Achieving justice is rarely straightforward. It is expensive, time consuming, and inherently risky. In recent years, third party litigation funding has emerged to help claimants navigate these obstacles. But do you know the basics?
With its decisions in Excalibur Ventures v Texas Keystone and others and more recently UK Trucks Claim Limited v Fiat Chrysler Automobiles N.V. and others, the judiciary has repeatedly signalled its support for the role played by third party litigation funding in the UK. But despite its growing prevalence both domestically and internationally, litigation funding remains an unfamiliar concept to some in the legal profession. In this blog, I go back to the basics of litigation funding and explore some of the benefits it can bring.
What is litigation funding?
In its simplest guise, litigation funding is a form of non-recourse financing for legal disputes. In exchange for a pre-agreed share of any proceeds arising from the litigation, the funder agrees to pay some or all of the claimant’s legal costs and disbursements. In the event that the litigation does not succeed, the claimant is not liable to repay these costs, which are written off.
More complex forms of litigation funding also exist. These include:
- Funding alongside conditional fee agreements (CFAs) or damages based agreements (DBAs).
- Funding a portfolio of disputes (with or without cross-collateralisation of damages).
- Claim and judgment acquisition as well as law firm working capital provision.
What are the benefits of litigation funding?
The particular benefits of litigation funding vary from claimant to claimant. For those with limited resources (whether an insolvent estate or an individual of ordinary means), litigation funding enables meritorious claims that would otherwise not be heard to be brought and, if not settled beforehand, taken to trial. It is access to justice in a very real sense. For the well-resourced, litigation funding prevents the diversion of funds earmarked for other purposes from being spent on potentially costly and uncertain litigation. In either case however, the inherent financial risk of the litigation is removed from the claimant’s balance sheet and transferred to the funder’s.
What sort of cases are suitable for litigation funding?
Litigation funders look predominantly to fund meritorious claims for monetary relief whether through contract, tort or restitution, whether brought by single claimants or through class actions, and whether through litigation or arbitration (under whichever set of rules). The scope of litigation funding is extremely wide and new ground is constantly being broken. There are, however, some types of cases which funders tend to avoid; defamation, family and personal injury are often (but not always) excluded.
The litigation funding market is stratified; subject to risk appetite and available capital, some funders look to back small claims whilst others focus exclusively on larger disputes (which inevitably require larger investments). Regardless of claim value, however, funders will always have minimum target returns on their investments. When assessing the economic viability of a case, it is imperative that these target returns can be achieved without taking a disproportionate percentage of the proceeds obtained by the claimant (should they succeed).
What if the case does not succeed?
In the event that the case is unsuccessful, the funder’s investment is written off. In order to meet any adverse costs awards made against the unsuccessful claimant, a prudent funder will either make provision to enable the claimant to purchase an after-the-event (ATE) insurance policy or indemnify the claimant against any such awards. In the latter case, the funder may choose to hedge its own adverse costs risk with ATE insurance purchased in its own name, or it may elect to self-insure the risk.
How much does litigation funding cost?
In general terms, after a return of its investment, a funder will expect to receive the greater of a multiple of its capital invested in the case and a percentage of the damages obtained. However, the specific pricing terms set by litigation funders in each case are a product of a number of interrelated factors including:
- The total budget required to bring and sustain the action.
- The likely duration and value of the dispute.
- The strength of the claim and whether it is in any way novel.
- The likelihood of appeals.
- The creditworthiness of the defendant.
- Whether enforcement action will likely be required and whether cross-collateralisation across multiple claims is possible.
Specific pricing terms are therefore unique to each case.
How do I pick the right litigation funder?
In recent years, the litigation funding market has seen a number of new entrants, but not all litigation funders are created equal. The Association of Litigation Funders of England and Wales is the self-regulatory body for the industry. Association members are obliged to comply with the association’s code of conduct, including its capital adequacy provisions. Those seeking funding are strongly advised to approach association members.
Moreover, a reputable funder will not seek to control or to direct the case (which remains in the claimant’s hands), nor will they leverage their funds (which ought to be ringfenced). Thorough due diligence on the case prior to investment should be expected from any serious funder.