The involvement of Third-Party funders (Funders) has – in recent times – become reasonably common in large commercial litigation in England and arbitration claims, both bilateral investment treaty and commercial, in the main arbitration centres of London and Paris. Typically, it remains the case that the involvement of Funders is limited to the extent that the funded claimant in the dispute is of limited financial means, at least in comparison to its better-heeled adversary. This is to be expected, and this imbalance is what third-party funding was envisaged as addressing when somewhat recent reviews of the English civil litigation system advocated the utility of litigation funding.
However, a central tenet of this article is that Funders are able to and do provide more to corporations and other entities, that otherwise do have the financial means to fund their legal claims, than just the requisite financial assistance. An outline of some of the other, non-financial, benefits Funders can provide to the legal teams of corporate clients with financial means is provided below.
First off, Funders with a level of internal sophistication are able to provide an assessment of the prospects of a particular claim from both a legal and a financial, or commercial, perspective.
Successful Funders must be able to turn around proposals or applications for the utilisation of their capital in a timely and professional manner. As such, any corporate funding applicant is able to gain, in effect, free advice as to the merits and prospect of a potential claim from a Funder in a timely fashion. Typically, in the absence of an exclusive agreement, a Funder would ask for no more than the opportunity to bid for the funding of the claim, in the event that it determines the claim warrants funding. In contrast to retaining a law firm and possibly counsel to assess a claim’s prospects, or even in conjunction with it, obtaining a similar opinion from a Funder is a decidedly less expensive exercise. It is of course necessary, as noted above, that the Funder has the requisite staffing to provide such a review – as the market matures, there is little doubt it is attracting and will continue to attract capable and experienced legal minds.
A Funder’s expertise in conducting its ‘due diligence’ on funding applications is absolutely integral to its success and its prospects of longevity. Its expertise should extend to the full ambit of commercial litigation and arbitration claims, including but not limited to: contractual, proprietary, intellectual property, competition and other anti-trust disputes. Funders with significant funding experience will be able to apply their particular legal, financial and commercial analytical skills to the subject matter of the dispute, to the benefit of the funding applicant.
It is an important point to emphasise that a Funder will focus sharply on the commercial viability of pursuing (and financing) a claim. With its financial exposure to the prospects of a particular claim of obvious prominence in its assessment and decision-making process, a Funder will run an eye over a claim not just focusing on the legal merits of the matter. It is a hollow victory to succeed in litigation but either: fail to recover the full amount of damages sought, or indeed only recover a fraction of the amount envisaged; and/or be unable to enforce a favourable judgment obtained.
In terms of analysing the potential quantum of a claim (the amount of damages or compensation sought), Funders will apply both internal and, where necessary, external expertise to this analysis. Often, it must be said, it appears that the amount of damages or compensation sought by a claimant is not subject to the same level of scrutiny as the legal prospects of the particular claim. The involvement of a Funder in the review of a claim’s prospects may assist in mitigating this strategic mistake prior to an entity embarking upon litigation.
Enforcement and Recoverability
Funders have recognised that they must become increasingly proficient in the examination and assessment of ‘recoverability’ in a matter, that is the prospects of the proposed defendant (or defendants) being able to satisfy a judgment against it (or them). In a world where more and more commercial litigation assumes an international or multi-jurisdictional aspect, such analysis is crucial. Enforcing judgments overseas and recovering damages from overseas defendants can pose significant potential challenges.
Any analysis of recoverability in a litigation or arbitration scenario might extend to an examination of the prospects of: a target falling into bankruptcy or insolvency (perhaps as a result of the claim); the target seeking to avoid a judgment; the prospect of obtaining a freezing injunction over the assets of the target; the likelihood of insurance otherwise responding to the claim; and other factors that will determine the ability of the claimant to recover.
A competent Funder should be able to at least assist in the assessment of the prospects of recovering in the various scenarios listed above.
Putting aside the recovery of damages in any piece of litigation and focusing on the conduct of it, Funders should be proficient in budgeting for and managing the costs of complex commercial litigation. It goes without saying that complex litigation and arbitration claims can be prohibitively expensive. In this regard, a Funder’s assistance to an in-house team in overseeing the practitioners conducting the claim can be invaluable, and it is frequently the case that additional oversight of legal spend will result in efficiencies that would otherwise not be realised. Funders need to be able to expertly manage large legal budgets for pieces of complex litigation, oversee the legal work as the matter progresses and keep a keen eye on both the time applied by lawyers to various components of the litigation and the focus of their endeavours.
Strategic assistance is available to corporates from Funders at various stages of the litigation process and in regards to various aspects of it.
For example, Funders are able to assist the in-house legal team with selecting the law firm and counsel best suited to be retained to prosecute the claim. Funders should have a deep understanding of the legal service providers within the jurisdictions they operate in – and which firms and counsel may be appropriate or preferable for particular types of claims (for example which firms or counsel would be appropriate for a financial services claim, or a fraud claim, a shareholder dispute etc).
Funders, within the ambit of the law and the obvious restrictions placed upon the involvement of a third party in litigation, should be in a position to provide assistance in terms of the claimant’s overall litigation strategy. Funders can, for example, assist in determining which of a host of potential possible claims should be pursued – and against whom the claims should be pursued, where there is more than one potential defendant.
Large and inevitably complex commercial claims tend to involve a raft of interlocutory skirmishes, and consideration as to whether they should be pursued, or avoided, is essential. Some are best avoided for strategic reasons, others must be fully engaged with. A Funder can add another, independent view when considering a claimant’s strategy in this regard.
The involvement of a Funder could otherwise avoid a typical interlocutory dispute, for example one relating to an application for security for costs. In this situation, a Funder which offers adverse costs cover within their funding package should be able to address this request, or negate the requirement that it be requested in the first place. Funders offering adverse costs cover should also be able to provide security in the format required, if indeed the court requires it, given their involvement in the matter.
Finally, Funders are able to provide strategic assistance to a corporate claimant with respect to the retention of other, non-legal, experts. For example, Funders should be able to recommend appropriate forensic accounting, investigative and/or industry experts.
An in-house lawyer can often feel bullied and outnumbered by their external legal team – the in-house lawyer can be quite a solitary role. The involvement of Funders operates to level the playing field to an extent, ensuring that the in-house’s lone voice, often in contrast to the army of well-trained external lawyers, can be heard. Otherwise, the reservations of the in-house lawyer (often commercial ones that would be shared by the Funders) can be shouted down by the well-meaning force of the external counsel. The external solicitor still has an unnerving habit of not explaining matters completely until after the event. Funders will not accept such a half-answer.
In terms of a claimant seeking to settle a claim, the involvement of a Funder will offer various intangible benefits in this regard and further potential advantages.
A funded claimant litigating in an adversarial context will enjoy the benefit of having receiving an independent endorsement of its claim (from the Funder), which can have a significant impact on any settlement dynamic. The backing of a professional entity, whose assessment of the claim is based upon an objective and impartial assessment of it, should not be under-estimated. It potentially negates any perception that the claimant is acting in a vexatious or capricious manner, or motivated by personal factors rather than sensible legal and commercial ones, in seeking to advance its claim.
Further, a Funder with a proven track record of backing meritorious claims brings this record to the settlement table. In theory, it should have a positive impact on settlement prospects, as the other side will factor in its record when considering whether to contest the claim or seek to resolve it.
Finally, a funded party is less likely to be perceived as capable of being out-spent, which can assist in the focusing the relevant minds on the actual prospects of the claim.
As noted earlier in this article, some Funders are able to alleviate the adverse costs exposure of their clients by providing not just funding for the claimant’s own legal and other litigation costs, but also protection or insurance against any adverse costs orders made in the proceedings. In an expensive adversarial legal system, such reassurance to a corporate claimant can be useful, particularly where its financial exposure to such costs is subject to inclusion on its balance sheet, often for a protracted period of time (complex litigation inevitably taking longer to resolve than is usually anticipated).
Most corporates will have the means to finance claims they seek to advance, however I have sought to raise and briefly describe above the numerous other, non-financial, reasons why they ight consider third-party funding. Of course third-party funding comes at a cost, but there are numerous intangible benefits that at least partly offset such a cost.
The benefits of a partnership with a Funder could lead to the funding of claims on a portfolio basis for the corporate, or at least the development of a relationship where a client is able to utilise the funding of a Funder on a systemic and ongoing basis. Such relationships would be of obvious mutual benefit, where the flow of information and the due diligence process could be streamlined and the parties have an agreed set of commercial funding terms.
In conclusion, when considering utilising a Funder’s assistance, corporates should look to closely assess the financial capacity (balance sheet), reputation, experience (track record) and expertise of any particular Funder they seek to partner with. In the event that the client finds itself needing to litigate a complex commercial dispute, or more than one, the prospect of financial and other assistance from a Funder can be an attractive proposition.