Counsel Kate Gee and Rosie Ioannou of Fortress explore the development and growing sophistication of the litigation funding market and what may lie ahead for the sector, in Litigation Finance Insider.
Kate and Rosie’s article was published in Litigation Finance Insider on 13 July 2022, and can be found here.
The third-party dispute resolution funding market continues to grow in sophistication and in its ability to meet parties’ requirements. According to research by Swiss Re, globally, the sector is now said to have a market value of over $17 billion. In the UK alone, the market is estimated to be worth over $1.3 billion. Since Signature last wrote about litigation funding in 2019, the market has doubled in size, with a marked increase in market participants, funding solutions and judicial support.
So what does this mean in practice for the funding market, for lawyers and for clients?
Evolution in the market
Perhaps the most noticeable development in the dispute resolution market in recent years is the evolution of financing products that are now available to law firms and their clients.
Traditionally, funding was provided to claimants to finance individual claims as they arose – enabling claimants to reduce and, indeed, in many cases, eliminate the cost risk (own side and adverse) of bringing claims. Single case funding along these lines remains available and continues to be a large part of the market. However, increasingly, well-capitalised and sophisticated funders are providing financing solutions to clients that go well beyond single case funding. For example:
– Portfolio funding for law firms: These provide bespoke firm – or department – wide funding solutions, giving certainty to clients of that firm that funding can be provided for individual cases, and greater speed to approval and execution. For firms, portfolio funding solutions generally result in improved economics over single case funding, providing improved cash flow and revenue streams upon success.
– Portfolio funding for clients: Similar to portfolio funding for law firms, portfolio funding can be provided directly to clients involved in multiple significant claims, providing them with company-wide financing solution. This can alleviate concerns about the costs of litigation (one of the key drivers in any company’s decision making when considering bringing disputes) by enabling effective cost-management across the suite of claims that may exist, but may also be used as a tool to monetize claims by releasing upfront damages claimed.
– Judgment enforcement and award monetization: Funders can advance capital to claimants secured by 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 monetize a portion of the judgment/award without waiting for the conclusion of potentially lengthy appeal/annulment or enforcement proceedings.
A sharper focus on the market
The significant growth and development of the funding market in recent years, with funding becoming a stable and established part of the dispute resolution landscape, has resulted in greater focus and scrutiny of it.
In England & Wales, the third-party funding market has been subject to self-regulation by the Association of Litigation Funders (ALF) for a number of years. ALF is an independent body charged by the Ministry of Justice with delivering self-regulation of litigation funding in this jurisdiction, within the framework of the ALF Code of Conduct. Among other things, the Code requires funder members of ALF to comply with certain capital adequacy and behavioural requirements.
Outside the UK, in June 2021, the European Parliament’s Committee on Legal Affairs issued its draft report on litigation funding. The report rightly described litigation funding as a “rapidly expanding commercial practice in the Union, which has a significant impact on justice systems as well as on European citizens”. It also identifies the different rules applicable to litigation funding in different European jurisdictions and suggests that there should be greater consistency in the European funding market, especially so in the context of funded cross-border claims.
A study on responsible private funding of litigation by the European Added Value Unit accompanied the European Parliament’s draft report. The study noted that litigation funding can “….represent a tool to support private citizens and businesses in accessing justice and constitute a mechanism for transferring the risk of the uncertain outcome of the dispute to the litigation funder.” At the same time, it acknowledged several important factors to be borne in mind as the funding market grows, including (inter alia) managing conflicts of interest, economic considerations and claims management.
The draft report and study reflect the growing attention that the dispute resolution funding market is attracting. The key points highlighted in those documents are important for law firms, clients and funders alike. However, they are also matters that reputable, well-established funders are always mindful of and effectively manage when investing. Managing conflicts of interest, safeguarding claimant rights and appropriate claim management are matters that are taken seriously by funders. In successful litigation funding arrangements, the interests of all parties are aligned. Reputable funders and the instructing solicitors work hard to achieve that, together.
Where are we seeing the most growth?
For single case funding, two areas have been attracting significant growth across Europe in recent years: a) funding for group claims; and b) funding for well-capitalised claimants.
a) Funding for group claims
Large group claims – collective actions – are the claims that hit the headlines. With claims such as Merricks v. Mastercard, a case valued at an estimated £14 billion, being brought in the UK Competition Appeal Tribunal (the CAT), and claims against high profile tech companies like Apple, Google and META following in its wake, this is to be expected.
Group claims such as the Merricks action are typically brought on a representative basis, with the lead claimant representing the entire group of claimants said to have suffered damages as a result of the unlawful behaviour. Because these claims are brought on a representative basis, the applicable court, the Competition Appeals Tribunal (CAT), is specifically tasked under its rules to ensure that the funding in place for the claim is satisfactory and that the funder can meet any obligations it has to fund the claim. Judgments in the Merricks claim, and other recent cases like it, show the focus the court has in scrutinising the funder and funding arrangements in place for such cases, emphasising the importance of the financial standing and reputation of the funder to the claim proceeding on this basis and therefore the underlying success of the arrangement.
b) Funding for well-capitalised claimants
Developing more quietly under the radar is financing of claims for well-capitalised companies and institutions. Companies are now proactively engaging with funders – adding funding to their financial and legal armoury – as they increasingly see the benefit of using funding to aid cash flow and improve liquidity. Of all areas of growth, for the leading funders and their clients, this is the one where the most innovation should be expected as the market continues to expand. Funding is being deployed in increasingly sophisticated and structured ways to meet the specific funding requirements of law firms and their clients, making the commercial terms and speed with which funding can be deployed increasingly attractive, managing cash flows and, ultimately generating greater returns.
The headline guidance offered in Signature’s 2019 article remains true now, when considering funding all parties should consider.
Claimants, their advisors and funders must work together at the outset of disputes to ensure funding for claims is right in that context and the funding is appropriately structured to the benefit of all parties. They should take other simple steps at the same time, to ensure that a balanced, open and – hopefully – successful collaboration between funder, legal team and the claimant can be established:
• Ensure transparent and honest presentation of the case – including its strengths and weaknesses – from the start;
• Maintain realistic expectations (on all sides) in terms of timing, budget and prospects of success; and
• Develop clear communication channels between stakeholders, as appropriate.
The funding relationship is fundamentally a partnership, which works best when there is a true alignment of interests between all the relevant stakeholders, including the clients, the legal team and the funder. Greater knowledge, experience and sophistication in the market with appropriately balanced oversight of it will serve to underpin long-term growth in the sector for the benefit of all stakeholders.
Claimants, law firms and funders alike should be encouraged by developments in the sector. Third party funding is now accepted as a well-known and growing part of the global dispute resolution landscape and, against this background, investors’ appetites to participate in this market also grow. Firms are actively seeking to help clients identify and employ alternative funding sources and fee structures from the initial instruction, and to revisit these as the claim progresses. Funders are working alongside firms to achieve those collective objectives. They are offering increasingly bespoke products and funding arrangements, with innovation being driven by the sophistication of the funders and by the knowledge of the market by both law firms and their clients.
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28 November 2023
28 November 2023