In the Professional and Financial Disputes team at Clyde & Co, we sometimes see litigation funding from the opposite end of the telescope in circumstances where the prosecution of a case has gone awry. We have drawn from this insight in preparing this article. For convenience, we refer to litigation within this article but the issues we address are equally applicable to arbitration.
The funding market has developed rapidly in recent years, so that there are now lots of different funding packages available for both high and low value claims, and many professional litigation funding companies have been established in jurisdictions throughout the world. Some funders will focus on a niche specialism, for example, insolvency litigation, whilst others will fund a wide range of commercial claims. Many third-party funders are now also (post-Jackson) offering integrated policies which provide both funding for own costs and indemnity against adverse costs (also known as after the event, or ATE, Insurance).
Litigants in the market for litigation funding should be aware that a funder's success fee will likely be a multiple of the amount invested and/or a percentage of the amount recovered - reflective of the likely risk - and that the costs of litigation funding can vary dramatically from funder to funder. Often, success fees will be staged, with lower sums due, the earlier the proceedings are resolved. It is essential that litigants seeking funding properly consider the various funding options available to ensure that any success fees they may be required to pay are reasonable. Litigants should also consider whether or not the funder has immediate access to funds, where the funds are coming from (that is, direct from the funder, or from other third parties), how much funds are available, and whether the funds to be provided will indeed be sufficient - placing an additional emphasis on the importance of early and accurate costs budgeting, where possible. Litigants seeking litigation funding may find it useful to consider those funders which are members of the Association of Litigation Funders of England and Wales (an independent body charged by the Ministry of Justice, through the Civil Justice Council to deliver self-regulation of litigation funding in England and Wales). Members of the Association are required to follow the Association's Code of Conduct. However, there are other legitimate and sensible funders, which are not members of the Association. Notably, solicitors are obliged to inform their clients about the availability of litigation funding at the start of a case.
The increased use of third-party litigation funding is necessarily adding a new layer of complexity to both litigation and arbitration. There is currently no requirement upon litigants to disclose their funding arrangements. However, if a litigant does become aware that its opponent is funded, this may shed a new light on the assessment of the case's merits, since funders are generally unlikely to take on unmeritorious cases (funders very often seek to fund only those cases which they have been advised have prospects of success in the vicinity of 60% and above). That is because, third-party funding arrangements are usually provided on a "non-recourse" basis. That is, the funders' only recourse will be against the proceeds of the claim. Therefore, if the case is lost, the funder will lose its investment and is owed nothing by the litigant.
Funded claims can be more difficult to settle, in circumstances where litigation funders may not properly understand the complex issues which can arise in commercial claims, and on receiving favourable but limited legal advice, may have a strong appetite for trial. However, in the aftermath of the highly publicised Excalibur litigation, third-party funders will, no doubt, now be very aware of the risk that they may themselves be ordered to pay adverse costs orders on an indemnity basis - even in circumstances where they were not themselves responsible for the matters giving rise to that order. Consequently, the Excalibur decision may encourage greater focus by funders on the elements of a claim which are likely to fail and result in an indemnity costs order. This may assist to provide leverage for litigants seeking to resolve funded cases outside of Court or arbitration.
Funders may also now give increased consideration to how heavily they monitor claims. Although, increased scrutiny of cases by funders may cause them to stray into the forbidden fields of champerty and maintenance, which would render the funding agreement void and unenforceable, and leave the funder liable to pay the full amount of the costs of the successful party.
Finally, litigants should be wary of sharing their privileged information with prospective funders. A "joint-interest" for the purposes of privilege is likely to arise once the funding agreement is in place. However, this will not apply to communications which pre-date the funding agreement. Accordingly, it is important to be aware that sharing privileged information with a prospective funder may result in a waiver of privilege.
We will be watching closely how the dynamics of litigation-funded claims play out in order to feed this into our strategic approach to resolving future claims.
This article was first published in Clyde & Co's International Arbitration 1/3LY. Please click here to read the publication.A Few Things To Avoid When Considering Funding
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.