With the news that Pinsent Masons and HFW have both agreed litigation funding portfolio arrangements over the course of the last few weeks, you may be considering whether this sort of facility is the way forward for your practice. If so, read on for my whistle-stop tour of the key types of arrangements that are available, along with some points you should consider along the way.
A portfolio arrangement enables multiple cases to be funded under a single facility through a streamlined process and on agreed terms. There are various ways this can be achieved, along with a sliding scale of commitment levels and a range of benefits available on both sides. The key is to consider the options available on the market and to tailor the arrangement specifically to meet your and your client’s needs.
What are the options?
One: Arrangements that sit behind the law firm
If a case fits the criteria for litigation funding, it follows that it should be suitable for the law firm to run under a damages-based agreement (DBA) or conditional fee agreement (CFA). The potential for the significant success fees that can flow from these retainers is appealing to most law firms, but many cannot stomach the thought of taking on the full risk across a number of cases. To overcome this conundrum, litigation funders and after the event (ATE) insurers offer various products that enable the law firm to act on outcome-based retainers whilst guaranteeing that they receive an agreed level of fees, no matter the result in the case.
For some firms, the opportunity to increase their fee realisation beyond their hourly rate, whilst hedging the downside in the event of a loss, is the key reason for moving forward with this type of arrangement. But another benefit comes in the form of retaining the simplicity of the relationship between the law firm and the client, since the client is not party to the agreement.
Litigation funding for the law firm
In this scenario, the funder agrees to pay some or all of the law firm’s fees whilst they wait (and hope) for the case to succeed. If the case is unsuccessful, the law firm has received the funded fees and the funder loses their investment. If the case wins, the funder takes a share of the success fee that the law firm recovers.
Pro: The law firm receives some cash flow during the life of the claim and in the event of a loss, whilst also taking a share of the client’s damages if the case is successful.
Con: The return of the funder’s investment will usually take first priority in the waterfall and so will be the first item paid from the law firm’s success fee if the case wins.
Insurance for the law firm
Where cash flow is not the law firm’s key concern, an insurance portfolio may be a more commercial route to managing the firm’s risk. The insurer guarantees that the firm will receive a minimum amount of fee income from the case. If the case is unsuccessful or the solicitor’s success fee is lower than anticipated, the insurer pays the agreed fees. The premium is only payable from the surplus success fee once the law firm’s agreed fees have been paid, and only insofar as there are sufficient funds available.
Pro: This arrangement provides the same end result as a funded option in the event of a loss, but it is usually significantly cheaper, giving the law firm a quicker route to earning more than their hourly rate in the event of a win.
Con: Whilst the existence of the policy is enough for most law firms to consider the fees “banked” for internal revenue recognition purposes, the firm does not receive fees during the life of the case.
Two: Portfolios that provide funding to the law firm’s client
There are two keys ways in which this may work.
A client specific portfolio
An arrangement may provide one client with fast track or guaranteed funding or insurance for multiple (though not necessarily a huge number of) cases on agreed terms.
Pro: The arrangement is likely to guarantee the client a minimum net outcome and can facilitate the client’s ability to bring cases they might not have been able to fund or insure separately.
Con: Provided the arrangement has been tailored to the client’s needs, there is no particular downside.
A facility that law firms can offer their clients
We have seen a raft of this type of portfolio arrangement announced recently. Essentially, the law firm agrees to refer their clients to the funder or insurer if the client requires their assistance.
Pro: The client should benefit from a faster decision process and agreed rates in the event that the funder or insurer wishes to be involved in the case.
Con: There is limited certainty because the provider will retain the right to decline to offer terms if they don’t like the look of the case.
Whether your firm should enter into a portfolio arrangement is a big decision. Tailoring an agreement that really works for you requires careful consideration of all the options available.
Food for thought
One: First of all, is a portfolio agreement necessary at all?
Whilst some law firms and their clients will benefit from a tailored portfolio arrangement, this approach simply doesn’t work for all. Not all clients will want alternative fee arrangements, and if the volume is low and the case types and sizes variable, it becomes harder to build an arrangement that provides truly worthwhile benefits that go beyond what is available on a case-by-case basis. If you can’t see significant benefits, then don’t waste your time.
Two: There are horses for courses so it may make sense to split your eggs between baskets
Every provider has their favourite case types and those they don’t really like, but most will want to see everything anyway. Take time to think about which provider is the best fit and whether it is appropriate to build a portfolio across all disputes, or whether it makes more sense to have a panel of providers depending upon the matter type. You can do this yourself through direct conversations with the providers or you can instruct a broker to undertake this legwork for you. A broker will usually assist at no additional cost to you or your firm and can add real value in structuring the most commercial arrangement. Moreover, a broker will continually review the market to ensure that your terms remain the most competitive available.
Three: Consider any detrimental effects of making big announcements about your arrangement
Whilst your firm may gain some good PR for being innovative, formally announcing a tie-up with one provider can have a detrimental effect on the way your firm’s cases are viewed by their competitors if you need to approach them for funding or insurance.
Four: Consider any steps that need to be taken to ensure you meet your obligations under the SRA Handbook
Watch out for the following:
- A client should only be referred to a funder or insurer if the provider is able to offer a product that meets their needs and not because they have promised to send work in return. If a financial benefit is anticipated, you need to let your client know.
- You should also let your client know if the provider can only offer products from one source.
- If the arrangement involves a funder or other provider assisting your client to arrange ATE insurance, you must establish that they are FCA regulated and authorised to carry on insurance distribution activities.
- If the funding and ATE insurance is packaged together, the client needs to be made aware that the products can be obtained separately, and that different pricing levels and payment structures may be available. For example, premiums may be payable upfront, deferred or a combination of both.
- If the portfolio arrangement is for the law firm, rather than the client, it will most likely involve an element of fee sharing between the law firm and the provider. If so, the client needs to be made aware of this, even though they are not party to the agreement.
Ultimately, it is important to distinguish a portfolio arrangement from the “special relationship” you may have from repeatedly using the same provider. The former should be based on a negotiated set of favourable terms, compared with the market, and should be agreed in advance. The latter arrangement rarely offers any true discernible benefit and can lead to the law firm or the client paying more than they need to.