by Elizabeth Taylor

What on earth is litigation funding?

Like many people, I often use Christmas as an opportunity to catch up with old friends and let them know my family and career news. Having told an old university friend that after 23 years in private practice I was now working for a litigation funder, a few days after Christmas I received a LinkedIn invitation from him including, to my surprise, a message asking me “What on earth is litigation funding?”. I was surprised by the message because my friend is a practising solicitor, having qualified twenty years ago.

What this shows is that although litigation funding has on numerous occasions received judicial approval over recent years, and is widely used in high value cases, there is still a long way to go before it becomes firmly established in the tool kit of many high street law firms.

I am also often surprised by the lack of understanding amongst some of the legal profession who are aware of the benefits of litigation funding about what a funder is looking for when considering funding applications.

So, what is litigation funding and how does it work? In a nutshell, litigation funders pay legal fees and/or disbursements in return for a pre-agreed share of the proceeds in the event of a successful outcome. This share is usually known as a success fee and the level of the success fee varies from case to case and from funder to funder. Typically, the success fee will be a multiple of the funder’s investment or a percentage of the recovery or a combination of both.

Before making a funding offer, the funder will undertake very thorough due diligence in order to satisfy itself that the claim satisfies three main criteria which are:

  1. The prospects of success are strong. Most funders will require the claim to have prospects of 60% or more. Counsel’s opinion is not always required, especially if the acting solicitors have significant expertise in the relevant field, but if counsel has proved an opinion a funder will usually ask for this. I recently rejected a claim where an opinion had been sought from counsel for the purpose of a funding application and the best counsel could say was that the prospects were better than evens. Other factors may also be relevant to the likelihood of a successful outcome. For instance, I also recently reviewed a contentious probate claim where the opponent was a charity who would have feared the criticism which could flow from spending a great deal of money on litigation thereby increasing the prospects of an early negotiated settlement.
  2. Any settlement, award or judgment must be recoverable. The prospects of success are totally irrelevant if the opponent is impecunious. Some funders will undertake their own enquiries into the opponent’s net worth. Others will ask the acting solicitors for evidence of this. In certain cases, a funder will pay for a wealth report but usually only if there are reasonable grounds for believing that the opponent has sufficient assets. In these circumstances the cost of the wealth report will form part of the funder’s investment for the purpose of calculating the success fee. I have rejected numerous cases where the merits were strong, but no-one has undertaken even basic enquiries into the financial standing of the opponent and I have ascertained very quickly from documents filed at Companies House that the opponent is insolvent or in some cases has even been dissolved.Assuming that there are sufficient assets, what is the enforcement strategy? A strategy that involves bankruptcy or winding up proceedings is rarely going to be attractive to a funder because it is unlikely that the client will have comprehensive knowledge of the extent of the opponent’s assets or other creditors and he will have no control over the costs incurred by the insolvency practitioner in undertaking his statutory duties of investigation and asset recovery. As such the timing and level of dividend payable from the insolvent estate is impossible to predict. A funder will always be looking for the fastest return on its investment.
  3. The likely recovery must be sufficiently large to cover payment of the funder’s success fee, any ATE premium, any uplift payable to a solicitor under a CFA and return a substantial proportion of the recovery to the client. It is for this reason that there is a popular misconception that funders are only interested in multi-million pound claims. This is a misconception because there are many funders who are interested in smaller claims, by which I mean claims of £50,000 to £500,000. What usually determines their attractiveness to a funder is the level of solicitors’ fees in relation to the level of likely recovery. In that regard, a funder will often ask for a summary precedent H and it will come as no surprise to many of you that some of the costs budgets I have seen are eye watering. The level of likely recovery is also often much lower than the maximum level of the claim. I reviewed a negligence claim where a small west end firm estimated that their costs were going to be in the region of £600,000 even though the opponent had admitted making the mistake and the damages sought were roughly £200,000. You don’t have to be a genius to work out that there is no return on this for anybody.

Although fixed costs are deeply unpopular amongst many practitioners, their introduction in the context of the proposed intermediate track for civil claims up to £100,000 (and thereafter possibly for claims up to £250,000) will make litigation much more commercially viable and therefore attractive to litigation funders which will in turn open up access to the court system to many litigants for whom at present litigation is simply too expensive.

None of the above should come as any surprise to solicitors who routinely enter into conditional fee agreements and whom I would expect to make all the same enquiries. However, a funder will often make some more subtle enquiries. For example, is the client likely to act on the advice of his solicitor (which could be very relevant when it comes to settlement negotiations) or with the benefit of funding behind him is he going to make life as difficult and costly for his opponent as possible? Do the solicitors have sufficient skill and experience to deal with the claim and are they reputable? Although a funder will have no input into the conduct of the litigation, there will usually be an agreement between the funder and the lawyers setting out details of the solicitor’s reporting requirements and the client care standards that should be adhered to. I recently rejected a funding application where, having researched the sole practitioner instructed by the client, I discovered that he had been disciplined by the SRA on more than one occasion and I suspected that he had only been instructed because his fee estimate was the lowest.

Litigation funding is a very valuable tool in the armoury of any litigator. In my experience, the backing of a reputable funder sends a very powerful message to an opponent. It says that having undertaken thorough due diligence the funder is confident of making a return on its investment and this tends to bring the opponent to the negotiating table more quickly.

So far as the claimant is concerned, it enables a corporate client to pursue litigation without having to provide for the litigation costs on its balance sheet. Most litigation funding is non-recourse meaning that if the claim is lost the claimant is under no obligation to repay the funding, so the action is “de-risked”.

Finally, and I will be unpopular amongst the legal profession for saying this, it helps keeps the lawyers’ costs under control. This is important to the client where the funder’s success fee is a multiple of the funder’s investment. The funder will usually only be willing to pay the costs agreed at the outset as set out in the summary precedent H unless there are very good reasons for departing from this.

I believe that my friend is in a small minority of solicitors who have no understanding at all of litigation funding, but I do believe there are many more who are aware of it but for a variety of reasons are suspicious of it or simply lack sufficient knowledge to recommend it to their clients. I hope that I have demonstrated that it is not rocket science and that most of the information funders require in order to conduct their due diligence is nothing more than common sense and that most of the information they seek from the solicitors and client is the same information that the solicitors should be gathering in any event in order to fulfil their own duty to advise the client on the risks of embarking on litigation.