Partner Daniel Spendlove and Professional Support Lawyer Johnny Shearman examine the third-party litigation finance market and the possible effect Brexit will have on it.
Daniel and Johnny’s article was published in Law360, on 4 May 2018, and can be found here.
In the past twelve months, Signature Litigation has seen an increase in the number of clients interested in benefitting from third-party litigation finance. In this article, Daniel Spendlove and Johnny Shearman of Signature Litigation look at (i) the third-party litigation finance market (ii) the possible effect Brexit will have on the market and (iii) the advantages of litigating in England and Wales which transcend the Brexit issue.
External litigation finance has emerged as an increasingly popular tool to allow parties to share the costs, risks and rewards associated with litigation with a third-party. In a highly competitive world, commercial parties are understandably anxious to explore ways of pursuing meritorious claims without having to tie up substantial amounts of working capital in doing so. Whilst not as mature as some jurisdictions, such as Australia, the English target market for third-party litigation finance is rapidly expanding. Corporates are becoming more acquainted with the services the market can provide and the number of funders in the market, and the availability of litigation finance, has increased to satisfy the increasing interest. The buoyancy of the English market is evidenced by the string of funders who have recently published strong profit growth. Some funders have reported net profit after tax rises of over 100 per cent over the past year.
However, with the single largest shake up of the UK’s economy – Brexit – around the corner, will the budding third-party litigation market weather the storm?
Despite the lack of clarity at this time, it is likely that the fundamentals of the UK’s trading relationship with the EU will be established by the end of the transition period in December 2020. However, inevitably, over the course of the next decade, the mechanics of the deal reached will be teased out, tested and probed by the corporate and legal sectors. Uncertainty in the economy fosters disputes, the most recent example of this being the 2008 economic crisis. A torrent of litigation followed the events of 2008 and legacy cases stemming from the fall out are still being pursued in the English courts. In 2008, however, the English third-party litigation finance industry was a less developed one and by the time it was more established there was little left on the bone for funders to properly sink their teeth into. Arguably it will be different this time around. The market is more mature, and corporates are becoming accustomed with outsourcing the cost of their disputes. As the full extent of Brexit unravels over the next several years, the potential squeeze on finances may mean corporates rely more and more on the third-party litigation market.
The more established funders will likely exploit opportunities arising in jurisdictions that are seeking to offer an alternative to London as a global litigation centre. Leaving aside the question of whether third party financing is permitted in those jurisdictions, a key consideration for funders is the prospect of a healthy return on their investment. A judgment is only worth more than the paper it is printed on if it can be readily enforced against the losing party. Enforceability is an especially critical issue where the losing party resides outside the jurisdiction. Presently, an English judgment can be enforced across Europe thanks to the UK’s membership of the EU. However, post-Brexit the situation is less clear: it has not yet been confirmed that the mutual recognition and enforcement of English judgments across Europe will form part of the Brexit deal. This issue does not appear to be high on the political agenda, but the maintaining of the status quo – in substance if not in form – is important if London is to remain a global disputes capital.
France has already made it clear that it hopes to compete directly with London post-Brexit. It has promised to open a special court to handle English-law cases for financial contracts following Brexit. Only time will tell whether the “Cour Franglais” will rival its neighbour across the Channel. But given the possibility that a) a French judgment, as compared to an English judgment, may be easier to enforce in Europe and other jurisdictions post-Brexit and b) the subject matter of the new court will be readily recognisable to the litigation finance market, it is possible that funders will seek to take advantage of the opportunities that rise from this additional seat. That said, funders and litigants alike are likely to proceed with some caution given the inevitable uncertainty that will arise when a foreign court, unfamiliar with English law let alone common law principles, is being asked to determine English law disputes. One solution, of course, may be to recruit senior English law practitioners to fill the benches of that Court.
Although the French proposal is a clear (if highly opportune) attempt to divert attention, and business, away from London post-Brexit, some jurisdictions, such as Singapore, Hong Kong and Dubai, successfully established themselves as viable competitors to London long before the Brexit referendum in 2016. It is notable since Brexit that the attitudes towards third-party funding in these jurisdictions have shifted dramatically. This shift has resulted in substantial legislative changes meaning it is now easier for third-party funders to enter these dispute hotspots. Arguably, the timing of these changes is not a coincidence. They enable funders to engage with the disputes practices across Asia and the Middle East at a time of volatility in London and the largely untapped Asian market will likely give another boost to the third party litigation finance market in the years ahead.
Advantages of the English system
In spite of the new opportunities abroad, a mass exodus of the litigation finance industry from London is unlikely. As already mentioned, the economic uncertainty post-Brexit and general trend for disputes to increase in such times will likely give rise to a number of new opportunities for funders. In addition to this, there are a number of advantages to litigating in London (and across England and Wales) which transcend Brexit and which remain important considerations for litigation funders. In particular:
- The common law system: England’s common law system, with its abundance of legal precedent, means there is a relatively high level of predictability in cases. This enables funders to more readily assess the risk of investing in one case over another – a critical advantage. It also tends to encourage early settlement.
- The English judiciary: The relative predictability of England’s case law is supported by an experienced, robust and independent judiciary which is adept at case managing and determining large, complex, financial disputes.
- The English Court system: The court system, particularly that which handles large and complex financial disputes, has evolved to become the envy of most others. It has become a, or the, trusted place to resolve global disputes.
- The relative speed of the English court system: Whilst being able to assess risk is critical to a funder, so too is the length of time it takes to realise their return. Again, the English legal system benefits from a degree of predictability for funders in this regard. Most claims, once served, take between eighteen months to two years to get to trial and appeals can only be made in exceptional circumstances. Therefore, when compared to other jurisdictions, English proceedings are relatively quick.
- Alternative dispute resolution (ADR): The prospect of an early settlement is attractive to a funder as they seek to minimise the time before they see a return. ADR and early settlement is actively encouraged by the English Court and the result is that most disputes are settled without the Court’s intervention.
- The attractiveness of the UK: The attractiveness of the UK, and London in particular, to international litigants should not be underestimated. Nor should the availability of high quality legal teams to handle English law disputes.
The above advantages mean that, despite the potential market volatility, England’s pre-eminence as a global litigation centre will likely survive post-Brexit. Therefore, with new opportunities presenting themselves in this jurisdiction and abroad, the litigation funding sector, which has matured since the 2008 economic crash, looks poised to benefit from Brexit, both in the immediate aftermath and as things settle out in the long term.