This article was first published in Legal Insight.
Litigation funding has become a hot topic over the past few years. Until recently, third party financing of dispute was seen as a dirty, underground pastime. For centuries it was a crime to fund someone else’s lawsuit, and it has only been in the past 20 years that third party funding has become increasingly acceptable and understood. Yet, it has taken time for the historic veneer of subversive criminality to rub off and a full rebranding to take place.
Whereas litigation funding in the past was seen as the domain of hedge funds operating out of opaque offshore structures. There has been, over the past eight years a renaissance. No longer is litigation funding simply an obscure investment strategy, it has become a legitimate corporate enterprise. For a share of the upside, there are now a number of well established brands on the market willing and able to provide the financing needed to pursue a claim. These are brands with websites, glossy brochures, polished pitches, and speaking slots at some of the major legal conferences attended by crisp professionals in suits. These are no longer are these deals done behind closed doors, this is now big business and increasingly simply another form of corporate finance.
Litigation funding has now become a normal everyday component of the justice system, and one which is essential. In one of the more sensational cases to have gone through the English courts the Court of Appeal in Excalibur Ventures v Texas Keystone endorsed and accepted that “Litigation funding is an accepted and judicially sanctioned activity perceived to be in the public interest”. It is, the court said, “a feature of modern litigation”. That is no surprise.
However, the fact that litigation funding is now available to a much wider client base than before is not yet fully on practitioners’ agenda. And, more importantly, the process by which funding is to be obtaining is not yet fully understood by the market. There are, however, firms such as Signature Litigation which have experience of both working with funders and pitching to funders and which understand the issues which need to be considered and the degree of preparation which is needed to maximise the chances of accessing financing.
Benefits of litigation funding
Litigation financing is of course a good thing, and comes with significant benefits for clients. At its broadest it mean that there is now greater access to justice. Litigation is an inherently expensive endeavour, and costs can make it prohibitive. That is particularly so in jurisdictions where parties are at risk of costs if they lose. That is certainly the case when it comes to litigation in the English High Court, and can also be the case in arbitration where the agreement can often specify that the tribunal is able to make an award on costs. For many medium sized enterprises embroiled in a substantial dispute, the costs of litigation may weigh heavily on the ability to pursue claims and recover losses. It is important that businesses are able to access justice, otherwise the stability of the economic system in which they operate is put at risk.
It also means that there can be access to justice for group claimants. Each may have a modest claim, but when collectively brought together, the claim may become viable. One good example is the RBS Rights Issue litigation, a claim brought by more than 27,000 shareholders in the Royal Bank of Scotland for whom Signature act. The claim concerns a rights issue in 2008 which, it is said, procured investment off the back of misleading information on the underlying strength of the bank. Each of the claimant’s individual claims is not significant, however when clubbed together, the claim value runs into the billions of dollars. These sorts of group claims are excellent claims for funding, and indeed in the RBS Rights Issue litigation there are funders in place.
The availability of funding is also good news for large businesses. No longer is funding solely for the impecunious. Even those with ready access to capital may (and indeed should) wish to consider whether litigation funding might be appropriate in certain circumstances. Businesses will often consider the extent to which they are better off ensuring their capital is freely available to further their business interests or whether it is best tied up financing a dispute. But unless litigation is what the business wishes to focus on, that is unlikely to be the case. Most business leaders will no doubt consider that capital is far better put to use investing in the enterprise. If that is right, it is inevitably going to be better to try and take the litigation off the balance sheet, partner with a funder who is able to provide the litigation capital and whose business it is to litigate, and continue to focus on the core business and its future prosperity. There is something inherently attractive about taking that approach and it is no doubt an approach which shareholders more often than not would endorse.
However, as with most things in life, funding comes at a price. A funder will typically look to see a return of 3 to 5 times their investment. Sometimes this might be expressed as a fixed multiple (i.e. for every $1 invested, the funder will want $3-$5 paid back on success) or a percentage of damages paid. In those circumstances and on average this might be between 20% and 35%. In one case in our experience, the percentage was even higher. The price is always reflective of the amount of risk a funder takes on and the potential exposure to adverse costs. But with funding having now become a mainstream feature of litigation, for lower risk cases, competition between funders keeps the cost low.
When it comes to funding cases, what is perhaps surprising is that all the mainstream litigation funders have ready access to cash. Their problem is not access to capital, but access to good quality cases.
In practice this comes down to the following factors.
First, a significant number of the cases which are referred to a litigation funder are bad. Some are speculative, other short on merit.
Second, the cases which have at least merit are not sufficiently well packaged or presented. All too often to funders complain that the person seeking the investment does not provide the details which are needed to be able to make an informed decision. The case papers are presented chaotically, with issues not being identified making it difficult for a funder to give a case serious thought. There is anecdotal evidence of boxes of documents being dumped on funders’ desks, which the funder is then required to review, consider, analyse to see whether the case is something they want to put money into.
That is a problem. It is also surprising. It is rare in commercial life that a party seeking substantial investment is successful without a pitch. But the anecdotal evidence suggests that is what happens when it comes to litigation financing.
So, if finance is sought, it pays to take time to prepare and plan how to approach a funder. An investment in analysing the issues, identifying the key issues and compiling relevant documents can make all the difference. A law firm will be able to assist with that process, and we at Signature have a great deal of experience in providing the support necessary to prepare the case.
The funders’ objectives should also be kept in mind.
- A funder will want to know first that the case value is sufficient to be able to generate a return. A 10 to 1 value to funding ratio is a sensible rule of thumb. There are funders who are prepared to work to lower ratio, but that is not the norm. A viable case will therefore rarely be valued at less that $5 million (although we do know of funders who will fund smaller cases based on lower funding ratios).
- Jurisdiction is important. Where is the case to be litigated. This can have a significant impact on cost, but also prospects when you consider the different legal attitudes of courts in different jurisdictions. If the case is one to be resolved by arbitration then this too may have an impact on the funder’s attitude and approach. One feature of arbitration is that there is usually no jurisdiction vis-a-vis the funder to order that a funder pay an adverse costs award. In that sense there is some protection for a funder from being forced, directly, to satisfy such an award should one be made. However in cases Signature has been involved in, the usual way of approaching this is to require a Claimant to provide security for adverse costs as a condition of being entitled to pursue the claim. Such an order will inevitably force the funder to provide that security if it wishes to pursue the investment. In general funders are very much alert to this prospect.
- The opponent’s solvency is critical. There is little point pursuing claims against an insolvent party, and a funder is unlikely going to have the will to provide financing for such an endeavour.
- But even if solvent, there must be sufficient assets available for execution, and in jurisdiction where they will be amenable to execution. In this respect it may be necessary to conduct pre-action due diligence. Assets can often be held off-shore, in jurisdictions such as the British Virgin Islands, Cyprus and Panama. Held through opaque and difficult to penetrate corporate structures, it may sometimes be necessary to engage professional enquiry agents to identify clearly where those assets are so that a recovery plan can be put in place from the outset. For a funder this is absolutely critical, and the absence of a proper enforcement plan may jeopardise the prospects of obtaining funding, even for a case which has good prospects of success.
- Finally, prospects. This is purely a question of risk appetite, but a funder will want to have a clear idea of the chances of success so that their investment risk can be assessed. Take for example the Texas Keystone case, a case which will go down in funding folklore. A $1.75 billion claim relating to oil concession rights in Kurdistan brought by an ex-US marine. He did not have the funds to pursue those claims, so sought funding from third parties in exchange for a share of the spoils. Those funders comprised an ad hoc collection of inexperienced parties led by the Greek shipping magnates Adonis and Flippos Lemos. Those funders are now on the hook for total costs of the proceedings (including the Defendants’ costs) which in total exceeds £50 million. That is a very significant risk to take and highlights the need for a funder to conduct thorough due diligence. But that is something which the person seeking the funding should also do, not least so that a successful pitch for funding can be made.
When each of these components is given full consideration in advance, the chances of obtaining funding clearly increases. The process is as much about selling the claim as it is the funding identifying an opportunity. It cannot be forgotten that by seeking funding, one aim is to de-risk (entirely or in part) the claimant’s participation and pursuit of a claim, and those are not necessarily small risks as the Texas Keystone case so aptly illustrates.
It should also be remembered that as part of a funder’s due diligence, it may be prepared to finance some of the initial components of the case. That includes assessing the claim value and the location and ownership of assets. Given the paramount importance to a funder of ensuring a claim has both actual value and execution value, where a claim looks on it face to prospects, then obtaining preliminary financing to investigate these additional components is potential invaluable to a claimant who may not otherwise be able to assess the full value of the claim itself.
So, once a case is identified for which funding might be possible, it is important to talk with lawyers to put in place a strategy for obtaining funding. Those initial components of quantum, enforceability and merits are critical to obtaining funding successfully and are issues which lawyers at Signature have teams to advise on. It is only with the assistance of legal advice that the full scope of the issues which a funder will want or need to consider can be properly navigated. That initial investment may pay dividends in the long run.