Opinion

Exponential growth of litigation funding in 2018

5 min read

06 February 2018

For businesses of any size, running commercial disputes through litigation or arbitration has always been a pain in the neck. Apart from the hassle, the absorption of management time and the real psychological stress of possible court appearances, the financial fall-out can be terrifying.

Quite apart from having to fund what seems an insatiable appetite from your own advisers for fees, court costs and other outlays, you can never be sure you will win the case. If you are unlucky enough to lose, the nightmare gets worse – you find that on top of all your legal costs, you have not recovered what you hoped to and now you are faced with potentially paying a large whack of your opponent’s costs as well.

It is hardly surprising therefore that many SMEs baulk at the thought of carrying a dispute forward, particularly if the opposition are a big enterprise with deeper pockets. However, even large companies with more than enough cash to afford the fight will often decide there are better uses for money. As a result, disputes are seen as a risk rather than the asset which they can actually be.

About ten years ago, the first litigation funders appeared in the UK market. Some lawyers were prepared to work at a discounted rate in return for an uplift at the end of the day if the claim proved successful. Nevertheless, the uptake was low and law firms did not want or could not afford to work on such a basis. These conditional fee arrangements were rarely applied to commercial claims of any substance.

Third party funding, under which someone else provides the legal costs in return for an agreed sum to be recovered from any damages, gave claimants a chance to take on cases which might have been left before. However, the funding costs of one-off claims were often high as a proportion of the recoveries and the legal market was slow in advising clients about this option. Slowly the market grew though. More litigation funders entered and the anecdotes of success spread.

Even though it was possible to fund your own costs this way, the real risk of having to reimburse the opposition remained a bar. The insurance market, often in conjunction with funders, marketed so-called “After The Event” policies under which they insured the risk of the other side’s costs.

If the metrics worked the combination of funding and insurance products provided a genuine “no win, no fee, no risk” offer but at a high price, with considerable up-front due diligence necessary. Unsurprisingly, because each case stood alone, the cost of cover was substantial.

Things have moved on since then. The revolutionary creation of a portfolio dispute fund for a major FTSE company in 2016 showed litigation funding was useful for all sorts of businesses and allowed funders to cross-collateralise claims. This approach was carried forward to a commercial law firm portfolio arrangement last summer, again for the first time, so that different clients could benefit from the same system.

The existence of a portfolio enables cheaper money, payable as a fixed share of actual recoveries, quicker initial decision-making and the potential for a wider range of disputes to get funding. All these are substantial pluses for business. But what of defendants? Traditionally, litigation funding has been for claimants, but all the financial issues that disputes throw up can equally affect those on the receiving end of claims.

Funders are commercial animals and are all too aware that to date they have targeted only half the disputes market. In many cases it is possible to work out the benefit of defending a claim, rather than settling to avoid escalating costs, and in appropriate cases funders can support defendants through this stage too.

The year 2018 will see growth in all these areas: a wider range of insurance products to cover the costs of either side, to provide a hedge even where no third party finding is taken – excitingly available to defendants as well as claimants; the growth of proper assessment of risk throughout a case, so that best settlement opportunities can be recognised; and, above all, an increasingly justified expectation on behalf of enterprises that lawyers will be as adept at the business of disputes as they may be at their process.

Guy Harvey is head of commercial and international disputes at Shepherd and Wedderburn LLP