Summary and implications
At first glance, a typical third-party funding arrangement can present an attractive option to prospective litigants. If the case is considered to be a suitable one for funding, the funder will agree to finance all or part of the legal costs in return for a fee payable from the proceeds recovered by the funded party. A funding arrangement essentially offers a risk-free source of finance for the funded party, since if it is unsuccessful in the pursuit of its claim it will not have to pay anything to the funder.
The topic of third-party funding is attracting more attention. It has recently been the subject of a number of prominent court decisions, two of which are considered in this month's litigation newsletter. This article examines some of the practical aspects of third- party funding.
Traditionally, third-party funding arrangements were prohibited in English law. This was due to a perception that the involvement of an unconnected party with a financial interest in the outcome of the litigation risked compromising the ordinary course of justice. Over time, however, the law's resistance has steadily eroded and the incidence of funded cases has increased as the courts have come to accept third-party funding as a legitimate mechanism for improving access to justice.
Today, the UK is one of the premier jurisdictions for third-party funding, along with Australia and the US. The industry in the UK is self-regulated and there are a number of specialist funding companies and brokers operating in the market. As competition between jurisdictions intensifies, other countries will be expected to follow suit and embrace the use of funding.
What does third party funding cover?
Third-party funding is used in both litigation and arbitration. It is predominantly accessed by claimants, but is sometimes available to defendants with significant monetary counterclaims.
Funding can be available to cover the fees of the client's own firm of solicitors and counsel, the client's own disbursements, and the court or tribunal's fees. In addition, funders may agree to be responsible for the opponent's costs if the claim is unsuccessful, or the cost of insuring against adverse costs as a contingent liability. Funders may also pay for the provision of security if the client is faced with an application for security for costs. Alternatively, it may prove more cost effective for the funded party to obtain after the event insurance to cover adverse costs or security for costs instead of paying the funder to bear the risk.
Key features that funders tend to look for
Generally speaking, funders will be looking to achieve returns of up to three times their investment. For this reason, funders tend only to be interested in investing in monetary claims. As a rule of thumb, funders will want to ensure that the value of the claim is sufficient to enable them to recover the total sum advanced plus their success fee, whilst leaving a reasonable amount for the funded client (the amount will depend on the particular case, but is generally thought to be around 50% of the proceeds). The funder's fee can be calculated as a multiple of the amount advanced by the funder, a percentage of the proceeds recovered by the funded party, or the higher of the two.
There are a number of considerations that funders will take into account when carrying out their due diligence. One of the guiding principles is that the case will need to have relatively high prospects of success. Although far from an exact science, this is normally taken to mean at least a 60% prospect of winning in the opinion of counsel and/or the instructing law firm. Funders will also be guided by the ratio of costs to damages, although acceptable ratios will differ from funder to funder and are often computed differently.
Another fundamental concern for funders is to ensure that any judgment or arbitral award can be enforced against the opponent in order to realise the claim proceeds. Funders will want to know whether the opponent has the benefit of insurance and whether it has sufficient assets available within the jurisdiction, or a foreign jurisdiction in which the judgment/award can be readily enforced. Funders will also want to know the proximity of the trial date, and the likely length of the enforcement procedure, as this will dictate how long it will take the funder to achieve a return on its investment.
Funding is often accessed by claimants with meritorious claims but who otherwise lack the financial resources to pursue them. Others are able to finance their case independently but choose to seek funding as they may wish to apportion the risk, or to free up capital to invest in other areas of their business due to the cash flow advantages offered by funding. However, not all clients will be prepared to cede a share in the spoils of the claim and so third-party funding will not be appropriate for everyone.
A party wanting to apply for funding will need to go through a detailed application process. The applicant will be asked to submit an application form and a case summary to provide the funder with information about the claim, such as the factual and procedural background, the major issues in dispute, how the claim has been quantified, and how it is expected that any judgment or award will be enforced. The funder will also expect to receive copies of the pleadings and key contemporaneous documents.
The funder can take anything from a few weeks to several months to decide whether or not to fund a claim, depending on the complexity of the case. If the client and funder decide to proceed, they will need to enter into a funding agreement. Typically, this will govern matters such as the order for allocating payments from the claim proceeds, the extent of any liability of the funder for adverse costs or security for costs, and the parties' termination rights.
During the proceedings, the client's lawyer will normally be required to provide the funder (and the insurer if applicable) with regular reports on the progression of the claim. The funder will usually have some input when it comes to strategic decision-making, including any settlement decisions. That said, the funder should be careful not to exert too much influence over the case or the legal representatives as it may risk creating conflicts of interest, or contravening common law principles which could invalidate the funding agreement.
The growth of the funding industry shows no signs of abating. In the UK, the market is well-established as funding arrangements have been allowed for some time. The legalisation of funding is now being encouraged in other countries, such as Singapore and Hong Kong where reforms are being considered to permit the use of funding in international arbitration. Recognition of the importance of funding is likely to keep growing as jurisdictions strive to position themselves as the top places for international commercial dispute resolution.
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.