Third-party funding is gaining credibility and more firms are willing to get in on the provider act, developing the market further

Q: Is take-up of third-party litigation funding growing and if so, why and for what kind of case?

Robert Hickmott, partner, Quinn Emanuel Urquhart Sullivan: Third-party funding has been available for a some time now but has only become mainstream in the past few years. This is because both the market and the products have become a lot more sophisticated. It used to be considered an option for only particular types of cases – insolvency-style claims or impecunious litigants – whereas it is now considered at an early point in most commercial litigation cases. 

It makes sense for any business to want to share the financial risk and operational burden of pursuing a claim by using external capital.

Engel

David Engel, partner, Addleshaw Goddard: We have seen some evidence of an increasing appetite on the part of claimants to investigate whether third-party funding is a viable option. This is primarily for larger claims – that is, damages in excess of £10m. 

The other main area where it is of interest to clients is insolvency litigation, for obvious reasons. However, the economics have to make sense for all parties: the claimant, the funder and the insurer – and the lawyers if they are on a conditional fee agreement (CFA).

Jonathan Warne, partner, Nabarro: Take-up of litigation funding is growing for both commercial litigation and international arbitration claims, but not all cases will be suitable for funding and not all clients will want to explore funding.

There are many reasons for the increased interest, including the expansion of the funding market giving rise to greater publicity and more competitive terms. Therefore both law firms and clients now have a better understanding of the opportunities available. Whereas a few years ago funding may have been associated with cases brought by impecunious claimants (where the proceedings would never have been pursued otherwise), it is now considered as a viable option for almost any type of commercial dispute involving a sizeable damages claim.

Paul Cooklin, practice manager, 3 Verulam Buildings: I’ve no doubt that the resource of litigation funding has permitted and enabled
cases to get off the ground which wouldn’t have previously. I think it’s something we should all embrace and I see the litigation funding scene as being very dominant in all sorts of legal contexts.

 

Q: What is the perception of litigation funding among lawyers today and which funders are the most popular?

Hickmott

Hickmott: Litigation lawyers have been pretty leery about litigation funding in the past but views are more mixed now. I’ve heard it described as both a “panacea” and a “plague” but, of course, the reality is more nuanced. The bottom line is that litigation funding does raise professional and ethical issues regarding confidentiality, conflicts of interest, professional responsibility, legal privilege and control over the proceedings. These are real risks that can impact the lawyer-client relationship, and that needs to be fully understood and contracted for by the funders, litigant and the lawyer. 

The third-party funding market is dominated by specialist investment firms such as Burford Capital Management and Juridica Investments, both of which are listed on the London Stock Exchange. Other well-known third-party funders include private companies and private funds (including hedge funds) such as Calunius Capital (UK), Gerchen Keller Capital (US), Harbour Litigation Funding (UK), and Omni Bridgeway (the Netherlands). 

A new player entering the London market is Bentham which is the leading provider in Australia. It has an excellent reputation in its local market and clearly takes the view that there is untapped potential in London and Europe for litigation funding. 

Burford is a serious player too – it has contacts throughout the city and knowledge of sophisticated but easy-to-understand products.

Engel: There would still appear to be a relatively low awareness among in-house litigation counsel, and in-house lawyers generally, of the various funding options for commercial litigation. For example, the fact that after-the-event (ATE) insurance may cover a party’s own disbursements (including counsel’s fees) and even a proportion of its solicitors’ fees or of the various CFA and conditional CFA arrangements (Addleshaws has at least seven different types of CFA available). 

Nor, I suspect, is there a high level of awareness of the different economic models offered by third-
party funders, particularly the fact that most funders have moved on from the US-style requirement for one-third of the damages or three times their investment, whichever is higher.

Warne: Litigation funding is perceived as a realistic funding option that should be considered seriously at the outset of each matter. For some cases, funding will not be viable and for others it will bring with it clear commercial benefits for clients and law firms. 

Today there are a number of well-known funders with substantial balance sheets and case-loads. However, a positive feature of the UK market is that there are a good number of competitive options outside of the largest names. Anecdotal evidence suggests that the UK third-party funding market is continuing to attract new entrants.

Cooklin: Six years ago people were generally still afraid to address how helpful funders could be. Now with this funding, the door for access to justice has been opened and I think there is growing acknowledgment of that.

 

Q: How flexible are law firms on funding litigation and to what extent are they willing to offer clients funding solutions?

Hickmott: There is no doubt that law firms are becoming increasingly willing to fund their client’s litigation through damages based agreements (DBAs) and conditional fee arrangements. Law firms have two important advantages over third-party funders when providing clients with alternative funding arrangements. First, law firms are not subject to capital adequacy requirements. This means their cost of capital may be cheaper given the absence of regulation on how much should be reserved for each case they fund. Second, law firms are less liable than third-party funders to be subject to an adverse costs award when entering into DBAs with funded parties.

Engel: Compared with the situation back in 2008 when we launched our Control litigation funding package, we are seeing a greater willingness among a number of commercial law firms to look at acting on a CFA and/or seeking to obtain ATE insurance and/or third party funding for their clients.

Nonetheless, it remains something of a minority sport among the bigger commercial litigation practices. Litigators are, of course, under a professional obligation to inform all clients of the availability of litigation funding and you would think that would be an easier conversation to have with a client if your own firm was willing to provide it.

DBAs have, however, turned out to be the predicted Cinderella of litigation funding. In most cases the economics simply do not stack up for the firm.

Warne

Warne: Law firms are becoming increasingly flexible with both clients and third-party funders. In our experience, both clients and funders will look to law firms to have some “skin in the game” whether through a CFA or working to fixed fees (and in due course we may see more appetite for DBAs). For example, Nabarro’s fixed fee litigation product was driven by client needs but has been welcomed by funders, who cite law firm overspend as a major concern on funded cases.

Cooklin: Many firms are offering more innovative fee deals and no matter how small or large the assignment, clients want to know the cost. Then firms are increasingly willing to offer a ceiling, a fixed-fee or even stick with the hourly rate but continually keep clients updated so they have more control over the process.

 

Q: To what extent do events like the outcome of the Excalibur case and funders like Argentum leaving the Association of Litigation Funders affect clients’ willingness to use funders?

Hickmott: It’s unclear whether these incidents have in fact dampened the market. The lesson to be learnt is how important it is to undertake thorough due diligence on prospective funders to ensure their ability to meet all liabilities that may arise under the funding agreement. 

Factors to consider include, inter alia, the reputation of the funder, its track record, its financial standing and the experience of its staff. Whether a funder is liable to meet an adverse costs order should be specified clearly in the contract and thought should be given to how to ensure those funds will be made available if they are required.

Engel: To the extent that there is an unwillingness to consider third-party funding, those events plainly do not help and may even reinforce existing prejudices.

This is a relatively new market, particularly in the context of commercial litigation, and it is probably inevitable that it will take a while for things to settle down. Nonetheless, every month seems to bring a new entrant to the market, sometimes with little understanding of the realities of commercial litigation. Litigants looking at such potential funders would be well advised to carry out proper due diligence, particularly where the funder is new to the market and has not yet built up a track record.

Warne: We have not seen any material adverse impact on clients’ appetite for third-party funding as a result of these events. Clients looking to source funding will want to satisfy themselves as to the reputation and balance sheet of third-party funders. 

Provided the client has identified the commercial benefits of funding and suitable terms are available from a reputable source, they are unlikely to be put off by isolated incidents such as these.

Cooklin: It hasn’t in my view put anyone off. I discuss the subject on a weekly basis and have yet to meet someone who is not interested or who have got cold feet as a result of these events. People are quite open to funders outside the Association of Litigation Funders (ALF); it is certainly referred to but the word that comes to mind is flexibility, and people are keen to explore. 

 

Q: What is the future of litigation funding in the UK?

Hickmott: Despite the fact that the Excalibur case has heightened concerns about third-party funders – including calls for increased regulation of the third-party funding industry – my view is that this is a market in the ascent. There are a number of very reputable, well funded, and sophisticated funders in the European market and there will always be meritorious claims that require funding. 

The question is whether law firms will be happy continuing to introduce third-party funders, or whether they’d like to get a share of the action and take the risk on themselves through a DBA/CFA arrangement. My feeling is that there is room in the market for both entrepreneurial law firms and external funders and, as far as clients are concerned, this should keep pricing competitive.

Engel: CFAs, ATE insurance and third-party funding are here to stay. Interestingly, the fact that CFA success fees and ATE insurance premiums are no longer recoverable from the losing party has not meant that parties are no longer interested in such solutions, though obviously they will now tend to be attractive only to claimants.

Economically, those costs of funding will now be paid out of the damages, in much the same way as the return provided to third-party funders. Therefore, in future, we may well see a greater convergence between third-party funding and ATE insurers, potentially including risk sharing between the solicitors (acting on a partial CFA), the insurer (with the ATE cover including a party’s disbursements and a proportion of its solicitors fees), third-party funders, and the party itself.

Warne: The third-party funding market will continue to evolve and cement its place as a viable option for most commercial disputes. 

I expect we will continue to see new entrants increasing competition; we may start to see consolidation between funders; and, in due course, the market may become formally regulated. 

Law firms are likely to develop closer relationships with funders and we may see a greater number putting in place umbrella funding arrangements for portfolios of claims. Perhaps the most interesting development to monitor will be whether substantial corporate clients are persuaded to engage with funders to commoditise disputes with a view to turning in-house legal teams into potential profit centres.

Cooklin

Cooklin: Over the next five years I see funding becoming even more a dominant force in the legal market, certainly as far as the bar and solicitors are concerned. I think we’re going to see much more of it in many practice areas in terms of dispute resolution. 

As far as law firms are concerned, my sense is they will continue to explore what forms of funding they can offer as well. Maybe one day there will be sets of chambers offering deals, though we’re nowhere near that at the moment, with the pace of change being as it is.

The panel

Robert Hickmott, partner, Quinn Emanuel Urquhart Sullivan

David Engel, partner, Addleshaw Goddard

Jonathan Warne, partner, Nabarro

Paul Cooklin, practice manager, 3 Verulam Buildings