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Finding funding: The growing influence of TPFs

by Antony Collins on 23 May 2014

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Recent recommendations by the International Bar Association that parties to international arbitration disclose the existence of third party funding (TPF) have put the issue back in the spotlight.

The move raised eyebrows among funders. Nick Rowles-Davies, managing director of Burford Capital, finds the case for disclosure of TPFs “quite remarkable” as third party funders are neither new nor unique. “

Parties in litigation can choose how to fund a case – they pay directly or via a bank loan or via a CFA, why is third party funding such a different form of finance? We do not interfere with a case yet this financial product for some reason needs to be disclosed.”

Disclosing TPF involvement was intended to flag potential conflicts but lawyers are suggesting, with such high success rates, disclosing the backing of a TPF may become a de facto assessment of the merits of a claim.

“There is ordinarily no requirement to disclose the existence of a third party funder, though of course there may be tactical advantage in doing so,” says David Engel, a litigation partner from Addleshaw Goddard. “It may cause an opponent to think twice if it knows that an independent funder has assessed the strength of your case and has been willing to invest in it.”

Experts say TPFs – which now offer many different deals and at different stages of the litigation or arbitration, whether pre-action or when a case is already quite well advanced – have become more active in financing cases as a result of the introduction of damages-based agreements (DBAs) in the Jackson reforms. The uptake of DBAs, in which the lawyers receives a sum of the damages rather than costs from the losing party, has been slow and TPFs have plugged the gap.

“Almost nobody is using DBAs because of the "all or nothing" way they have to be structured under the relevant regulations,” Engel observes. “The law firm has to carry all of the risk, while the litigant carries virtually none. There is currently no option of discounted or hybrid DBAs, as there is with CFAs.”

Engel adds that innovations from TPFs are helping to solve that situation. These include covering the “work in progress” to take some of the risk away from law firms and develop new models, a point which Rowles-Davies echoes.

“In the US, Burford usually assists by sharing the risk in the lawyer’s contingency arrangement, which gives the lawyers money up front to cover disbursements and expenses,” Rowles-Davies remarks. “In the UK, we can take on a DBA and agree to provide liquidity to the lawyers to assist with cash-flow. We then get that payment back if the case is successful as well as a share of the remaining damages,” he adds.

Even so, the general consensus is that there is something of a limit, preventing TPFs from breaking into higher stakes litigation. While TPFs can offer money upfront, there is only so much liability they want to assume so when faced with a very large liability, the TPF may be less robust in taking on a case.

Rowles-Davies explains that the costs of bringing a case are broadly the same, whether the claim is for £20 million or £100 million: “The value of the claim does have some impact, however, because the higher the claim the higher the potential for the case to run to trial; it ramps up the risk. Nine out of ten cases valued at £5 million or less will settle, which drops to nearer six in ten for cases valued at more than £5 million. As the cost of bringing a case are practically the same, parties with a higher value think they may as well roll the dice and take a 50/50 chance at trial.”

He adds that, merits aside, for most funders it is more about ratios and what the likely reaction of a defendant will be. “We work on the basis that if there is enough headroom should the damages half and the costs double, then a case may work for funding. But we also consider carefully: what will be the realistic response from the defendant?”

Engel says he would not rule out more developments, such as club financings to spread risk or more consolidation between the funders and ATE insurers, to provide “a more holistic finance solution”. Rowles-Davies, who says the market has seen some co-funding arrangements in the very large claims against banks because there is just “not enough liquidity in the risk or ATE market for a single provider to cover”, is also looking at consolidation, stressing that Burford is more than a litigation funder; it is a “finance provider”.

“We are looking at more portfolio deals and want to work directly with companies to provide financing solutions so that their litigation costs are off-balance sheet,” he concludes. “It is a slow burn but we aim to become the financier of choice in the legal marketplace.”

This post was written by Antony Collins who is a freelance journalist. He can be contacted at ac@acollinsmedia.com

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Topics: International Arbitration

Antony Collins

Written by Antony Collins