The Excalibur fiasco has exposed the failings in third-party funding. Can the Association of Litigation Funders strike through the shambles?
The first rule of third-party litigation funding is you don’t talk about third-party litigation funding. Once billed as a boon for access to justice, it has morphed into an under-reported and deregulated high-stakes game occasionally landing claimants and lawyers in sticky situations when the cards are revealed.
This is an industry shrouded in mystery, but trade body the Association of Litigation Funders (ALF) is struggling to drag it into the light. This month it is planning to fix the market’s image by launching a code to crack down on risky players.
But this may not be anywhere near enough. Numerous lawyers declare third-party funding their “area of profound ignorance”; claimants say they don’t understand it; and other funders don’t seem to know who they are competing against.
It is, on the face of it, a mess.
Little wonder then that the third-party market is turning into a nightmare for a number of claimants, lawyers and funders. They may have pound signs in their eyes but so far there is very little in their pockets.
Win and lose
The cases of funding-gone-wrong have been piling up. A mixture of little or no regulation, a new profit-hungry layer in the litigation mix and a staggering amount of confusion among lawyers and claimants has resulted in big battles.
Last December a mammoth privately funded case brought by Clifford Chance was thrown out of court, leaving the client with a hefty costs bill but only two solvent funders. The “spurious” claim was denounced and the magic circle firm rounded on by Mr Justice Christopher Clarke for pursuing it “as an act of war”.
The $1.2bn (£726m) battle brought by company Excalibur over rights to oil blocks in Iraqi Kurdistan could have paid out healthily for the coterie of funders. Instead, it became a symbol of what can happen when you put someone else’s money where your mouth is. Excalibur was slammed and ordered to pay £17.5m of indemnified costs and an extra £5.6m – a bill that remained unpaid at the time of press.
The funding group included New York hedge fund Platinum, New York fund BlackRobe and Psari, a London-based company involved in shipping called Lemos & Co. Eyebrows had already been raised over the size of the claim and shot up further when it emerged that Clifford Chance partner Alex Panayides was the brother of George Panayides, a director of Lemos & Co.
Following the stinging judgment, the defendants have been granted permission to drag the funders into the dock in a bid to recover costs. But only two remain standing after BlackRobe closed, citing a failure to gather enough capital. Founder Timothy Scrantum, who also founded high-profile fund Juridica, has since given up the funding game in favour of consultancy.
Meanwhile, established funds such as Juridica claim to have found themselves playing cards with an incomplete deck (see ‘Sticky endings’, below).
The funder is involved in litigation with former client S&T Oil Equipment and Engineering and is arguing that it was not made aware of the full facts of the case – something S&T denies. It reveals the issues when funders feel they are left out of the loop.
“Cases develop and no-one is going to sign a blank cheque in circumstances where it could turn out that a party is lying or a document is concealed or revealed,” says Memery Crystal partner Harvey Rands.
Withholding important information also led to a former Stewarts Law partner being struck off after he failed to mention his involvement with the Candy brothers and their wallets, an action he is appealing (see ‘Too close for comfort?’, below).
This unknown quantity of mysterious figures willing to bet big is not the full story. But for claimants desperate to stake a bet the choice appears to be between discerning, well-heeled funders and the unknown quantity of other entities willing to foot the bill for sometimes dubious cases.
“Excalibur is notable for the fact there is not a single UK litigation funder invested in it,” says Leslie Perrin, chairman of Calunius Capital and the ALF. “The investments were from the Platinum hedge fund, a litigation funder trying to raise money that didn’t make it, BlackRobe and the shipbuilding family of the Clifford Chance partner doing the case, which seems strange.”
A code for clarity
The pitfalls of this deregulated market explain the ALF’s desire to create a new code. Perrin called an emergency general meeting in January to pin down measures to inject transparency into the sometimes murky funding pool.
He says he is concerned about the opaque market in private funders operating out of offshore tax havens. Funders often have complex business structures and subsidiaries that make pinpointing their identities – and activities – tricky.
The rules will mean that those who are keen to join up will no longer be able to dodge complaints by saying ‘it wasn’t me’. All associated entities will be bound by the code and neither will funders be able to claim healthy backing when they have no access to funds – a dangerous claim because funding agreements lock claimants into exclusivity for months, by which time case costs have already been racked up.
“I know for a fact there are people out there who don’t have money and are wasting everyone’s time,” says Susan Dunn, founder of high-profile funder Harbour Litigation. “If people only have that as their experience of funding they may never use it again.”
The code will ask funders to hold at least £2m of capital to cut down on people coming to the table with empty wallets. But that would barely cover a funders’ costs – something even Perrin acknowledges.
Add to that the fact that the code is voluntary and scepticism abounds.
“Self-regulation?” says head of litigation at Lloyds Banking Group, Richard Blann, “Well, we couldn’t get away with it.”
Perrin admits that “the small guys don’t want to pay £10,000 to the ALF to be policed”. That could be why the body only has eight full members. Of the 20 entities calling themselves funders in the association’s magazine, the other 12 are
“either people who don’t have capital and are really brokers or are only incidentally involved in the UK, or small investors”.
Jackson – third-party time?
Other non-members include small funders and hedge funds that also have an appetite for high-risk, high-reward portfolios but are not as easy to identify.
In fact, very little is easy to identify in this market, even for those in the know. The fear and uncertainty over the impact of Lord Justice Jackson’s costs reforms in the courts have proved to be a fertile breeding ground for funders with products to push.
The changes started to sting in April 2013. Out were old risk-sharing fee models with high costs and premiums recoverable from the other side, in were fees paid out of own-side winnings, known as damages-based agreements (DBAs).
But a lack of clarity over DBAs has left lawyers unwilling to dip their toes into the water for fear of what lies beneath. Jackson’s answer? Third-party funders that have rushed in, claiming to shoulder the risk burden.
Mayer Brown partner Rani Mita says: “We’ve seen a lot of third-party funds coming to the firm with products to address the uncertainty in DBAs. There have been some strong warnings from QCs telling firms to stay away from them.”
Meanwhile, Berwin Leighton Paisner (BLP) partner Graham Shear says: “DBAs are too uncertain and the legislation is so badly drafted it’s hard to rely on. I don’t like the prospect of entering into one until they refocus.”
Seizing the chance
Funders have waded into the confusion with a range of wares to peddle. In October 2013, listed funder Burford introduced its hybrid DBA, a tripartite agreement between funders, lawyers and claimants enabling lawyers to take up the arrangement but still get paid during the case.
Burford chief investment officer Ross Clark says: “Lawyers were frankly moaning to us. We give the client and the law firm what they would have anyway and everything is above board.”
The fund turned over £12m last year, according to its company accounts, and is one of two funders listed on the London Stock Exchange, along with Juridica. But Burford CEO Andrew Langhoff refuses to put a number on the take-up of his product – a reticence shared across the market.
Harbour Litigation is also launching a DBA this month, enabling lawyers to take on work at risk and guaranteeing both a healthy chunk of the winnings at the end of the case.
“We’ve formulated a DBA whereby the law firm enters into the agreement and we fund it so it takes only a partial risk,” says Dunn.
Meanwhile, Calunius announced it is closing a second fund this month, adding a further £30m of capital.
In on the action
Funders position themselves between firms and clients, offering each a dizzying range of agreements in exchange for a piece of
the action. Some firms have jumped at the chance.
“We finance firms who have taken on conditional fee agreements or DBAs and want to hedge the risk,” says Langhoff, though he will not be drawn on which firms are keen.
“Firms such as Quinn Emanuel Urquhart & Sullivan are aggressive and entrepreneurial,” a source says. “By and large we think boutiques are spot on because they have an entrepreneurial mindset. They tend to be good clients.”
Addleshaw Goddard has attempted to set itself up as a pioneer in terms of litigation funding, having tied up with after-the-event insurers and launched its own service, branded Contro£.
It is not the only one – in December 2013 Jones Day announced a risk-sharing fees deal plan, making the firm one of the few to embrace DBAs following the new regulations.
Its offer would involve structured arrangements with ‘trigger points’ during litigation, according to partner Craig Shuttleworth, when the firm would take a share in the damages recovered.
Stewarts Law is also getting cosy with funders. The firm is fighting a multimillion-pound shareholder claim against RBS, funded by Argentum. Partner Clive Zietman refuses to be drawn on the precise nature of the firm’s relationships and to what extent it affects work-in-progress. Instead, he says: “Our attitude to Argentum is the same as all funders – we’re not wedded to any.”
Of dollars and frogs
But funders want to return from the table with more chips than they went in with, and more often than not that means they don’t want to play at all.
The biggest funders are not interested in games of chance – most reputable ones have a list of sources who will bring them cases and are not interested in betting on a stranger’s game. The bigger the risk, the higher the reward needs to be.
Harbour recently saw a record period in terms of queries, with 20 enquiries from 23-27 December, and 50 in January. Dunn says she may take a third of those as they have come from three close sources, but usually the rate is 10 per cent.
“We look at 40 cases for every one we invest in,” says Juridica chairman Richard Fields. “For the 30 in our first portfolio we looked at more than 1,200.”
Finding the right case is an almost impossibly difficult task. Funders are either after claimants with money to spend who will pay a return of 1:4 on their investment, or impecunious claimants with eye-watering claims, pretty much guaranteed to win.
The recoverability of damages is also crucial as funders want to get out quickly and easily after winning.
“The unspoken truth is that there are only so many meritorious cases with impecunious claimants and the funders are kissing a lot of frogs,” says Stewarts Law’s Zietman.
“The majority of funders aren’t so stupid as to fund spurious claims, but there will be some stupid firms that do stupid things – who will take on DBAs with dollars in their eyes.”
Impecunious claimants or companies with cash?
Funders say their perfect clients are either impecunious claimants with strong cases or big companies with cash which want to “take risk off their balance sheets”.
“In big-ticket litigation the parties are often big businesses or wealthy individuals and they’re not cash-strapped,” says Addleshaw Goddard partner David Engler. “So the only reason they will want to deal with a funder is to take it off the balance sheet and crystalise downside exposure.”
But in-house lawyers seem more worried about losing control of complex litigation and getting involved with mysterious funders.
As Stephanie Pagni, managing director for corporate investment banking litigation at Barclays Investment Bank, says, “it’s too fraught with difficulties”.
What do in-housers think?
Nationwide wouldn’t use funders, and we haven’t used them. We’ve used insurance now and again, but third-party funding, no. While there might seem to be a relatively strong appetite out there, the market is pretty limited and Nationwide is a substantial institution with a strong record and business model, so it’s not going to be short of money to pursue or defend itself.
The way Nationwide reports and its obligations to show those sorts of contingent liabilities mean the idea of getting risk off the balance sheet doesn’t really work.
If my senior management said ‘we want to third-party fund this case’ I wouldn’t know where to start. I’d get on the phone to my panel firm and say ‘have you had experience?’ and take it from there, and it would probably take me three or four days to find companies or people who might be interested.
If you think about the changing risk throughout the life cycle of a case and the complexities of reporting to executives and senior management, putting third party in the mix would make it even more of a headache.
We expect our firms and advisers to stand by their advice and in some cases that means taking on some element of risk – maybe a conditional fee agreement or a deferred fee arrangement.
You wouldn’t find Nationwide at the court door on a risky case. Commercially and reputationally it’s just too nerve-wracking and we’d always ask about champerty – is this a sham?”
Darren Kelly managing counsel, Nationwide
We’ve seen more claims brought by claims management companies, but in terms of the more heavyweight end of the market we haven’t seen a great deal of action from third-party funders so far.
We don’t use them ourselves. I’m not saying we never would, I’m just saying that we try to avoid litigation as far as we can, but sometimes it’s inevitable. But obviously the vast majority will be with us and defendant, and funders still struggle to work out ways to make defendant funding work.
In normal circumstances we’d want to retain control because most people we get into a dispute with will be in some way customers or shareholders – we want to ensure they are treated fairly. By introducing another party, there’s another interest to be served. The reputation issue is likely to be more important [than taking cost off the balance sheet].
There isn’t much transparency about what’s being funded. A lot of people have come into the market claiming to have large funds to invest, but actually nobody’s sure what they’re dealing with.
It’s difficult to know what the state of the market is – it’s a bit like the land of the dinosaurs. I was in private practice four years ago and was quite engaged with funders and the different funding models romping around. There were a lot of ideas around what a funder would look like and how they would do their risk assessment analysis.
Self-regulation is slightly… well…we can’t get away with it.
Richard Blann head of litigation, Lloyds Banking Group
I was involved in a focus group chaired by Lord Justice Jackson investigating third-party funding options. I sat on it as a legal practitioner and I believe access to justice is important and options must be available to people who have valid and cogent cases to bring but are unable to do so without access to funding. It was sensible that the Jackson review looked closely at that aspect.
With my banking hat on, we’re careful only to bring litigation we truly believe in and which is necessary. We’re mindful of reputational issues and who we might bring a claim against. In terms of third parties funding claims brought by banks, it’s rarely going to be an option. If we were to get involved with a funder we’d lose an element of control. There could be issues in relation to privilege and leakage of information for the sole benefit of balance sheet management. The risks outweigh that benefits.
Banks are sophisticated in terms of any litigation they bring. We’re set up to manage the process and when you’re in the eye of the storm of a piece of litigation you have to make some pretty quick, strategic decisions. If you’re dealing with a funder, that ability is reduced. We simply don’t need the additional baggage of a funding arrangement.
The funding industry is looking principally for a small number of significant cases so that takes out a lot of the litigation we face. Litigation against banks is likely to involve former customers or other financial institutions. Customers are generally going to have smaller claims and as a result less access to funding, and the bigger litigation parties probably take a similar view to us in avoiding funding. Third-party funders are not necessarily going to help individuals with small yet meritorious claims.
We live in a society that is arguably becoming more claims-oriented and inevitably some claims are not meritorious. One impact of third-party funder involvement is that if a claim lacks merit that party may not be afforded the ability to bring it and such claimants may well approach funders. So long as the funders are asking the right questions, these claims should be weeded out. That is the challenge for the funding industry if it is to prosper.
William Luker head of litigation, RBS
Too close for comfort? The curious case of the lawyer and the Candy brothers
Litigation funding itself is not champertous but numerous institutions are worried about loss of control and potential reputational damage if they go down the funding route.
The line between champerty and private investment was tested recently in a private prosecution resulting in two Stewarts Law lawyers being struck off for dishonesty. Following an appeal it will be retried this year.
Former Stewarts Law partner Andrew Shaw and associate Craig Turnbull found themselves in hot water following a funding arrangement with property tycoons the Candy brothers.
Shaw had pursued an injunction against former investment banker Geoffrey Logue in 2010 on behalf of holiday company Complete Retreats Liquidating Trust. But he failed to tell the court that the Candy brothers were funding the order, despite the fact that Logue was suing them in a separate litigation over kitchen cabinets.
The battle began as a row over the finish on Logue’s kitchen cabinets in his £12m One Hyde Park apartment. The dispute over breach of confidence, abuse of process and unlawful interference settled in January but Shaw’s fight involving the brothers continues.
Details of the private prosecution, brought by Logue, against the lawyers remained under wraps until a High Court appeal in December 2013, when the relationships between the parties emerged.
Logue had bought an interest in the Knightsbridge property but was accused of fraud, and bankruptcy proceedings started against his company in the US.
The Candy brothers became nervous about the bankruptcy proceedings and began funding the injunction against him launched by Stewarts Law.
The freezing order was later lifted and action brought against the lawyers at the Solicitors Disciplinary Tribunal (SDT), where Wilberforce Chambers’ John Wardell QC argued that both lawyers had acted dishonestly by failing to give full and frank disclosure in relation to the involvement of the Candy’s CPC Group as “the latter had a commercial interest in the outcome and was funding the proceedings in the UK, and that both of these matters should have been disclosed”. The funding was one of six allegations of dishonesty the SDT upheld.
At the High Court December 2013 hearing, Wardell said “a solicitor must disclose the fact that both lawyers also acted for a party who is in acrimonious dispute with the defendant and is funding the action and has a commercial interest in the outcome, however indirect”.
But Mr Justice Jay ruled that five out of six of the counts of dishonesty would be set aside for a newly constituted SDT Tribunal.
RBS: high-profile group litigation
The mammoth group litigation order (GLO) waged between RBS and its former shareholders is set to be one of the year’s highest-profile funded cases in the UK.
Argentum threw its weight behind a £360m claim in April, agreeing to bankroll one of the claims in the GLO over RBS’ £12bn rights issue in 2008. Shareholders allege the issue was defective and contained “material mis-statements and omissions”.
The Argentum-funded RBS Shareholders Action Group is represented by Stewarts Law partners Clive Zietman, Keith Thomas and Fiona Gillett on behalf of 77 institutional investors.
“The funding agreement was perfect because it was set up before Jackson so we got our ATE [after-the-event] in place,” says Zietman. “It’s spread across five insurers, all organised by us and the third-party funders. We presented a package to prospective claimants. It’s interesting because they’re not impecunious but they’d rather have funding.”
RBS is set to run up a £42m legal bill defending the action and has set aside £3bn to cover litigation and customer compensation claims over 2014.
The Rights Issue Action Group has been considering whether to join the litigation since April. All claimants allege that the prospectus portrayed the bank
as being in good financial health but the reality was different and the take-up of shares would have been limited “had the truth been known”.
No date is set for the full trial.
Sticky endings: when funding goes bad
Two cases show the difficulties of the relationship between funder and client, and the difficulty of getting out when a case does not go to plan.
Earlier this year a deputy judge ruled in the funder’s favour in the first High Court termination of a third-party litigation agreement since the Jackson reforms.
CMS Cameron McKenna client Buttonwood Legal Capital claimed it had not been adequately informed of developments in a case and should not have to pay £30,334 to litigants.
Its agreement with the Alternative Real Estate Fund and Roskill Advisors stipulated a letter written by solicitors advising that success prospects exceeded 60 per cent. But the letter never materialised and several months later a review by Argentum found that success prospects were lower than 50 per cent.
Blackstone Chambers’ David Donaldson QC, sitting as a deputy judge, concluded: “I do not consider that the lender ever came under any obligation to pay (£250,000) to Rylatt Chubb for the purpose of security,” and added, “Harcus Sinclair should pay the entirety of the monies in the escrow account to the first defendant.”
Meanwhile, high-profile funder Juridica is engaged in litigation arbitration with a former claimant in the US after a case it funded went sour.
US chemical company S&T had been represented by King & Spalding to bring an arbitration against Romania over the privatisation of a chemical plant. In 2008 Juridica funded the case but soon ran into problems when King & Spalding alleged S&T had failed to produce an important piece of evidence, which would have had implications for the funder. S&T and Juridica are now embroiled in satellite litigation over the funding arrangement.
Juridica chairman Richard Fields says: “The claimant in this case misrepresented the facts to the lawyers and to us.”
S&T denies the allegations and litigation continues.
Litigation continues in the US.