The rise of third-party funding

Article by Disa Greaves, Land Economy graduate (Cambridge University) and GDL graduate (ULaw)

With the UK officially entering into a recession last summer for the first time in over a decade, and more than 500,000 companies in financial distress, disputes are set to inundate the courts.[1] [2] The backlog and delays in the courts are only likely to put further strain on companies’ cashflows as claims are pushed back. Yet, unlike in previous recessions, third party funding (TPF) has emerged as an option available to potential claimants looking to pursue actions or claims.

Background

TPF is where a third party funder, unconnected with the dispute, finances the costs on a non-recourse basis, only recovering its funding if the claim is successful for a fee payable from the proceeds.[3] As a result, this minimises the risk of a client pursuing a claim unsuccessfully and losing large sums. TPF can take two forms: ‘single case’, where a funder finances one claim, or ‘portfolio’, where a funder finances a ‘book’ of claims from a client in order to reduce its risk through diversification.[4] TPF has been viewed favourably by the courts as a means to improve accessibility to justice, provided the client is the primary beneficiary of the judgment (receives 50% or more of the award/damages), and they control the case.[5] In light of this, most cases that are funded will be those with high rewards in the balance, to enable a recoup of the funder’s costs given the minimum 50% client stake.

The UK is the jurisdiction with the most number of specialist litigation funders, and is in part due to England & Wales being the only one with a Code of Conduct for TPF, which is self-regulated by the Association of Litigation Funders (ALF).[6]

Progress

Over the past 10 years, TPF has experienced a lot of growth and the UK has seen some significant cases supported by big funders, such as Augusta Ventures. According to the company’s co-founder, Louis Young, a number of law firms have recently made enquiries with them as disputes are emerging.[7] Moreover, Eversheds Sutherland’s head of litigation funding, Glenn Newbury, has stated that the current financial climate has sped up the progress of TPF becoming mainstream and will facilitate cases that clients have not previously been able to afford.[8]  It is expected that litigation, such as commercial disputes, insolvency claims and insurance disputes in particular will increase, according to a survey of funders conducted by The Lawyer.[9]

The case for TPF

TPF has a number of attractions for clients. Liquidity is currently key, so litigation, and its accompanying costs, has become unaffordable for many companies, especially to some who may not previously have considered TPF, but now need to preserve cash. For smaller companies, TPF can enable cases that they could otherwise not pursue. For larger companies, TPF shifts the risk of litigation costs to the funder and is a strategy that enables spending in other areas.[10] Engaging in TPF can also validate the strength of a case, as funders will only take on cases worth their while on the basis of their own due diligence.[11] Nevertheless, it is important to consider that a significant proportion of recoveries will be given to the funder, and despite clients’ control over the case, it is possible that there can be some loss of decision-making power.

TPF has not been without its complications. For example, the Excalibur case from 2013 was one of the largest TPF cases, with around $50mn secured from investors, only for the claim for $1.6bn against Texas Keystone and Gulf Keystone to be dismissed.[12] The High Court and Court of Appeal held that the funders were liable for £23mn in indemnity costs, and subsequently the funders sued Clifford Chance for professional negligence.[13] This case has served to demonstrate the huge risks that third party funder may undertake in the hope of potentially large rewards, and set a precedent that funders are liable for costs based on indemnity.

Future

Movements in the market at present indicate a centre-stage position of TPF in the future. The benefits of TPF have become evident to many law firms, and consequently a number of tie-ins have developed between firms and funders, for example between a number of firms and Augusta Ventures.[14] These firms will involve the funder in cases where clients are interested in funding options.

The future of TPF is one of imminent further growth and will become an increasingly important tool for all types of clients in the sphere of litigation.

[1] BBC https://www.bbc.co.uk/news/business-53748278

[2] FT https://www.ft.com/content/1bf6edab-0744-4dac-8334-d56b29bf6c3d

[3] Practical Law https://uk.practicallaw.thomsonreuters.com/8-521-3304?transitionType=Default&contextData=(sc.Default)&firstPage=true

[4] Pinsent Masons https://www.pinsentmasons.com/out-law/guides/third-party-funding-introduction

[5] Pinsent Masons https://www.pinsentmasons.com/out-law/guides/third-party-funding-introduction

[6] Practical Law Law https://uk.practicallaw.thomsonreuters.com/8-521-3304?transitionType=Default&contextData=(sc.Default)&firstPage=true

[7] The Lawyer https://www.thelawyer.com/levelling-up-litigation-the-past-present-and-future-of-third-party-funding/

[8] The Lawyer https://www.thelawyer.com/levelling-up-litigation-the-past-present-and-future-of-third-party-funding/

[9] The Lawyer https://www.thelawyer.com/levelling-up-litigation-the-past-present-and-future-of-third-party-funding/

[10] The Lawyer https://www.thelawyer.com/levelling-up-litigation-the-past-present-and-future-of-third-party-funding/

[11] Ashurst https://www.ashurst.com/en/news-and-insights/legal-updates/quickguide—litigation-funding/

[12] The Judge Global https://www.thejudgeglobal.com/excalibur-ventures-loses-1-6bn-claim/

[13] The Lawyer https://www.thelawyer.com/levelling-up-litigation-the-past-present-and-future-of-third-party-funding/

[14] The Lawyer https://www.thelawyer.com/levelling-up-litigation-the-past-present-and-future-of-third-party-funding/