A portfolio litigation funding arrangement enables multiple cases to be funded under a single facility through a streamlined process and on agreed terms. When reading the press or listening to funding focused panels during this year’s conference season, it might seem like portfolio litigation funding arrangements are the new norm. Whilst this may one day be the case for certain types of law firm, in my experience, it is not so in the here and now.
There is no doubt that a portfolio arrangement with a reputable law firm or corporate client is an attractive proposition for a funder. Likewise, certain firms can reap significant rewards from putting all of their eggs in one basket. In addition to cheaper rates, the firm can benefit from speed and certainty and may also be able to include cases that aren’t likely to be offered terms on a standalone basis. However, whilst some law firms may choose to enter into an arrangement that captures a defined portion of their commercial disputes, this approach is unlikely to work for all dispute resolution practices and most law firms currently (and will continue to) access the market on a case-by-case basis.
Whether your firm should enter into a portfolio arrangement is a big decision and tailoring an agreement that really works for you requires careful consideration of all the options available.
Portfolio arrangements can be tailored to meet the law firm’s case load, client base and risk appetite but not all clients will want alternative fee arrangements and most disputes differ in size and risk. If the volume of cases is low and the case types and sizes vary, it becomes harder to build a portfolio arrangement that works for all.
There are three main frameworks that typically form the basis of a portfolio arrangement.
Prior submit arrangement
As the name suggests, a prior submit arrangement allows the funder to individually assess each case prior to offering terms. This type of arrangement can range from being nothing more than an agreement to give the funder a right of first refusal on each case through to offering the comfort that the funder will only perform light touch due diligence to ensure the criteria is met before offering terms at a pre-agreed rate. Because the funder individually assesses each case, the mechanics of the funding agreement, including the price, can be specific to each matter.
Such an arrangement is a great way to develop the relationship between law firm and funder and can lead to a reduction in the due diligence the funder carries out on each case as they get to know the firm. Typically, there is no requirement to submit a minimum number of cases but, as a result, it is unlikely that the cost of the funding will be much cheaper, if at all, than approaching the market on a case-by-case basis. Indeed, such an arrangement removes the element of competition that can drive prices down. Moreover, if the funder has refused to offer terms, you will likely have to disclose this to other funders subsequently approached, which may taint their view of your case.
For this reason, when considering entering into a portfolio arrangement, it is important to carefully choose your funder, taking into consideration their appetite for and approach to the types of cases you typically handle.
Delegated authority arrangement
Under a delegated authority arrangement, the law firm has the authority to draw down funding on a case-by-case basis under agreed terms, provided the case meets fixed criteria. The arrangement can be for a law firm or a network of lawyers but, in order to set the criteria, it needs to apply to a group of homogenous cases. This can be difficult for a broad disputes practice but can work well for certain case types such as professional negligence, for group actions or for cases in which there are multiple claimants with similar claims.
A delegated authority arrangement offers speed and certainty beyond that available through a prior submit scheme and, if the volume allows, will enable the funder to offer cheaper rates. It should also lead to a faster process for obtaining funding for cases falling outside of the criteria, provided the funder has an appetite for such cases. The law firm’s ability to assess the case on behalf of the funder, however, brings significant responsibilities and the law firm needs to ensure they have the necessary processes in place (and are adequately insured) to meet these.
This is a portfolio arrangement in its truest sense. It provides funding for use across all cases in which the law firm is acting on a contingent basis and that fit agreed criteria. The funder will undertake significant due diligence on the firm prior to putting the arrangement in place but, once completed, will remain passive. The arrangement will run for a set time or until the last case has closed and will ensure that the law firm receives an agreed amount of fees across the collection of cases. The funder’s success fee will only be payable in the event the firm recovery across the batch of cases exceeds the agreed amount.
A cross-collateralised arrangement offers the ultimate choice in speed and certainty at (typically) a much lower cost, but the real point of interest is that funding can be provided for operating costs and not just the hourly charge-out rates. As a result, such an arrangement can reduce the need to take on other forms of debt. It is, however, a long-term commitment and comes with big responsibilities owed by the law firm to the funder.
A downside to this level of integration with a funder might be that the firm is perceived as having too close a relationship with the funder, its economic stability too dependent on the facility, such that the funder might (theoretically at least) have influence over the firm’s advice to the client. In the wake of the ICCA-Queen Mary Task Force Report on third-party funding, which recommended that the existence of a funding arrangement should be disclosed in arbitrations, the prevalence of portfolio arrangements might intensify calls for disclosure.
Whether a portfolio arrangement is right for your firm and, if so, which type, will depend upon many factors. Some of the key questions to ask yourself include:
- How many cases are likely to require funding and how varied are they in type and size? The more homogenous the cases, the easier it is to build criteria that can apply to the majority. Moreover, a cross-collateralised arrangement is not likely to be attractive to a funder if the success of the arrangement is predicated upon one big result.
- What are you hoping to achieve? Speed, certainty and lower costs are achievable in the right circumstances. However, if you’re hoping to receive case referrals from the funder, you should consider how many other mouths the funder is hoping to feed and take a view on whether you will be one of the lucky few.
- Who will be the end client? An arrangement can be put in place to enable you to quickly arrange funding for your fee-paying clients or it can be structured to benefit your firm when acting under an outcome-based retainer. After all, if a case is good enough for funding it follows that it is good enough for a CFA or DBA. The answers to these questions will shape the structure of the arrangement.
- Funding or insurance? Or both? It is important to establish whether the overriding priority is to ensure a fixed level of cash-flow or whether the key driver is risk management. Funding works well for the former and insurance provides a cheaper alternative for the latter. If both appeal, an insurance portfolio that covers the bulk of the risk, with access to a facility that enables you to draw down some fees on a flexible basis, might be the answer.
- Is a co-ordinated process realistic? It can be challenging for some firms to co-ordinate their approach to funding on a case type, practice or firm level. If it is unlikely that a co-ordinated approach will be implemented successfully; obtaining funding on a prior submit or case-by-case basis may be more efficient for your firm.
- Lastly, is the firm comfortable that it can rebut any notion of influence by the funder?
When considering entering into a portfolio litigation funding arrangement, it is vital that you have a complete picture of the options available and that you secure terms that are appropriate for most of the cases you envisage including within the arrangement. Moreover, it is important to review your arrangement regularly to ensure it remains competitive.
Failure to understand and regularly review your options can, at best, lead to an ineffective arrangement that you are unlikely to use and, at worst, cost you or client significantly more than necessary.