Can third party litigation funding provide access to justice and put claimants in a stronger bargaining position? Are worries about loss of case control and regulation exaggerated? Legal Week Intelligence and Vannin Capital examine the rise and popularity of litigation funding and what this means for the legal market.
As lawyers' understanding of third party funding grows, so does their willingness to use it, according to the results of a recent Legal Week and Vannin Capital survey.
However, the survey, alongside targeted interviews of both in-house and private practice dispute resolution lawyers, suggests a gap remains between practitioners' theoretical willingness to use dispute resolution funding and its use in practice.
The growing enthusiasm for third party funding shown by the survey participants seems primarily to emanate from a strong view that it can assist businesses of all sizes to bring claims. Proponents of funding point out that this perception is correct: at its core, the funding model is simple, involving little more than a third party commercial investor paying for the fees (lawyers, counsel, experts and disbursements) of pursuing a claim through to resolution. If the claim succeeds, the investor receives a return on its investment (paid from the damages awarded). If the claim fails, the funder loses all of the money it has invested. The claimant has no risk of losing money.
Without innovative fee arrangements, of which funding is one among a number of options, small and medium sized businesses, and individuals, with strong claims are being priced out of the legal market, which is increasingly becoming the domain of entities with the deepest pockets and a corresponding willingness to risk the costs of litigation.
The recent increase in court fees has made the position even worse for impecunious claimants: prior to the introduction of the new fee structure, a claim for £100,000 incurred a court fee of £910. Now that cost is £5000. Indeed, enabling access to justice is one of the primary reasons why over 50% of the private practice lawyers surveyed said that they had offered third party funding to clients on at least one occasion.
Anneli Howard, competition law barrister at Monckton Chambers in London's Gray's Inn, says that in her specialism "third party funding has totally opened up opportunities for claimants to bring claims in what is an incredibly technical area", adding: "competition law damages claims can take a minimum of three years, involve detailed economic analysis and extensive disclosure, with costs running into millions of pounds."
Increased efficiency
Against the backdrop of rocketing court and wider costs, requiring lawyers and their clients to think creatively about funding, it is easy to see why third party funding has so quickly woven its way into the psyche of dispute resolution lawyers.
Interestingly, Noah Rubins, dispute resolution partner in the Paris office of Freshfields Bruckhaus Deringer highlights that third party funding can also resolve many of the concerns raised in connection with contingency fee arrangements: "A law firm - no matter how focused on contingency arrangements – cannot diversify risk nor calculate its magnitude with the same efficiency as an organisation that does nothing but this.
Also, contingency arrangements can create perverse incentives and tensions with ethical standards, especially when it comes to the possibility of settlement. It is better to eliminate that tension by allowing the lawyer to focus on best serving the interests of the client, rather than his own interests, in conducting the litigation. Third party funding allows this to happen while still satisfying some clients' preference (and some clients' absolute necessity) to mitigate risk and cost."
As well as impecunious claimants, large, wellresourced organisations and their representatives are also being persuaded of the benefits of third party funding. These organisations may have the resources to finance multiple claims, but funding is increasingly being viewed by larger companies as a commercial risk management tool with which to hedge uncertainties and costs attached to large-scale disputes. Funding takes the claim off balance sheet, ensuring that the cost of the claim has no impact on EBITDA and reduces or, in many cases, eliminates internal legal spend.
While a financial director may have the funds to pay for an action, by deploying litigation funding they can choose to invest those funds elsewhere: given the potentially costly, prolonged and changeable nature of litigation and arbitration, this is very attractive. Or a financial director may have pursued a piece of litigation or arbitration only to reach the limit of the available budget before the case is concluded – a litigation funder can step in at this stage. The key advantage of the funding model is that it offers companies the ability to bring litigation with little or no cash-flow burden or financial risk.
Tomaso Calcaterra, global commercial finance leader at GE Power Conversion says: "As a financial proposition third party funding of commercial claims makes perfect sense in certain situations for well capitalised companies. First, we are not always the best placed to determine the legal risk of a claim and the intervention of a third party funder is very valuable to assess the sheer economic value of a claim after having performed their extensive due diligence.
We are not in the business of optimising litigation, but third party funders are. Furthermore, in terms of a company's balance sheet, a claim is nothing more than an asset with a potential value. The asset's value can be unlocked at no risk for a company with third party funding.
The availability of cash is naturally an important criterion. Some businesses are more sensitive to investing their limited cash on dispute resolution because they need that money to run a cash intensive operation. In summary, it's a matter of horses for courses when it comes to the option of using third party funding but it seems illogical not to consider the option at all. Naturally, high or low borrowing interest rates should also be factored into the decision."
Constantine Partasides QC, a partner at international arbitration specialist law firm Three Crowns, comments: "You don't have to be an opportunistic claimant to find third-party funding interesting. You might well be a blue chip that finds as a matter of fiduciary duty you need to pursue a claim but would rather not expend ill-defined and unlimited amounts in fighting it, and would therefore find third-party funding a useful way of discharging your duty to your shareholders, that is to say, to pursue the claim while taking on limited risk.
"We are starting to see blue chips thinking about third-party funding as a smart way of managing litigation and arbitration portfolios."
Indeed, existing general counsel behaviour provides a clue as to why they are increasingly interested in the funding model.
It is well known in the industry that funding unlocks "sleeping beauties" – claims that would not otherwise be run, or at least pursued as effectively, without it. The decision whether or not to use vital funds to fight litigation presents a dilemma and a complicated cost-benefit assessment for companies. One should not forget the distraction that litigation can cause a business or underestimate the value of the resources that would otherwise be used to fund the litigation being deployed elsewhere in the business, allowing for more positive growth. Litigation funding enables companies to avoid making the difficult choice whether to spend money on a meritorious claim or on the core commercial activities of its business.
The survey also highlights a level of disconnect. While a majority of general counsel remain open to the suggestion of third party funding, many law firms appear reluctant to discuss the model with their clients. Given in-house lawyers' openness to funding, this seems like a missed opportunity.
"That's the main issue for third party funding – lawyers are afraid of it," claims Ann Benzimra, a commercial litigation and arbitration partner at Hill Hofstetter.
Benzimra's firm have employed the third party funding model in several matters. But, she says, private practice lawyers generally "don't understand it, and therefore they hope clients won't want any further explanation..."
While some private practice lawyers cite simplicity of the funding model as the main reason that they would consider using it, Benzimra seems to disagree, "Many in the legal profession put third party funding in the 'too difficult' pile. Lawyers as a breed are quite stick in the mud and don't like change. They like to do things in a clear way that they understand – they bill and get paid".
Could one reason for this disconnect be unwillingness on the part of the lawyers to discuss with their clients what they may see as an embarrassing issue around the costs of funding a claim or a lack of the same? Funders maintain that their model is straight forward: the funder pays the fees of the action in the same way a client would – the lawyer issues an invoice and it gets paid. If the claim is successful, once damages are paid, the funder receives either a multiple of the funds advanced or a percentage of the recovery, whichever is greater.
Is there a real risk that funders will fund spurious claims?
Despite the positivity within the legal community about dispute resolution funding, there are a number of vocal critics of it. Leading the pack is the US Chamber of Commerce's Institute for Legal Reform, a lobbying group that represents large American corporations. Representatives from the Institute are known to lobby Whitehall and Brussels, preaching what they maintain are the dangers of third party funding – chiefly that it will let loose the hounds of a US-style compensation culture on the UK and Europe, encouraging claimants to bring unmeritorious claims which are costly and time consuming for businesses to defend.
In reality, as a general rule, litigation funders require claims to have, on an independent analysis, a greater than 60% chance of success. While this is not an exact science, it is not in funders' interests to fund unmeritorious claims. The risk of losing their investment, which is usually substantial, is just too high and puts them at risk of not making a profit.
While there is a clear business agenda behind the arguments raised by the Institute, the sceptics also invoke ethical issues around a system where one party has an exclusively commercial interest in the outcome of a piece of litigation.
While funders monitor and follow the progress of the litigation, as prescribed in their funding agreement, they will not influence its conduct. Decisions during the litigation process, such as which lawyers to instruct, remain exclusively a matter for claimants. Similarly, claimants and their lawyers jointly retain control over the strategy of the action, not least, and crucially, over whether, when and for how much to settle. As Christopher Kinsella, a former chief financial officer for the Dyson Group and TI Automotive and now a member of the UK government's Industrial Development Advisory Board, comments: "Commercial sensitivity, reputation and control are all questions for third-party funding. It is crucial to recognise during litigation if we have reached a point where the case is not worth pursuing any further, and to take the pragmatic option to settle. You need absolute control over that situation as a litigant."
David Greene, the senior partner at boutique London litigation law firm Edwin Coe, agrees. Whilst still unsure over how much of an impact third party funding will ultimately have on the wider market, he says ethical concerns have been over-emphasised and, as with other funding models, they will be surmounted.
"You have to face reality," says Greene. "Claimants have an entitlement to enforce their rights and go to court. How will they fund doing so? We've overcome the ethical questions around solicitors acting on a conditional or contingency fee. Modern day litigation has addressed those ethical questions and come up with practical answers."
Should the existence and terms of a funded claim be disclosed in all or in some circumstances?
The notion of disclosure of a funder has given rise to much debate. From a claimant's point of view, there are risks and benefits associated with each course of action.
A claimant disclosing that they are funded, especially in the context of international arbitration, addresses the risk of a potential conflict of interest accusation head on. The disclosure would put the arbitrators in a position of knowledge and they could then examine their past or existing relationship with the named funder and disclose, if necessary, that relationship. This would naturally protect the integrity of proceedings or, more importantly, of the consequential decision.
Disclosure of funding may, however, either lead the court or the tribunal to award security for costs or to draw inferences from the existence of the funder which may modify its appreciation of the facts and the law.
Over 70% of respondents with in-house positions who took part in our survey said that their own strategy in a dispute would be different if they knew that the case against them was funded.
As pointed out by Charles Lightfoot, partner in London at the international law firm, White & Case: "In any system that involves a loser-pays principle, there is an argument that funding arrangements should be subject to disclosure."
There seems to be a consensus among the private practitioners interviewed that the decisions on costs are really the area where the disclosure of the fact of funding is the most relevant and important. As noted by Khawar Qureshi QC from Serle Court Chambers: "There may be a marked differential in terms of the rates and amounts paid in legal costs where litigation funding is in place as opposed to payment by a client itself. "A court or tribunal assessing costs may benefit if it is able to ascertain whether the funding arrangement is a material factor in this regard."
For private practice respondents to the survey, the issue of regulation was a significant concern, with a majority of respondents highlighting this as an issue.
For Arif Kamal, chief financial officer at London law firm Thomas Cooper: "A serious issue is that third party funding is largely unregulated. And the Excalibur case though now sometime back, caused significant concern. A general view is that third party funding has not been welcomed by many parts of the legal profession, and the fallout from Excalibur has painted the funding model as being profit hungry with no regulation."
In fact, as highlighted by the court (Christopher Clarke J), the funders did not act improperly in that case rather than counsel for the claimant and its appointed expert. However, the court did sanction the funders for failing to undertake their own due diligence on the case and to monitor it appropriately. The cost decision in the Excalibur case is far from a blow to the funding industry. Instead, Excalibur has highlighted that, as with any investment in the technical fields of law or finance, it must be undertaken with professionalism and strict due diligence standards must be met.
Professional third party funders, such as Vannin Capital, expend a considerable amount of time and resources reviewing cases so as to assess their chances of success. The process is overseen by experienced dispute resolution lawyers to ensure the quality of the due diligence and the ethical transparency of the process. Additionally, and importantly, the Association of Litigation Funders, of which Vannin Capital is a founding member, has a clear code of conduct by which all its members must abide. Among other things, the code requires members to meet strict capital adequacy and confidentiality requirements.
While membership of the association is voluntary and awareness of the association and the code among the wider legal community remains limited, its importance and significance are clear.
Conclusion
There is no doubt that litigation funding is becoming more mainstream. Its evolution in recent years has been significant. Its use and availability is increasing with a number of sophisticated and well-resourced players in the market.
Those who have used litigation funding are generally positive about the experience they have had and regard it as inevitable that third party funding will become a solid and well used fixture on the UK and international litigation and arbitration scene.
From Vannin's perspective, provided claimants use third party funders that are members of the Association of Litigation Funders and therefore well established, experienced and regulated, the commonly held concerns about litigation funding that many dispute resolution lawyers have should fall away and because Vannin understands those concerns, its business model and approach are designed specifically to address, answer and eliminate them.
If anything is missing, it is the availability of adequate information to potential claimants about third party funding. That is easily rectified by the recognition from both funders and lawyers of the need to make that information more readily available and by greater co-operation between them to bring it about.
Originally published in Funding In Focus, May 2015
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