Using third party litigation funding
December 7, 2022
Traditionally, the prospect of taking a claim or a counterclaim into the dark world of commercial litigation and possibly into the courtroom is one of the most intimidating challenges a business can face. In our first blog on litigation funding, we looked at some of the options for claimants and defendants that have emerged in recent years, which now make this far less risky than before: Conditional Fee Agreements, Damages-based Agreements and After the Event Insurance.
A recent estimate of the UK market for third party litigation funding puts it at over £1bn. The market has doubled in the past three years and continues to grow apace.
As the use of third party funding has increased, so have the number and range of institutions that are prepared to finance litigation and arbitration. In addition to specialised third party funders, insurance companies, investment banks, hedge funds and law firms themselves have entered the market.
What is third party litigation funding?
Third party litigation funding is where someone who is not involved in a dispute provides funds to a party to that dispute in exchange for an agreed return. Typically, the funding will cover the funded party’s legal fees and expenses but can cover the other side’s costs if the funded party is so ordered, as well as providing security for costs. Its application can extend beyond litigation and arbitration to all forms of dispute resolution, and is available for a wide variety of commercial disputes.
When should third party litigation funding be considered?
Unless they specialise in financing smaller claims, funders will generally only fund one-off cases where damages are likely to be £10 million or more because funding litigation is so high risk and such a time and resource-intensive investment.
Funders will only consider cases where there is a good prospect of success. They will undertake their own separate analysis of the claim and only fund it if they have confidence in it and in the expertise of the legal and support team behind the claimant or defendant.
They will want to satisfy themselves that the opponent will be able to meet the award against them. Issues they will consider include where assets are situated because the ease or otherwise of enforcement is a key concern. Assets located in jurisdictions where enforcement is difficult may deter some funders. Other considerations, including whether the target is likely fight to the bitter end rather than settle, may also influence the funder.
What are the advantages to third party litigation funding?
Necessity
Litigation is famously expensive. If a claimant cannot afford to pursue a worthwhile claim, or a defendant presses for a valid counterclaim, funding may well be its only option.
Risk and cash flow management
Claimants or defendants with the financial resources to litigate may want to share some of the risk associated with costly proceedings, assuming they are willing to give up a proportion of any recoveries to do so. It also enables a business to invest that money elsewhere. Using outside funding takes away the cost pressures and cash-flow issues associated with the legal costs of a major dispute.
Independent validation
Funders are only interested in good claims, which means that they will conduct their own extensive due diligence and carry out their own analysis of the merits of the case before agreeing to provide funding. This objective analysis may assist the claimant or defendant to shape their case strategy. It may also encourage early settlement if the other party knows that their opponent has the backing of a funder.
Eliminating the David vs. Goliath problem
When a litigant with limited means is faced with a defendant with substantial or unlimited resource, having the support of a third party funder behind them helps to level the playing field.
You may also be interested in: Why litigation funding can be the answer to a business litigant’s prayers
Disadvantages of using third party litigation funding:
Sharing the recoveries
A successful litigant will generally have to pay a significant proportion of their recoveries to the funder.
Loss of control
Funders are generally prohibited from taking undue control of or influencing litigation, but there may be some loss of autonomy for the funded party, especially where a settlement is being negotiated. Funders may reserve the right of approval over the settlement.
Cost and distraction of assembling the funding application
Substantial costs and time can go into packaging the case for presentation to a potential funder. These will be wasted if the application for funding is unsuccessful and even where it is agreed, funders are unlikely to pay these up front costs.
Finding the right funder
Third party litigation funding is a developing market with new funders constantly entering. When selecting a funder, it is vital to ensure it has sufficient capital to meet all liabilities that could arise. This should not be an issue when dealing with a reputable funder with an established track record. Even so, proper due diligence on financial strength, track record and reputation must be carried out, particularly where the potential funder is new to the market. As a minimum requirement, it should be a bona fide member of the Association of Litigation Funders.
What reward will the funder look for?
The funder’s return will always be tailored to the particular case. There is no one size that fits all cases. Considerations will include the size of the expected damages, the length of the matter and the level of risk.
The way the return is calculated will vary between cases and funders. It could be based on a fixed percentage share (typically 30 to 50 per cent of recoveries), a multiple of the funding to be provided (usually three or four times), or a combination of both.
Conclusion
Third party litigation is not appropriate for many claims, but can be a crucial route for those involved on either side of high value commercial litigation. As with other forms of litigation funding there will be a need to assemble complex financial and commercial proposals and information packs for funders, dealing with the background to the case and the claim itself. Recovery of awards and settlements can be problematic in such large cases.
Success across these aspects will mean assembling a team including forensic experts, experienced in such matters, and possibly restructuring and insolvency professionals where the outcome threatens the financial health and even the survival of the losing opponent. Few litigation winners have these uniquely specialised skills in house.
If you are seeking professional advice for your business, Opus is here to help. You can speak to one of our Partners who can discuss options with you. We have offices nationwide and by contacting us on 020 3326 6454, you will be able to get immediate assistance from our Partner-led team.