Stepping Stones to Successful Third Party Litigation Funding
24th March 2016
It has its proponents and its detractors but whichever side of the debate you happen to support, one thing for certain is that third party litigation funding in the UK is alive, well and prospering. It is also gathering momentum in the US, but it is in the UK as well as in Australia (the UK arguably having to some extent followed in Australia’s footsteps) that the vanguard of its development can be found. Open access to justice for all or a useful adjunct to a highly remunerative business line for lawyers? Issues relating to third party litigation funding are legion and it is certainly not possible to deal with all of them here. Instead, this commentary aims to provide a practical overview for those considering embarking upon such funding, whether as the instructed solicitor on a case, a prospective funder or the client.
What is it?
Funding, on a non-recourse basis, of all or part of the legal costs of litigation by a third party with no previous connection with that litigation. The financial reward for the funder, if the litigation is successful, is a return on its investment, being either a multiple of the costs invested and/or a share of the proceeds recovered by the solicitor’s client arising either from a damages award made by the court or from a settlement.
In what circumstances might it be used?
The simplest situation is a where litigant has no access to the level of funding required to enable it to pursue the action which is contemplated; this can include insolvency practitioners where the company over which they have been appointed has insufficient assets in the estate or no willing creditors to fund a case. However, there may be potential litigants who, although having the necessary financial resources to support the legal costs of their contemplated litigation, nonetheless feel that the risks involved are too great to “go it alone” from a funding perspective in the litigation or would prefer to manage their own cash flow for the ongoing business rather than on litigation.
In some cases ‘seed funding’ might be used to reduce the expense involved in carrying out a preliminary investigation into the facts of a case and early expert involvement, both of which are vital for determining how likely a claim is to succeed, but this can be costly.
What is it used in conjunction with?
Part of the risk sharing usually involves the instructed solicitor and wherever possible, the barrister, agreeing to work under the terms of a conditional fee agreement (CFA). Under this type of arrangement, work is carried out for the client at a discount to normal hourly rates, which are paid by the funder. The balance of the fees are deferred until the end of the case and are payable only in the event of “success” (as defined by the parties) together wjth a “success fee” being an agreed percentage uplift (up to 100%) of the deferred costs. From a funder’s perspective, this arrangement creates a useful incentive for the legal team to win the case.
It is usual for the funding conditions to include a requirement that the claimant will obtain after-the-event insurance (ATE), that is, insurance against the legal costs of the opposing party should the case be lost. Having this ATE gives a funder comfort that adverse cost awards can be enforced against the claimant without recourse to the funder itself. The other advantage of ATE is that the insurer will have carried out an independent review of the case to be satisfied that a case is a suitable insurance risk thus giving the parties added confidence in the merits of the case.
An alternative basis for the remuneration of the legal team which represents one of the most extreme forms of risk sharing is a Damages Based Agreement (DBA). Under this arrangement, the risk undertaken is far greater than for example, under a CFA, but the rewards can be significantly higher. It is an “all or nothing” bet – there is no middle ground. If, the case is won, the claimant will pay the solicitor an agreed percentage of the damages awarded or settlement achieved. If however the case is lost the solicitor is not paid any fees. Unlike the arrangement under a CFA, there is no limit on the percentage return which can be agreed, it is simply a question of negotiation. That is not to say that there are no issues with DBAs. Uncertainties exist as to how they are meant to work under the Damages Based Agreements Regulations 2010 (SI 2010/1206). However, an analysis of the issues is beyond the scope of this article.
Effects of The Jackson Reforms
On 1 April 2013 (enacted in the Legal Aid, Sentencing and Protection of Offenders Act 2012), the law changed so that winning parties could no longer recover CFA success fees and ATE premiums from the opposing party. There was a temporary exception to this rule for litigation being conducted by insolvency practitioners and/or companies in insolvency proceedings. However, that exception will end on 6 April 2016.
Preparing the Case for a Prospective Funder
As a solicitor acting for litigants seeking funding for their case, the key to an efficient process to enable a prospective funder to reach an informed decision on funding is, put simply, a high degree of prior preparation and planning. In practice, this means that the solicitor should gather together information and documentation sufficient to explain what the case is about and to identify its merits, demerits and possible defences. Wherever possible this should include Counsel’s opinion, ideally from a QC experienced in the relevant area of law giving the case a strong chance of success, commonly expected to be at least 60%. A cost budget is also an essential element, particularly for larger and more complex cases. For larger cases, the funding agreement can take many weeks to negotiate. This should be born in mind when considering the overall timescale and people’s expectations.
Notification of Funding to the Court
Unless the case is one which the litigant is able to recover the success fee and ATE premium from the opposing party, there is no obligation on a funded litigant to inform its opponent that it is in receipt of funding.
The lack of an obligation to inform an opponent about the existence of commercial funding does not necessarily mean that silence is always the best policy. There may be strategic reasons why it could be advantageous to let an opponent know. The knowledge that a litigant is in possession of commercial funding may have the effect of making its opponent stop and pause, reconsider the merits and demerits of its case and perhaps start to incorporate into its own strategy, some headroom for a possible settlement at some point down the road. The opponent will usually be aware that in order to obtain commercial funding, the litigant will have had to overcome some significant hurdles in satisfying the funder of the strength of its case, including an opinion from a QC giving a 60% or higher chance of success.
US Market Developments
In the US, third party litigation funding is still in its infancy but is gaining significant momentum. Some might say somewhat unusually, the US is taking the lead from other countries, in this case, predominantly Australia and the UK. However, in the US the playing field is not so level. A patchwork of state regulatory regimes, some particularly hostile to litigation funding, creates some considerable difficulty. However, the global economic crisis has fuelled litigation and with it, the need for litigation funding. Add to that, global competition by some of the largest law firms in the world with headquarters, or at least a presence in London, and the result is that competitive pressures have been brought to bear upon domestically focused US law firms who are being driven to consider litigation funding. These lines of tension are creating an environment in which the use of litigation funding can accelerate. However, this is no easy ride, in the US, third party funding is under investigation by the Senate and lobbyists from the business and insurance sectors have stood firm against third party funding, employing the Consumer Right Act 2015 in an attempt to limit its use in class action cases. That having been said, there is no doubt that the popularity of third party funding in the US will continue to increase, as is the case in the UK but here it is important to bear in mind that as a solicitor or prospective litigant looking for litigation funding, it is not a buyer’s market out there so satisfy yourself that the case has strong merits and put a lot of work into its presentation – prior preparation and planning will help prevent disappointment.
If you would like any further information, please contact Adrian Harris on 020 7955 1415.
This article should not be taken as definitive legal advice on any of the subjects covered. If you do require legal advice in relation to any of the above, please contact Adrian Harris as above.