As the litigation funding market grows, claimants are faced with increased choice when sourcing funding and have more leverage when agreeing terms than ever before. Whilst “off the shelf” products exist, the majority of arrangements are tailored to the facts and the economics of each specific case, and there is often a good deal of room for negotiation between the parties to the agreement.
The recent disclosure of a well-known litigation funder’s funding agreement with a group of claimants bringing a class action has led to a number of press outlets expressing surprise at some of the terms contained within the agreement. With this in mind, here are some points that claimants should consider before entering into a litigation funding agreement.
Litigation funding isn’t for everyone
When considering obtaining litigation funding, the claimant should ask themselves whether they need cash flow assistance or whether what they really want is budget certainty and a way to manage their cost risk. If the claimant does not have the funds to pay their legal fees then, in order to pursue their claim, they will need to negotiate a risk sharing retainer with their law firm, obtain litigation funding or potentially combine the two. If the claimant has the means to self-finance the case, however, they can obtain litigation insurance that will reimburse them for an agreed percentage of their own fees in the event of a loss. The insurance premium for this type of cover is often contingent upon success, as with funding, but is usually a fraction of the price, thus maximising the net recovery from successful litigation.
A sticky situation can arise when a claimant has entered into a funding agreement without being fully aware of the consequences and the alternatives. Using the class action mentioned above as an example, if the claimants’ trade union were willing to assist with the legal fees without taking a return from the damages, the claimants would want to consider such an offer very carefully before spurning it in favour of a litigation funding agreement that requires the return of the funder’s investment plus a success fee to be paid from the claimants’ damages, even if the latter means more freedom over the choice of law firm instructed to represent them. In England and Wales, failure to put the claimants in a position to make an informed decision with regard to how they might pay for their legal fees can be a breach of the Solicitors Regulation Authority Code of Conduct.
Merits are important but so are the economics
Once a claimant has established that litigation funding might be a good option for them, and assuming the case has the necessary prospects of success, it is important to consider the economics of the case. One of the terms in the disclosed agreement mentioned above related to the need for the claimants to recover more than 250% of their legal fees before they received their share of the damages. To a newcomer to the market, this can seem expensive, but to experienced users, this doesn’t seem that out of the ordinary and could be seen by some to be quite reasonable.
A funder typically requires the successful claimant to pay back the funds it has invested along with a success fee that is usually expressed as a multiple of the amount invested, typically around 3x (or 300%). Alternatively, the funder will agree a percentage of damages or will offer a “greater of the two” model. But they will calculate that percentage based on a desire to recover a similar uplift. This may seem expensive but it’s important to remember that a funder’s investment is non-recourse, that is, it loses its investment in the event of a loss and limits its success fee to the damages available in the event of a low recovery. As such, the money recouped on winning cases needs to be sufficient to make up not just for the unsuccessful cases, but also the cases that win but with a lower success fee than anticipated.
For this reason, whilst the merits of the case are important, the economics of the case will also be a key factor in the funder’s decision to fund the case. It is rare for a funder to offer funding terms on a case where the damages are unlikely to be significantly greater than their success fee. The bigger the delta between the success fee and the full damages, the more confident the funder can be that they will recover their money.
A well-informed claimant has bargaining power
The number of funders in the market has increased significantly over the past few years and their terms and pricing structures can vary widely. Claimants that have searched the market are better placed to compare and negotiate the best terms.
Searching the market also increases the claimant’s chances of finding a funder that is willing to back their case. Approaching funders sequentially can be prejudicial. If a funder has declined to offer terms, the claimant will likely have to disclose this to other funders, which may taint their view of the case. The industry is awash with claims that have been taken to funders sequentially, destined now to never receive funding. Carefully planning the approach to a considered selection of funder at the outset can remove this risk.
It pays to consider the likely costs of your case to trial
When obtaining funding, it is tempting to be optimistic with the budget, perhaps anticipating an early settlement. However, failing to obtain adequate funding to trial may cause issues later as the funder may not be willing to invest further capital if the merits have changed or may seek to charge a higher rate for additional capital. It is also vital to establish that the chosen funder does, indeed, have the funds that they are promising to commit to the case. This should not be a problem with established, reputable funders but may become a bigger concern as new, previously unknown funders enter the market.
Adverse costs insurance is likely to be a requirement of the funding agreement
When funding a case, a litigation funder opens itself up to a liability for the opponent’s costs in the event the case is unsuccessful. This liability is often referred to as the funder’s “Arkin risk” following the decision of the Court of Appeal in Arkin v Borchard Lines, which limited the funder’s liability for adverse costs to an amount equivalent to the funding provided. The funder may also be ordered to pay money into court in response to a security for costs application and this can exceed the amount committed by the funder to fund the litigation, as was found to be the case in Bailey and others v GlaxoSmithKline UK Limited.
When a funder offers to fund a case, therefore, the offer will often be subject to the claimant obtaining adverse costs cover that protects the funder from these additional risks. The premium for adverse costs insurance can be wholly or partially deferred and contingent upon success, payable from the claimant’s damages. Alternatively, the funder may agree to fund the cost of the premium in addition to the legal fees, but this can be an additional cost that newcomers to the market might not anticipate.