What’s the deal with… litigation finance?

Until very recently, those starting on the legal training path could get away with not knowing very much about litigation finance.

But not any longer. Would-be lawyers – particularly those with an eye on representing clients bringing claims in the Commercial Court – must be schooled in the subject.,.

Why? Recent changes in the legal landscape are one reason, not least with the fact the Lord Jackson effectively rubber stamped litigation finance upon introducing his sweeping reforms to litigation and costs in April 2013.

More recently, the levy on court fees introduced by the Government has further increased costs by up to 600 per cent, a move which has been widely criticized as being a barrier to access justice.

But what is litigation finance and how does it work?

Litigation finance provides an alternative funding model that means no legal team should need to pass over —or struggle to finance—a meritorious case due to budgetary constraints or fear of risk.

In its most traditional form, an outside financier provides funds during an on-going case. They meet all budget needs and also the law firm’s current cash flow needs, in exchange for a portion of the damages if the claim is successful. Unlike a law firm, a litigation finance provider has a balance sheet, which enables it to take risk, defer payment and participate in upside.

The payment in fees is actually an investment by the litigation finance company.

If the case does not win, the company does not get its money back. Not surprisingly, the legal analysis of the chances of success is important to the funder, which will use its own experts and counsel in reaching a decision on whether to fund. Should the investment be made, the financier will of course seek a return on that investment, which will be a multiple of the initial layout.

So litigation finance is effectively a synthetic contingency fee, with the funder acting as the middleman between client and law firm.

The system is more common in Australia but growing in the US and becoming increasingly established in the UK, where it has grown over the past six years. Recent research conducted by The Lawyer and Burford Capital confirms this growth. According to the inaugural Litigation and Arbitration Funding Barometer, 90 per cent of UK lawyers recognise the value of litigation finance, and 86 per cent have recommended using a third-party funder to their client in the past year.

The traditional litigation finance model has  evolved to meet the requirements of the contemporary legal case. Far from being a one-size-fits-all model, there are diverse funding options to manage smaller cases, portfolios of cases (e.g., multiple claims against a single company, multiple unrelated cases led by a single firm or claimant), and more complex cases. Moreover, The Lawyer and Burford’s inaugural funding report shows 34 per cent of lawyers now make their clients aware of regardless of the size or complexity of their case.

While it has been traditionally geared towards high-end Commercial Court cases with minimum expected damages set in the £3-5m range, lower-value funding products have also found their way into the market.

The worth of the range of litigation finance options to the legal system is clear, as there is a benefit to clients with cases that fit the bill. As Lord Jackson stated, “Funding is beneficial and should be supported. It promotes access to justice.”

This is because, as a financing tool, it provides a valuable means of access to justice for litigants who may not have funds readily available, or who do not wish to tie up resources that would be better used within their business.

Some 65 per cent of private practice lawyers surveyed in The Lawyer and Burford’s inaugural report said their clients who used third-party funding in 2014 did so because of limited resources. A further 19 per cent doing so because it helped their balance sheets, and 14 per cent said it allowed them to more effectively manage resources. This conveys how effective clients can find litigation finance.

Advanced litigation finance analysis shows that by alleviating any stress on the balance sheets, litigation finance effectively monetises the case, turning it into an asset rather than a liability.

Of course, where matters of law and finance collide, there is an opening for criticism. Litigation finance has experienced its fair share, mainly in the US but also in the UK. One argument charges funding with being responsible for frivolous litigation. But this criticism is without foundation: funders do not like to lose money and therefore by definition will avoid cases without merit.

There have been high-profile losses, such as the now well-known Excalibur case in London, where the funders of that case were not members of the recognised UK body the Association of Litigation Funders.  Wins tend to go unmentioned as there are often confidentiality agreements between funders and claimants. But the bottom line is that funders do not like to back a losing horse.

Litigation can be a necessary, costly and uncomfortable part of running a business. The question of how to fund any litigation is not a new one. Litigation has always been expensive and the cost has always been an important consideration for any potential litigant.

Fortunately, with litigation finance, legal teams can relegate commercial concerns to the past and invest in the pursuit of meritorious claims.

Today’s up-and-coming lawyers must be ready to talk to their clients and their companies about litigation finance. Indeed, one element of the Jackson Reforms was to put the onus on lawyers being able to explain the full range of funding options to clients. This means that it’s essential to gain an understanding of litigation finance early in your career. And because litigation finance is growing so rapidly in the UK, it’s clear there will be many more opportunities to learn as your career matures. 

Nick Rowles-Davies is Managing Director of Burford Capital UK and author of Third Party Litigation Funding.