According to Pythagoras: “The oldest, shortest words – ‘yes’ and ‘no’ – are those which require the most thought.” Litigation funders would wholeheartedly agree when deciding whether or not to fund a case. As the largest funder in the UK by volume of claims funded, Augusta has made such decisions more often than most. However, we need to be confident in a case before we decide to provide non-recourse funding. Like all funders, we look at cases (or portfolios of cases) on their individual merits and generalities do not always apply. Yet given the number of cases we have seen, and the number of decisions we have made, we are in a good position to shed some light on the rationale behind “yes” and “no,” and why funders ask the questions they do.
The legal merits
One factor that funders can all agree on is the importance of the legal merits. Augusta conducts a legal review internally and externally (usually through an independent lawyer) to make sure that we are comfortable with the merits. Like other funders, we engage with the claimant’s lawyers about the legal arguments and the evidence to reach a conclusion on whether the legal merits of the case meet our risk profile.
The importance of the legal merits review does not mean that we will only consider the perfect case, if such a thing existed. However, a funder takes on all the financial risk of losing and so we want to be confident in what the risks in a case are. To assess those risks, the funder needs to see the contours of the claim from an early stage. If users of funding are seeking a way to expedite or facilitate the legal review, then the best way for an application to get ahead in this regard is to provide a full legal opinion and address any risks or areas of concern at the outset.
People matter. When deciding whether to fund a claim, one of the most important (and sometimes unexpected) features of our diligence process involves a look at the claimant themselves. The depth and intensity of this analysis will depend on the type of claimant, but we want to check who the claimant is, their means, and their motivations. Indeed, in some instances, we have rejected cases where there was insufficient clarity about who the claimant was and what their intentions were.
We will also ask law firms and claimants to answer some questions about finances. Even though a funder provides money on a non-recourse basis for legal fees and disbursements, the claimant’s financial situation is still important. We understand that many claimants pursue litigation because of financial pressure, or significant losses, caused by the defendant’s wrongdoing. However, if a claimant company is at risk of insolvency during the litigation, that obviously poses questions about the funder’s legal rights in that scenario and how the case will be managed should an insolvency process commence. As such, we will want to know whether the claimant expects to withstand the litigation without any overwhelming financial strain.
We will also ask for a meeting with the claimant, or the owner/director of the claimant, themselves. In part, this is about verifying identity, but it is also about understanding their motivations and their position. The claimant’s interests lie at the heart of the case, but we want to see what they are like and why they are pursuing their claim. We believe in enabling access to justice, and we are ready and willing to support claimants who need their “day in court.” However, any funder will be wary of a claimant who is pursuing a vendetta without regard to a commercial settlement, or a claimant who does not fully appreciate the risks involved in litigation.
Similarly, we are interested in the claimant’s decision-making process. If there is a claimant company with a laborious decision-making process, funding a claim may be difficult as the claimant may not be able to make quick, commercial decisions if required. On the other hand, a claimant that is fully engaged and appropriately advised (as if often the case) is someone we will be keen to work with.
At the outset of a case, the focus is often on the facts and the legal position, but the economics of the legal costs are obviously important. We want the lawyers to have the financial resources required to make the case a success, but budgets and damages projections will have to be modelled and tested. Predicting the scale of damages in the early stages of a case is not easy, but we need to strip away the vagaries as much as possible in the diligence process to get a conservative estimate of what the claimant can expect at the end of the day. We will often want to see a preliminary damages report or details of how the quantum has been calculated. While the claimant may (legitimately) put forward a “best-case scenario” damages projection, we want to know what the “bottom line” is. However, rather than being a cumbersome hurdle, this early quantum assessment should be a constructive process as it focuses on the economic realities of a claim and how much it is worth to the parties involved.
The focus on economics is not just self-interest on a funder’s part. There needs to be enough value for the claimant to get a sizeable return after the deduction of the funder’s uplifts, the lawyers’ success fees, and the after the event (ATE) insurance premium (to protect against adverse costs). It is only fair that the claimant is going to see a decent return, and the legal claim remains theirs. If nothing else, a claimant who cannot expect a fair deal has limited incentive in giving a case their full attention.
A funder’s other major focus is the defendant. This involves consideration of what the defendant is likely to do. We need to consider whether they are likely to push for a gladiatorial battle to the bitter end, or whether they are more likely to adopt a commercial and pragmatic approach. However, we are also interested in whether the defendant can, or will, pay an adverse judgment or award. The litigation funder and the lawyers are there to help a claimant win their case, but that victory is worth very little if the defendant is impecunious or there is no prospect of recovery.
For a funder, a pyrrhic victory in the shape of an unenforceable judgment is effectively a loss. For that reason, we must think about the aftermath of a judgment or award before the case has even started. We will be focused on the defendant’s financial standing, what assets are available, where they are, and the prospects of successfully enforcing against them. Even at an early stage in the case, we must consider how a successful judgment or award will be enforced or paid. Again, however, this is not purely for the benefit of the funder because it also allows the claimant objectively to assess the economics at an early stage.
All litigation involves risks, and funders are used to assessing those risks and managing them. In reaching our decisions, however, much of our thinking revolves around the four factors listed above. While each case is different, these factors lie at the heart of our thinking. Hopefully, this overview will give the users of funding a clearer sense of how and why we decide to say “yes” or “no.”