Litigation finance has been extensively covered in the press over the last few years. Anyone following such coverage will know that the market has significantly evolved in recent times.
The most basic premise of litigation finance is now widely understood – a third-party investor finances the legal fees and expenses for another party’s legal claim on a non-recourse basis. If the case loses, the funder loses its investments whereas if the case prevails the investor is entitled to a success fee. Such success fee is typically calculated as either a multiple on the amount invested, a percentage of the damages recovered or a combination of the two.
While there have been several surveys citing increased awareness of litigation funding by corporate counsel and financial controllers, it likely remains the case that for one-off litigation finance agreements, the majority of cases funded will not be for large corporate entities, but rather smaller enterprises or individuals with commercial disputes.
This is understandable, since the one-off litigation finance arrangements can be an expensive way to finance a case. For a litigant without the cash-resources to finance their case, they may have no choice but to engage with a funder. Such funding is a lifeline to obtain access to justice. However, for larger enterprises with available cash resources, the decision to use external finance for their legal claim is not likely to be one borne out of necessity, but one of commercial analysis.
Knowing your options
One key obstacle for corporate counsel when undertaking such analysis is how to collect the most updated relevant information about their funding options. There is a natural expectation that the company’s external lawyers or prospective lawyers will, in addition to detailing the proposed legal budget, also explain the various finance options that might exist for the case. Indeed, for cases within England and Wales, such an expectation is well founded, because lawyers have obligations under the Code of Conduct rules to provide such advice and enable their clients to make an informed decision about the services they require.
But herein lies two very significant hurdles for corporate counsel: first, some lawyers will shape their advice differently for a corporate client as compared to a smaller enterprise or individual client and second, many lawyers themselves lack awareness and understanding of the full range of options.
Lawyers who are less familiar with current alternative finance options may well breathe a sigh of relief when approached with a new matter by a corporate enterprise. Where such a client does not make any mention of alternative finance options, but instead moves straight to negotiating a new private fee-paying retainer, the lawyer may well be reluctant to do anything that could interrupt the signing of that engagement letter. Given internal pressures on lawyers’ billing targets, this is understandable. Nonetheless, the lawyer could unfortunately be doing the client a disservice.
Many financial directors/GCs will not be tempted to involve a third-party financier to fund their case where that funder is seeking to charge many multiples on their investment or a significant slice of the potential damages recovered. The value of saving the cash outlay is outweighed by the ultimate cost, and such a decision would be logical. However, to think of the alternative finance market in this way is simply too limiting, for example:
-Many corporate enterprises are involved in a wide range of disputes at any given time (including defendant matters), and for those businesses it may be more appropriate to consider a portfolio litigation funding facility. By cross-collateralizing a pool of cases, funders can significantly lower the cost of their funding and make the terms more favourable in other ways, perhaps by including a provision for funding cases that would not normally attract funding in isolation – for example, a defendant case or a low value claim.
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-Litigation funding can encompass the monetisation of a large award or portfolio of claims, so that award-holders (yet to enforce their award) or claimants (where legally permissible) can sell or assign the economic value of the claim.
-By extension to the concept of monetising a claim or portfolio’s value, some funders are treating litigation finance as a quasi-by-product to achieve the deployment of significant sums of traditional corporate finance. For example, a claimant might be contemplating pursuing a dispute with an expected legal fee budget of circa £10m. Given the strength of the claimant’s balance sheet, the discussion widens to one where a much larger corporate finance facility can be provided (e.g. in the hundreds of millions), on terms well below market rates. In exchange, the fund is provided with a success fee, which is only payable if the case in question prevails. In that sense, the company has leveraged the prospective value of their case to secure a significant capital raise that they can put to general use immediately.
Lawyers could be forgiven for not straying into such wider exploration of the company’s corporate financing arrangements; however, what is more troubling, and what could put the firm in hot water should a case prove unsuccessful, is failing to advise a corporate fee-paying client that notwithstanding the fact that they have chosen to self-finance their case, they could ultimately be insuring their capital outlay.
Litigation insurance is a form of insurance designed to insure the legal fees and expenses incurred when pursuing a commercial claim. Some lawyers misguidedly label this cover as “adverse costs insurance” which is now far too narrow. While the origins of such insurance – introduced some 20 years ago – were designed to remove the adverse cost risk for a client, in the past decade the protection has evolved to include a claimant’s own side legal bill.
Corporate enterprises could routinely be insuring a significant portion of the fees and expenses paid to their external counsel against the risk of a case losing or an award being unenforceable; thereby removing unwanted “financial shocks” arising from an unsuccessful case.
A win-win situation?
A key purchasing decision feature of this form of insurance is how the premium is paid. Insurers will often charge what is known as a “deferred and contingent upon success premium”. This means that the insurer only charges a premium (or the majority of their premium) if the case is successful and collects the same from damages recovered. Combining such insurance with partially deferred fee-retainers with external lawyers could be a win-win for both a business and the law firm.
The cost of litigation insurance is usually less than a quarter of that charged by funders, meaning that it is a vastly more economic form of risk transfer: one that once explained properly, is clearly a very different proposition to the cost of using litigation finance. In fact, such is the attractiveness of this insurance, most litigation funders insure themselves on this very basis to limit their downside.
Will Litigation Law Firms be on the front foot to advise financial directors/GCs in 2018? It is perfectly feasible to provide any given client with a sound overview of current options in less than a 30-minute chat, or to provide 4-5 worked examples as to how the proposed fee budget can be addressed using different options or combinations – each showing the net likely impact on the client’s damages.
So why do litigators still fail to advise their corporate clients on the full suite of options? There is a clear disconnect somewhere. With increased press attention on the subject, and a growing move by corporate entities to engage directly with insurers, funders and specialist brokers to seek a better understanding, it is likely that 2018 will see a shift in strategy by many law firms so that finance directors are in an informed position as to the various ways in which they can finance or better risk manage their legal disputes. .