Historically perceived as a last-ditch resort for the cash-strapped, litigation funding has evolved into a commercially astute alternative for many litigants, including HNWIs with valuable claims who are reluctant to commit significant resources to costly legal proceedings.
In short, litigation funding is where a litigant obtains the financing to cover the costs of bringing a claim from a third party with no direct interest in the legal proceedings.
The litigation funder provides this backing in exchange for a return on their investment in the form of an agreed share in the proceeds, and risks losing its capital if the claim fails.
Once the preserve of hedge funds, the capital for litigation funding derives from an increasingly diverse range of sources; from sovereign wealth funds, hedge funds, and family offices to individuals speculating through crowd-funding type initiatives and even a recent blockchain platform.
Leaving aside the opportunities for investment, what do HNWIs and their advisers need to know about using litigation funding to bring a claim?
Peters & Peters’ Jonathan Tickner, head of commercial litigation and civil fraud, and Holly Buick, trainee solicitor, break down what people need to know.
What kinds of cases can be funded?
The industry has evolved rapidly over the past five years to meet the demands of the international legal market and fund an increasing variety and scale of cases.
Litigation funding is best known for its use in large commercial cases, and increasingly in group or shareholder actions.
However, funders are now open to a broader range of claims; including, for example, international fraud and asset-tracing proceedings.
In practice, only high value claims are likely to be backed by major funders: most will look for a claim value to funding requirement ratio of 10:1, and the cost of running cases means that in the UK the minimum claim value is likely to be around £5m ($6.3m, €5.7m).
Funders must also be convinced that, if the claim is successful, the proceeds will cover their fee and return while leaving a reasonable return to the litigant.
As well as the financials, funders carry out detailed analyses of the claim with input from expert counsel on the prospects of success and likely quantum.
They also consider enforcement risk – the possibility that even following a favourable judgment, the defendant will be unable or unwilling to pay – and the availability of assets in a jurisdiction where a judgment can be enforced.
What are the benefits?
Having passed the assessment process, a funded litigant will be reassured that an independent third-party considers their claim to be sufficiently strong to warrant its investment.
Funding may also have strategic benefits in terms of the other side’s view of a claim, sometimes helping to secure an early settlement.
Where settlement is unlikely, a key benefit of litigation funding, even for those with significant resources, is the ability to avoid the financial exposure inherent in entering into complex proceedings, often spanning different jurisdictions, which can take many years to resolve.
Access to non-recourse funding can allow claimants to take a broader or more aggressive approach, bringing claims against multiple defendants or funding enforcement proceedings in different locations.
Choosing a funder
Focusing on the UK, HNWIs and their advisers will have a large choice of funders in a developed and competitive market.
Those which are members of the Association of Litigation Funders (ALF) are subject to a form of self-regulation, and must comply with a Code of Conduct, as well disclosure and audit requirements, and importantly, conditions on capital adequacy to ensure they can meet their commitments.
Beyond this, it is sensible to choose a funder with a strong track record in the type of case to be funded.
A benefit of funding is the ability to draw on the funder’s expertise, and a suitably experienced funder will understand the process, timetable, and particular hurdles to bringing the type of claim.
Funded litigants need to fully understand the role the funder will play at different stages.
For example, if a decision is taken to enter into settlement negotiations or mediation, it is common for funders to attend along with the client and solicitor.
Litigation funding is proving increasingly attractive to corporates, including blue chip multinationals, demonstrating that even the most-well capitalised see the benefit of sharing the risk of litigation (and managing their balance sheets).
HNWIs who want to bring high value claims but are put off by the need to commit significant financial resources should consider whether they would prefer to share the risk with an experienced financial backer, in exchange for relinquishing some degree of control and a portion of the proceeds.
If so, the opportunities presented by litigation funding should not be discounted.
This article was written for International Adviser by Jonathan Tickner, head of commercial litigation and civil fraud, and Holly Buick, trainee solicitor at law firm Peters & Peters.
