The role litigation funders are playing in the UK market
6 min read
03 August 2018
Litigation funding is going from strength to strength in the UK, after Augusta unveiled a £150 million war chest. However, there is an increasing trend for law firms to float, which gives the company the option of tapping its shareholders to fund litigation cases.
It is clear from the allusions that litter his plays that William Shakespeare was pretty familiar with the law and with lawyers generally.
There is nothing to suggest that his familiarity sprung from any involvement with the courts of the day, but, if it did, it would certainly explain the none-to-charitable impression of lawyers Shakespeare provides in King Lear: “Then ’tis like the breath of an unfee’d lawyer; you gave me nothing for’t.”
The common law is an adversarial system in which it pays to have a good advocate. But, in response, good advocates have always expected to be paid, and paid healthily, for their services. The words of any “unfee’d lawyer” tend not to be worth the breadth used in their production.
The inevitable consequence of these two facts is that litigation is expensive. So expensive that for a long time businesses have seen litigation (or arbitration) as a lose-lose exercise, to be avoided at all costs. Perhaps, with the rise and rise of third party funding, it is now time to reassess that evaluation.
Ten years ago, third party funding was niche, to put it mildly. Now, the regular headlines generated by the likes of Burford, Harbour and Therium show that it is anything but.
On 26 July, Burford announced its half-year results, showing an increase in income to US$205 million, with profits also up by 17%. Underpinning this stellar performance are investments in disputes of $1.6 billion. Burford may be the biggest third party funder, but it is by no means the only. Established funders and new entrants are raising money to invest in disputes at an astonishing rate.
Why does the growth of the third party funding market mean that now may be the time to reassess an evaluation of litigation, from lose-lose to something more positive? Because third party funding provides a solution to the two principal disadvantages of litigation: its riskiness and its cost.
Third party funding involves a commercial business paying some or all of the costs of the litigation in return for a proportion of the damages that the litigation produces. Inevitably, some of the money that the funder provides is used to purchase insurance to cover the financial risk of an adverse outcome in the litigation.
The commercial business gets no decision-making power in return for its investment. The law is clear that this has to remain with the litigant. But it monitors progress, provides assistance if asked and picks up the bill. Most importantly it there is an adverse outcome in the litigation, the funder is the one who suffers. Third party funding is always a non-recourse investment.
In short, third party funding takes the costs and risks out of litigation. For claimants (predominantly the class which can access third party funding), it means that what is left behind is the upside of litigation: recovery of money. Thus, third party funding can turn litigation from being a risky drain on the resources of a business to a risk-free source of revenue for it.
For example, take a business that imports wine. The Competition Authority has recently published a decision that certain Cote du Rhone wine producers have been operating a cartel, meaning that the wine import business has a claim for damages.
Without third party funding, is it a sensible idea for the business to spend the hundreds of thousands of pounds to prosecute its claim. Possibly, given that it is a potential source of significant revenue. But, by removing the cost and risk, third party funding takes away the doubt.
The doubters will be waiting for the catch. And, of course, there is one. Third party funders only choose horses that they think will win, and then they charge very significant fees for providing funding.
Five years ago, the market norm was that they were looking at recovering their investment plus a success fee of three times their investment. Now, that market norm has fallen to two times their investment, but it is still very expensive. As a result, it is only available for high value claims, typically where the Claimant is expecting a recovery in excess of £1 million.
That is beginning to change. With more money and more funders, the competition for good cases is providing downward pressure on the multiple that funders are offering. They are also diversifying their offerings, away from single case investments towards portfolios, which spread the risk of an adverse result and thus enable the funder to offer better rates.
Most significantly, the large insurers have woken up to the significant sums that the funders have been making and want to get in on the act, at a much cheaper price. For businesses with litigation claims, it has never been a better time to act.
Ben Pilbrow is a partner in the commercial disputes and regulation team at Shepherd and Wedderburn LLP, with additional reporting from Jake Simons.