Not so long ago, third party litigation funding (TPF) was viewed with caution and criticised for lack of transparency. Under English common law, the concepts of maintenance, champerty, and barratry acted as a bar to non-parties financing claims on the basis that the third party might seek to control the litigation and inflate claims.
However, over the past 10 years, this view has gradually been dispelled as litigation funding has gained widespread acceptance around the world with countries such as Australia, the US and UK leading the charge. The UK market alone is worth £2 billion.
The TPF market in England and Wales is thriving. Claimants, law firms and businesses now have access to innovative financing solutions – from portfolio funding through to credit facilities and options to assign claims. Gone are the days when TPF was only available for single cases of high value and exceptionally strong merit in commercial cases. TPF is now an established feature of the litigation landscape, with the global pandemic only serving to fuel this ever-evolving market with claims ripe for the funding. Every litigator worth their name now has to understand the options available and be prepared to explain what those alternatives mean to the client.
In the early days of funding, providers were few. The last decade has seen a variety of new and diverse entrants to the market, increasing competition among TPF providers, which has resulted in a myriad of new funding products with different applications for claims varying in specialism, complexity and value bringing huge benefit to litigants. Of course there have been casualties, but the impact of the Covid-19 pandemic on the TPF market has been minimal. Investors still perceive litigation funding as a growth area.
Not only are private equity houses and investors providing funding but many law firms are now setting up their own funding arms in order to facilitate the provision of TPF to clients. These firms utilise the third party funds to finance cases run by their own solicitors. This provides the clients and the law firms with confidence and added security to run claims with minimal disruption to their cash flows.
Over recent years, we have also seen the rise of the alternative business structure (ABS), allowing external investment and for non-lawyers to have a financial stake in a law firm.
Portfolio funding can be used by both law firms and their clients. Some law firms are working with funders to obtain financing to manage their exposure to conditional fee arrangements in litigation work, and can offer financing against other litigation-related risks, such as a portfolio of litigation claims. Portfolio funding solutions generally result in improved economics over single case funding, providing improved cash flow and revenue streams upon success.
One of the key drivers in any company’s decision making process when considering bringing disputes is the costs. Portfolio funding can also be provided directly to clients enabling multiple cases to be funded under a single facility through a streamlined process and on agreed terms.
Monetisation of arbitral awards and judgments
Corporate clients with outstanding commercial litigation judgments and international arbitrations awards are often anxious to expedite recoveries, particularly after lengthy legal proceedings, but may then be faced with lengthy and expensive enforcement proceedings. Funders can assist with this issue by monetising part of the outstanding award or judgment, providing the client with immediate liquidity. What this means is that funders advance capital to claimants against recoveries made from an arbitration award or court judgment (whether final and subject to enforcement, or still subject to further regulatory and legal proceedings). This solution allows claimants to monetise a portion of the judgment/award without waiting for the conclusion of potentially lengthy appeal/annulment or enforcement proceedings.
Third party funders are increasingly working with law firms to extend credit facilities for specific projects, for example if law firms wish to manage their exposure to conditional fee arrangements in litigation work, or seeking financing to aid expansion plans and even recruitment. The funding is non-recourse meaning that the law firm is not burdened with debt.
Assignment of claims
Assigning a claim can ensure that the case is kept alive. Often it can be transferred to another party who has more ability to deal with the legal costs of running the claim. Frequently a litigation funder may acquire a claim in its entirety or in part by paying a premium and agreeing to share the proceeds in a similar way to a damages-based agreement, by taking a percentage share of the claim. There are a number of funders who deal almost exclusively in assignments. This is frequently seen in insolvency litigation where office holders have a good claim but no means to fund it.
Where the third party funder has taken control of such a claim they will usually be named as the party, they take the case on and bear the risk burden of adverse costs orders.
Class action funding
Class action funding is on the rise. There are currently a number of high profile group actions, which are backed by third party funds that have an environmental focus. Group claims are typically brought on a representative basis, with the lead claimant representing the entire group of claimants said to have suffered damage as a result of unlawful behaviour. Because these claims are brought on a representative basis, the court will seek to ensure that satisfactory funding is in place and that the funder can meet its obligations to fund the claim. Judgments in recent cases have shown the scrutiny the court undertakes of the funder and funding arrangements, emphasising the importance of the financial standing and reputation of the funder to the claim.
Funding for “riskier” forms of litigation – crypto litigation funding
Cryptocurrency litigation funding is also on the rise with on the ball litigation funders identifying that UK consumers of cryptocurrency may have suffered losses as a result of the recent decline in the value of cryptocurrencies. This is off the back of a huge surge in crypto-based class actions in the USA where private equity investors are seeing the benefit of funding this area of litigation.
One such entity has recently joined up with forensic recovery practices and specialist law firms and chambers to triage cryptocurrency fraud claims and then to provide financing for meritorious claims. Funders will undertake their due diligence and only pursue claims that are worth their while and if funders think an area is safe to invest in; this opens up new avenues for law firms to assist their clients.
One particular growth area is in ESG claims and businesses, which have the potential to impact on the environment are attractive targets.
Funding for well-capitalised claimants
Savvy in-house counsel at well-capitalised businesses are also now working with funders as they increasingly see the benefit of using funding to assist cash flow and improve liquidity. Where they are not, law firms are having conversations with their clients across sectors to understand whether they can unlock potential litigation with the introduction of third party funds, at very limited initial outlay to the client.
The benefits are obvious, the commercial terms and speed with which funding can be deployed, assisting with managing cash flows and potentially seeing greater returns and keeping legal spend to a minimum. This is an area to watch and likely where law firms and their clients will start seeing increasing innovation.
Lower value claims funding
Third party funds for litigation are no longer restricted to the high value commercial claims in excess of £5million. There are new entrants to the market targeting the lower value end of commercial litigation funding space with specific geographic focus.
On the consumer end of the market, there are also now funding solutions available for specialist claims in the inheritance disputes and family/divorce arenas. There are a number of niche providers who offer bespoke funding solutions to beneficiaries who wish to challenge their entitlement under a will. The family law sector has long worked with litigation loan providers to assist with the legal costs of a messy divorce. This form of funding allows clients with traditionally lower value claims but with good merit to pursue an action to recoup what is rightfully theirs.
This is an exciting time for litigation and funding and with the looming recession likely to affect most markets, claimants and law firms should be encouraged by the flexibility and security that third party funds can provide.