Would you invest your own money in the outcome of someone else’s court battle? It intuitively sounds risky, but the market for litigation funding across the globe is booming. In the UK alone, the top 15 funders reportedly have almost £2bn of assets under their control, and with the growth of potentially lucrative class action cases, that figure is expected to rise further.
What is third-party litigation funding?
As the name suggests, litigation funding involves a claimant with a monetary claim receiving funding from a third party to meet their legal costs. The funder – typically a hedge fund, private equity group, high-net-worth individuals or a specialised third-party funder – covers all outlays and in exchange, receives an agreed sum from the outcome of the case. That is, of course, dependent on the claim going in their favour; the funder also takes on the risk that if the case is unsuccessful, they will not recover anything. Third-party funding is not restricted to court disputes and may be used across other areas, like international arbitration.
The key point for any funder will be finding enough appropriate cases to invest in where (a) there is sufficient money at stake; (b) there are good prospects of success – usually at least 60%; and (c) the defendant in the case has a good financial covenant to allow recovery of any court award against them. Of course, many cases do not run all the way through trial to a judgment so, funders will often have a say when any settlement terms are discussed.
Although the primary relationship in any dispute remains between the lawyer and client, a litigation-funded case lends itself to more of a tripartite relationship between the client, lawyer and funder. The funder enters into a direct contract with the client, so the client’s lawyers will often undertake various reporting duties to the funder, who in turn will meet the lawyer’s bills as they fall due.
There are advantages and disadvantages to this way of working, but generally speaking, a team approach works well in the right cases. The circumstances in which this trinity emerges will, to an extent, depend on the nature of the dispute and the client’s attitude to risk and reward. Funders’ terms are not for everyone and many clients will pay their own legal costs, in order to retain all damages if successful in court.
Generally though, funders are relying upon a return, so a case will typically have to involve one significant claim for money or, alternatively, many small claims by a large collection of claimants. The latter, known as a class or group action, is an area of growth for claimant firms and funders alike. Given the level of risk involved in any litigation, funding will usually only be available in high-value claims, or for class actions where the class is big enough to generate a sufficient settlement pot or award from the court.
Advantages of third-party funding
First and foremost, funding allows the costs and risks of pursuing a claim to be shared. For a party with limited means or cashflow issues, it may be the only way of pursuing the claim unless they can convince their legal team to pursue a case on a ‘no win no fee basis’.
But many cases take years to conclude by the time all appeals have been exhausted. Most legal firms are not financed in such a way as to allow large amounts of work in progress to accrue without regular income for that work. Moreover, most cases come with a need for expert reports, barrister and court fees, all of which can amount to a significant sum of money.
While funders will always need to be satisfied that a claim has good prospects of success and that there is a route to payment, they are often well financed and equipped to reverse engineer their decision to fund a case, by thoroughly checking the asset position of the defendant. Funders will conduct their own investigations to satisfy themselves on a claim’s merits, which can be reassuring to the party pursuing that claim. The defending party’s approach may also be influenced if they are aware of a funder’s involvement and there is also the prospect of legal expenses being taken off-balance sheet for companies involved in disputes. Other products, like after-the-event insurance, are often available through funding packages which may mitigate adverse cost awards.
Disadvantages of third-party funding
The obvious disadvantage is that a successful party has to give up a significant proportion of any sums recovered. Yet, some cases accumulate a six or seven-figure legal spend, which can impact on cashflow for claimants in the absence of funding.
Notably, funders will only accept liability for costs incurred after the funding has been put in place, not expenses involved in preparing the application for funding. Finally, the most important thing to consider is that the funder may retain the right to influence certain decision making – for example, agreement on a settlement figure.
Litigation funding is here to stay. As an asset class, although now more widely understood and regarded as a mature market, it still accounts for a smaller percentage of cases than those where claimants pay their own way. To that end, there is scope for acceleration of a growing trend whereby funders source and build their own book of claims, perhaps in conjunction with claimant firms.
For corporate counsel, it is worth monitoring emerging, new class action trends, arising under the likes of ESG or data protection. Ongoing scrutiny and increased consumer awareness in areas like healthcare, finance and retail hold the potential for large classes to form.
If funding is attached to class actions, this could create determined opponents who have little or no risk of adverse costs. But for corporate counsel, funding could also provide a useful tool to pursue a claim while mitigating legal expenses.
Litigation funding will not be suitable for every dispute, but it remains an attractive and accessible option for parties wishing to pursue a claim against a good covenant – if they are willing to share their spoils.