affected the market?
Dunn: It has led to more new funders seeking to enter the market. This is understandable, but the challenges of funding should not be underestimated. Raising funds to invest requires a record of success, and few have such a record.
Litigation and arbitration take a long time to conclude, so records take a long time to establish. And results are unpredictable – even good cases lose and the fact is that any claim is not in the hands of any given funder but instead in the hands of the claimant and their lawyers.
The cases we fund are complex and challenging and yet, interestingly, we are accused sometimes of only funding sure-fire winners. There are no such cases. Of the over 40 cases we are presented each month, only around 5 per cent are funded. Typically, cases fail to secure funding because of a clear strategy for enforcement or overestimation of the value of the claim versus the budget. Assessing whether a case will win or lose is possibly the easier part. Determining whether the case has the stated value or if will be run according to budget are the two most difficult matters to evaluate.
“The funding of international arbitration is the fastest growing area for our industry”
Funding is a long-term endeavour, not for the faint-hearted. It’s a high-risk endeavour. Results, especially at final hearings, whether in litigation or arbitration, remain unpredictable, even in apparently strong claims.
Marshall: It is assumed that there has been an increase in awareness on the part of the legal fraternity of third-party funding in recent years. Whether that has had an impact in terms of the number of single-party commercial claims that are funded, or the total number of such claims brought, is unknown.
There are no doubt a healthy number of lawyers and brokers in London seeking to secure funding for numerous single-party claims, but equally it is the lament of a number of funders that the quality of the funding proposals they receive is generally low. As time passes and funders are able to better articulate to law firms and others that broker these claims what they will and will not fund, it is hoped that the quality of the funding opportunities will rise.
In a group action context, it appears there has been a tangible increase in both the awareness of the benefits of litigation funding and the commensurate appetite to secure funding for these types of claims. In that sense it is likely that increased awareness of funding will lead to more claims of this type.
Craddock: The volume of capital deployed and the number of clients exploring funding has risen exponentially in the past four years.
As magic and silver circle firms have embraced funding there has been a global shift in profile of both the typical funded client and law firm.
No longer are clients confined to asset-rich or cash-poor entities. We’re now seeing, our typical clients being multinational corporates and sovereign states.
Similarly, we now deal almost exclusively with the magic circle, the largest US firms and similar quality law firms who are recommending their clients to Vannin or seeking portfolio solutions themselves. Funding is not limited to those firms who are acting solely on a contingency basis.
Perrin: There is more demand all round; more sophisticated approaches from law firms and their clients to the opportunities to use litigation funding. Ever larger cases are coming into the funding market.
Rowles-Davies: Increased awareness means litigation finance is no longer used out of pure economic necessity, but rather as a deliberate business-driven decision. This means claimants are opting to unlock the asset value of pending litigation and are therefore able to add cashflow to businesses. Claimants are also now better able to manage the risks of their litigation.
Q: What do you consider the biggest misconceptions about litigation funding? How can funders work to disprove them?
Dunn: That there are a lot of funders in the market. The fact is there are still only seven members of the Association of Litigation Funders, those being the funders who have both affirmed, by third-party verification, that they have the funds to fund the claims they are funding and have had their agreements independently verified by counsel to ensure they are compliant with the Code of Conduct of Litigation Funders.
No other funders have submitted to that and it is interesting to me to see how many lawyers and claimants opt to engage with those who are not members of the association. We know that a number of entities claiming they are funders do not in fact have funds but instead seek funds on a case-by-case basis from funders who are members of the association. This can end up making the engagement with a funder much more lengthy and ultimately unrewarding if funds cannot be secured. It remains the obligation of the claimant adviser to satisfy themselves that a funder is both in funds and funding in a way compliant with the code.
“Funders no longer simply fund the costs of individual cases. They also fund portfolios of cases for major businesses”
One misconception is that funders control the litigation. We don’t. If we were to do so we risk the accusation of infringing champerty and maintenance, and having our agreement declared void, having spent potentially several million pounds on a case. We would be reckless to do so. We rely on qualified lawyers and quality claimants when funding the claims in our portfolio.
Another misconception is that we insist on lawyers working at a discount. We don’t. We want the lawyers running the cases we fund to be properly remunerated. Indeed, when presented with budgets for matters we fund we often increase them where we think inadequate provision for inevitable challenges has been made. Running cases on a shoestring is counter-productive to the best chance of a case succeeding.
And some believe that we fund frivolous claims. We don’t. What would be the point? They will fail and we only stay in business if we fund successful cases.
Others may think that we are somehow funding so many cases, in particular arbitrations, that we control all arbitrators and there is inherent conflict as a result. The reality is that even a funder of our size (of around £410m in funds) only funds around 25-30 cases a year in 13 jurisdictions and a range of arbitral forums – our average budget nowadays is £4-5m and our minimum claim size is £10m – of which around 10 per cent are arbitrations at the moment. The numbers we fund are tiny relative to the total of litigation and arbitrations, and the idea of us being able to control all arbitrations is clearly not true statistically. In addition, if we fail to declare a conflict where, for example, an arbitrator has a connection to our fund, we again simply face the fact that any successful award would be overturned for conflict. It would be reckless.
Another misconception is that we only fund sure-fire winners. I wish! We have strict criteria about what we will fund based on 14 years’ experience, which we stick to. So yes, we are unapologetically rigorous about funding cases where we know we will get paid if we succeed, we believe will win, that have a clear minimum value and a robust budget. That’s how every case we fund is assessed, and still cases advised on by the leading practitioners in the world sometimes fail and we lose all the money we have invested.
The last big misconception is that we practice some kind of dark art when assessing claims. We don’t. As we say to any lawyer with a case looking for funding – if you believe you would invest in the case then we will probably agree with you, but you have to demonstrate it has value, that it will succeed based on what we know today and has a defendant who can pay if the case is successful with a budget which is around a tenth the size of the minimum claim value.
Perrin: The biggest misconception is that litigation funding is harmful, when it is both an essential element of access to justice and an indispensable part of the rational commercial management of litigation risk. That using litigation funding involves a loss of control for the lawyers and their clients and will make people think your business is insolvent.
Funders can work to disprove this by taking the story to the marketplace, continuing to invest in great opportunities and continuing to win cases.
Marshall: There is sometimes a misconception held by clients without experience of funding and perhaps fuelled by American anti-funding lobbyists that if the litigation isn’t going to plan a funder is likely to withdraw funding before judgment, leaving the previously funded client high and dry.
This belief fails to take into account a number of important issues. First, any funder worth its salt will have carried out significant due diligence on the matter before agreeing to fund the case.
Second, in large-scale litigation there are invariably a number of interlocutory skirmishes which may not go the way of the funded party, but which will have no bearing on the outcome of the case; for an experienced litigator, pulling the plug early would be naive.
“The interests of funder and funded institution are aligned”
Third, withdrawal is the nuclear option as far as the funder is concerned. Not only will the funder lose all the costs it has incurred up to that point, it also remains liable for the other side’s adverse costs (potentially on the indemnity basis) for the entire period it provided funding. This is particularly relevant in this jurisdiction where legal costs are some of the highest in the world. Fourth, the reputational damage and the damage to the funder’s business would be huge. Word would quickly spread around the legal market resulting in potential clients using alternative funders. Ironically, a funder losing a case and fulfilling its obligations may well give the market far more confidence in it, in the long term.
Funders need to educate parties who have not used, or seriously investigated, funding. There are a number of funded large-scale group litigation actions before the High Court coming to trial. It is likely that the media interest in those will greatly assist in this education at a general level.
More specifically, potential clients and their lawyers should satisfy themselves of the written safeguards that should exist between the funder and the funded party, in relation to the possibility of withdrawal. Further, where there is a dispute as to withdrawal by either party the matter should be referred to a jointly instructed QC or referred to arbitration, whose findings shall be binding on both funder and funded party. This preserves fairness and transparency in the arrangement.
Craddock: The two most oft-quoted criticisms of funding are: that it will give rise to vexatious or frivolous litigation; and that funders will attempt to control the course of litigation.
To the first point, this ignores the fact that professional funders have no interest in funding frivolous litigation because the business model precludes doing so. While there is an increasing amount of capital in the market, those that fund high-value commercial litigation and arbitration will not waste resource on frivolous litigation.
To the second point, as far as we are aware, this is nothing but scaremongering. A funder that has made a well-analysed investment decision will never – and those who are members of the Association of Litigation Funders cannot – interfere with the progress of a claim, and that includes any settlement that may be reached.
Disproving these misconceptions is not difficult. We are fortunate in that we deal with a rational, commercial audience and our challenge is ensuring we reach as much of that audience as possible.
Rowles-Davies: One of the biggest misconceptions is that funders exercise control of the funded proceedings. In fact, funders are ‘hands off’. While every funding agreement is different, funders are usually kept updated by claimants of significant case developments and strategy, but it goes no further than that.
Secondly, the market has misconceived funding as a tool only for the prosecution of claims. In fact, funding is available to assist with any piece of litigation, whether it be defence, declaratory, small or large when they are rolled into a portfolio of a corporate’s suite of cases.
Finally, there is a misunderstanding that engagement with a litigation funder and the provision of various documents to that funder exposes the claimant to the risk of waiving privilege that would ordinarily attach to key documents. This is misguided. There is case law that provides that privilege is not waived when disclosing key documents to a funder and that those documents still attract privilege.
Q: Numerous institutions are worried about loss of control and potential reputational damage if they go down the funding route. What is your response to this?
Marshall: Ironically, some clients feel the tunnel effect of the litigation process itself is the reason for the perception of loss of control. The starting point is that the interests of funder and funded institution are aligned. Champerty and maintenance rules mean that control of litigation remains with the client.
Is this in name only, on the basis that the funder is paying the bills? Not really because, ultimately, a lawyer has to act on the instructions of his client, not on the wishes of the funder, and a compliant funding agreement will always accept that the client’s wishes remain paramount. The fact is that many sophisticated clients value the input, experience, perspective and vested interest a funder provides.
There are often periods in a piece of litigation when a client and a funder are able to exert an influence that is beneficial for the case. Similarly, there are times when a lawyer and a funder can have such an impact.
“One of the biggest misconceptions is that funders exercise control over proceedings – in fact, funders are ‘hands off’”
The reality is that the tripartite arrangement can provide benefits to all. Funders do not simply bring their financial clout; they are able to assist the client in retaining control of its case.
Once this is clearly understood it is evident that concern as to potential reputational damage is overblown. The knee-jerk reaction that assumes a funder’s involvement equates to the impecunious nature of a client is now somewhat fallacious. There are reasons why a funder may be involved that having nothing to do with the provision of finance. It can enhance a client’s reputation to involve a professional who can apply a high level of objectivity over an investment decision in relation to a complex litigation.
A tension exists between lawyer and client – particularly when the lawyer is being invited to pitch for a piece of litigation. The funder can genuinely assist the client at all stages of the litigation journey, and so it can almost be said that a failure to involve a funder – and lose the benefit of the considerable experience that it can provide – is a management failure, rather than a management weakness.
Dunn: I have talked about control before. As to reputational damage, it is hard to understand what that is. We encourage all claimants we fund to tell their opponent they are funded by us as we believe it is a positive message to deliver to the opponent that a funder who only reviews and invests in disputes and has rigorous criteria, has committed to the case. As a defendant that should be a positive message to receive.
Craddock: Many of our clients can fund their own litigation but have opted to involve a funder because we’re experts in our field, we align ourselves with them and help ensure their dispute is as well-run as it can be. No-one is more adept at assessing, calculating and then managing the risk of dispute resolution than a third-party funder. This is our specialism.
Litigation is time-consuming regardless of who is paying for it and, at the end of the day, management are far better employed running their businesses than becoming embroiled in litigation.
An experienced funder will give clients access to the best lawyers and experts. This doesn’t change their approach to litigation necessarily but it does ensure they have the best chance of succeeding in what are, more often than not, complex and hard-fought disputes.
Perrin: If businesses are concerned about loss of control to funders they have clearly been working with the wrong funders.
Using litigation funding is now a sign of an in-house legal team with commercial awareness rather than a business approaching insolvency.
Rowles-Davies: Funders typically defer to the claimant and their advisers for the claimants’ litigation strategy. There are contractual checks and balances that limit any control by funders.
Some claimants see funding as an endorsement of their claim and are content to disclose. Finally, the optics of funding are demonstrative to corporates’ shareholders, and the market generally, of a proactive risk management strategy so funding could be a positive reputational development.
Most experienced funders are well aware that the decision to embark on a piece of litigation is not solely a financial one. In fact, reputational risk is possibly the biggest concern for our corporate clients. While being seen as a willing funded litigant is something that sits well with our US-based corporate clients it is now becoming more common in the UK.
Increasingly, the ability to lay off the financial burden of legal fees for litigation, with its damaging effect on earnings before interest, taxes, depreciation and amortisation, or ‘EBITDA’, means a funded solution is attractive. Moreover, the ability to bring litigation claims where previously they could not – for example, the budget may have been used up in paying for defence cases – means there is a significant net inflow of revenue to the business on the successful conclusion of a case.