Partner Daniel Spendlove and Managing Director of Vannin Capital, Paul Martenstyn provide invaluable insight into navigating the litigation funding process from two unique perspectives.
Dan and Paul’s article was published in Law360, 9 September 2019, and can be found here.
The London commercial disputes market continues to boom. While it continues to face stiff competition from other jurisdictions, London’s position as a preeminent global disputes hub has made it a magnet for third-party litigation funders.
The advantages of litigation funding are well known. It allows meritorious claims to be brought where not otherwise possible due to lack of available resources to spend on legal costs. For those parties who can afford to pay their own legal costs, it offers an option to reduce (or even eliminate) the financial risks of pursuing cases, and alleviates pressures on balance sheets. Sir Rupert Jackson put it succinctly: “Funding is beneficial and should be supported. It promotes access to justice.” Solicitors are also under a positive duty, pursuant to the Solicitors Regulation Authority Code of Conduct IB (1.16), to discuss with their clients how they will pay for the costs associated with pursuing a legal claim.
With little shortage of meritorious claims, there is little shortage of litigation finance to pay for them. There are now no less than nine funder members of the Association of Litigation Funders, while outside the ALF, there are numerous third-party financiers, with investors ranging from hedge funds, sovereign wealth funds and high net worth individuals who are willing to finance legal claims.
It is against this backdrop that claimants, solicitors and third-party funders increasingly work in partnership, if not in unison, in prosecuting strong cases. So far, so good for all concerned. However, many solicitors taking cases to funders on their clients’ behalf are entering into unfamiliar territory. There is of course no substitute for first-hand experience of the funding process, but the following guidance should help solicitors to navigate the process and manage client expectations.
Is the case appropriate for funding?
To be blunt, some cases are likely to be unfundable, and others are borderline fundable. It is important to recognize this at the outset, and advise clients accordingly, so as to avoid false hope. Funders tend to target cases which have at least most, or all, of the following features:
• Strong merits. Generally, funders only wish to back cases which have a prospect of success of at least 60%, as determined by the legal team acting on the case (and often verified independently by lawyers appointed by the funder).
• Sufficiently high quantum. Most funders look for cases where the realistic recoverable damages are at least 10 times the amount invested. Without that, funding is unlikely to be a viable economic proposition either for clients or for funders.
• Strong enforcement prospects. This is vital. If a prospective defendant does not have assets available to enforce against, a judgment against it is barely worth the paper it is written on. All claimant solicitors should, in the interests of their client, have a keen eye on enforcement, both at the outset of a case and as the case progresses, but for funders it is also a critical component in the decision as to whether to invest.
• Quality of the claimant. Most funders are anxious to meet the decision-makers at the claimant for the simple reason that they are investing not only in the underlying case, but also in the quality of the client’s decision-making processes when key matters such as case strategy and settlement offers are being determined. Will the claimant accept a good settlement offer, or simply wish to pursue the litigation for its own personal or emotional reasons? The latter will concern a funder.
• Likelihood of settlement. Litigation is inherently, and notoriously, unpredictable. While funders will naturally accept a degree of unpredictability given the nature of what they are investing in, they are, more often than not, comforted if a case has obviously strong settlement potential e.g. where it is in neither party’s commercial interests for the case to reach trial.
If any of these features is absent, a funder is likely to have some serious reservations about backing the case.
Target the right funders.
Not all funders are the same. Some funders have more risk appetite than others, and some are constrained in the amount they are able to finance on a single case basis. Equally, some funders are better capitalized than others, or are subject to different capital adequacy requirements. These are all relevant considerations when identifying which funder(s) to approach on a client’s behalf.
A good starting point is to approach members of the ALF, or at least those funders that subscribe to the ALF’s Code of Conduct. That code was published by the Civil Justice Council (linked to the Ministry of Justice) in November 2011, and lays down the standards by which members of the ALF must abide. It includes rules on capital adequacy, settlement approval and control of claims among others, and is widely perceived to be the go-to set of standards for litigation funders.
Be realistic with the budget.
While under-budgeting may be tempting in order to present a case as being economically viable for funding, or to improve terms, it is ultimately a short-sighted strategy which should be discouraged. Aside from misleading one’s own client, an unrealistic budget is likely to be met with a degree of skepticism. Funders are, after all, well versed in dealing with legal budgets, and have a sharp eye for what is realistic and what is not.
Ultimately, of course, an estimate is just that — it is not, and never can be, a guarantee of what the final costs bill will be. The key point is to set that estimate with a healthy dose of realism, based on previous experience.
Maintain the proper balance of risk and reward between all stakeholders.
The funding relationship is akin to a partnership and works best when there is proper alignment of interest between all stakeholders: client, legal team and funder. Funders are also anxious for legal teams to demonstrate their confidence in the case by putting a portion of their fees at risk through a contingency fee agreement, in return for an upside if the case wins. Solicitors should therefore be open to acting on such arrangements, and have “skin in the game” alongside client and funder.
It is also important to strike an appropriate balance of risk and reward when negotiating and agreeing other terms in the litigation funding agreement, such as the funder’s return and settlement. When negotiating the funding agreement, the solicitor must, of course, put its own client’s interests at the front and center of the exercise. But it can be helpful in negotiations to manage expectations, and for clients to be reminded to properly account for all parties’ interests. The same is, of course, equally true for the funder.
Ensure the case is presented in a balanced way early on.
Taking a case through the funding application process can be time-consuming, during which time, the claim is usually on hold until such time as funding is secured. It is important, therefore, to make the process as streamlined as possible and present the case to funders in an appropriately balanced way from day one. Funders are adept at identifying potential weaknesses in a case, and there is little to be achieved in suppressing those weaknesses in the hope that they will not be noticed. They will be. It is far better to present those points early on, with an explanation as to how they will be dealt with, in order to obtain a reliable indication from the funder as to prospects of the case being funded (and if so, the likely terms).
Be open about the strategy.
Just as cases should be presented in a balanced way, they should also seek, to the extent possible, to be candid about the proposed strategy for resolving the case, secured by the execution of a nondisclosure agreement with the funder, which all reputable funders should have no difficulty in agreeing.
This helps both with the assessment of the funding proposal, but also with the negotiation of possible terms. If, for example, the client wishes to settle the case very early, and is able to demonstrate why that is a realistic (if not probable) outcome, the funding package can be tailored to accommodate that. It may be, for example, that the funder’s return can be significantly reduced in the event of a very early settlement. This can have the effect both of supporting the client’s preferred strategy, but also potentially agreeing funding terms to make available a fighting fund in case settlement on the preferred terms cannot be achieved.
Have the client meet the funder.
It can be very helpful for the client to meet with any interested funders early in the process. Funders are investing not only in the underlying case, but also in the quality of the client’s decision-making processes. An early meeting can also help a client to understand, firsthand, the expectations and drivers of the funder, and vice versa. This can help to avoid misconceptions, build trust and confidence between the parties and facilitate the subsequent negotiation of any final funding terms. Funding is, again, a partnership, and it is vital to get the relationship off to a good start.
Put yourself in the funder’s shoes.
Viewing a situation from another party’s perspective — whether the client’s or one’s opponent — is essential, including when a lawyer is guiding a client through the funding process. It is often helpful for solicitors and clients alike to ask themselves some key questions. Would I fund this case? If not, why not? And if I were to fund it, what would I insist on being in place in order to safeguard (as best as possible) my investment and agreed return? Anticipating, and adequately dealing with, perceived concerns will make the process a smoother one for all, and one which begins the funding relationship on the best possible footing.
Dec 01, 2020
Dec 01, 2020