Considering litigation funding for the first time? What questions should you ask a potential funder?

Fortunately, most people are never involved in a major legal dispute. However, not everybody is so lucky and it’s not uncommon for a claimant to enlist the help of lawyers to seek redress. Frequently they are also supported by the capital of litigation funders, but how should a claimant select a litigation funder?

Effective due diligence

If you have not used litigation funding before, it may be difficult to know what the key due diligence questions are, but there are some basic enquiries that you should always undertake.

First, check that your claim is of an appropriate size for the funder and in an area of law and a jurisdiction where the funder has the requisite experience and the appetite to provide funding.

It is then worth establishing the source of the funder’s capital, whether they leverage their funds, and under what circumstances they have ever discontinued funding a case. What you are seeking to assess is whether the funder truly has money to invest or if they are a broker who, having identified your claim, will then themselves approach the market for the funds, which may not be what you intended! Also check whether the funder has the requisite committed funds and if the cash will be ring-fenced for your exclusive use. It’s quite possible that the funder may commit to financing more cases than they possess funds to cover and borrow money to fund the case. In such situations, there is a real danger that if the funder’s other funded cases (which will be nothing to do with yours) lose or take longer than anticipated, the funder may not be able to meet its obligations to you.

It’s not just about the money

Providing capital is only one part of the story. You need to be confident that you are working with a funder that will support your case through to its conclusion. Membership of the Association of Litigation Funders of England and Wales may allay some of these concerns, as members abide by a code of conduct. However, referencing a funder with a respected law firm or clients who have worked with them previously can also be worthwhile.

Having essentially ascertained the credit quality of the funder, and perhaps through their reaction an appreciation of how easy or difficult they may prove to deal with over the life of the funding arrangement, the next step is to explore the more qualitative aspects of the potential relationship. These are frequently more important than claimants realise.

Control is a fundamental issue. Does the funder pursue a “claimant control model” where the claimant selects the law firm, the claimant drives the strategy and the claimant has sole authority on whether to settle, or is the funder looking to take a more interventionist approach?

Another qualitative aspect is the reputation and standing of the funder that you select. Litigation usually takes years and its unpredictability can be extremely stressful for all concerned. The validation of a claim by a litigation funder is rightly prized; the fact that they have skin in the game is evidence that professional, independent litigators agree that the claim has merit. However, as Chambers and Partners rankings and private practice lawyers will likewise attest, not all funders are seen in the same light. Ideally you want to work with one whose involvement will truly provide peace of mind to the general counsel. One whose reputation and standing will make your opponent pause for thought and be more open to engaging in a serious settlement conversation with you.

Clearly, what are often considered just qualitative measures can have a very direct financial impact on the outcome of the case.

It shouldn’t be a one size fits all market

What I’ve outlined so far is probably relevant for every claim. However, many questions are specific to the situation. For example, if the claim is not fully formed, will the funder provide seed capital to pay for the formative issues to be addressed? Alternatively, is the funder willing to include in the budget non-recourse funds that may be used away from the litigation, perhaps as working capital for the claimant’s core business? In some instances, there may also be appetite for the funder to purchase the claim at this stage, or it may be more appropriate to consider selling once a judgment or award has been granted, but before enforcement efforts have begun. Certainly, this latter approach is in line with viewing litigation as an asset class that can be monetised in times of need; this is very much a private equity view of the world.

There is also the return that the funder is suggesting and whether it represents value for money. Is it better to structure the return in terms of a multiple of the amount spent or an agreed percentage of the damages received? Or perhaps an either/or measure? In any event, investigate whether it is the amount spent rather than amount budgeted, and that it is the damages received rather than damages awarded, as they are clearly not the same thing! Tiered pricing may also be negotiated, so a lower return is due to the funder if the claim is settled in the earlier stages of the process. Finally, explore the nature of any after the event insurance that is purchased, how the premium payment is structured (it may be contingent on the successful outcome of a claim) and to what extent these costs would have an impact on the distribution of any damages received.

Clearly, selecting a litigation funder involves asking lots of questions. However, appropriate due diligence is important, and you can be confident that a reputable litigation funder would actually welcome your enquiries.

Hopefully, though, you’ll never be involved in a significant legal dispute and the need for litigation funding will not arise!

Leave a Reply

Your email address will not be published. Required fields are marked *

Share this post on: