13 May 2016
The growth and evolution of third party funding or "litigation funding" has been one of the most significant developments in the litigation market over the last 10 years or so. Typically, litigation funders provide funding on a case-by-case basis, however there now appears to be a growing shift by funders and corporates who are seeking to structure their funding arrangements on a portfolio basis.
What is litigation funding?
Litigation funding is where a third party (unconnected to the legal proceedings) agrees to finance all or part of the legal costs of a claim. In return for the funding, the "funder" will (if the claim is successful) typically receive either a share of any monies recovered from the litigation or their contribution to the legal fees will be returned with an agreed uplift. If the claim is unsuccessful however, the initial investment is lost and the funder may be liable to pay any adverse costs awarded against the funded party, capped at the amount of the funder's investment. In practice however, a funder's risk of being liable for adverse costs is often mitigated through the purchase (by the funded party) of an "after the event" insurance policy or in some instances the funder may offer additional funding to cover any adverse costs.
Litigation funding enables a claimant (generally speaking) to offset some of the risks of litigation and to focus their cash-flow into their business, rather than diverting it away from their business and into their legal spend. Funding arrangements also allow claimants to bring claims in circumstances where they may not otherwise have sufficient resource to pursue litigation.
The developing nature of litigation funding
Traditionally and more commonly, litigation funding is provided in respect of individual claims, primarily to claimants with a monetary claim or sometimes to defendants with a substantial counterclaim. However, an alternative to this model appears to be developing.
As litigation funding has evolved and grown in popularity and individual funders have developed relationships with both law firms and the ultimate litigants, there has been a shift towards providing funding for a portfolio or collection of claims (which could in theory cover all claims pursued by and against a litigant), rather than funding for individual claims on a "case by case" basis with separate funding arrangements for each dispute. The recent portfolio funding deal which Burford Capital has reportedly entered into with BT is indicative of this shift.
The logic behind the shift towards a portfolio-based approach reflects the notion that an investment in a portfolio of claims diversifies the funder's risk and any losses that the funder suffers as a result of any unsuccessful claims by the funded party may be balanced by the upside of successful claims. Key advantages for the funded party include the ability to aggregate claims together to reach any minimum funding threshold and flexibility as the funded party does not need to seek funding for each new claim that arises because the "pool" allows it to spread the available funding across its range of cases and apply it to where it is needed the most.
There will, of course, be plenty of instances where funding on a "one off" basis remains appropriate for some claimants, particularly those which do not litigate frequently and therefore do not have the need to spread funding across a multitude of claims. However, for larger corporate entities which, at any one time, may have several claims in progress, the prospect of having their entire "book" funded is likely to be particularly appealing.
Mayer Brown International's Dispute Resolution team has established relationships with several litigation funders and would be happy to assist with any questions that you may have relating to litigation funding more generally.