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Funder enlightening

by Antony Collins on 23 Apr 2014

 funder enlightening

The growing impact and influence of third-party funders in UK litigation brings a different voice to arguments about proportionality and predictability of cost. As lawyers begin to share risk with clients through contingency fees, and other alternative fee agreements, a more transparently commercial evaluation of value, risk and timeline to recovery is emerging. Mediation, it seems, is increasingly favoured for commercial risk management and speedier recoveries.

Funders are third-parties that finance a case – either fully or partially – and receive an agreed share of the proceeds or settlement of a successful claim. They also foot the entire legal bill for an unsuccessful claim so it is a risky business. Funders, then, are quite particular about the cases that they finance and the preferences for resolving these cases in order to balance the risk of losing with the returns of winning.

In the first instance, cases are carefully vetted. “As a litigation funder, Calunius sees hundreds of cases each year, but funds a small fraction of them,” explains Leslie Perrin, chairman of Calunius. “Some of these cases will be without merit; far more often, cases will be passed over despite good merits, because the realistic quantum does not justify the cost of bringing the claim.”

On the second point, funders actually prefer to avoid litigation whenever possible. This has given rise to the desire to engage in mediation and early settlement options.

Neil Purslow, chief investment officer at Therium Capital, says whilst his firm plans on the basis of having to fight every case all the way if need be – and are not deterred by taking a case through to a final hearing – the costs of litigation can become a material factor. On a basic level, trial is the most expensive part of dispute resolution because legal fees soar. This may be good news for the lawyers but for funders, a quicker resolution avoids hefty costs and can provide proportionally better returns.

“In order to take a case through to trial, the funder will have to invest more in the case which is reflected in the funding cost at that stage,” Purslow continues. “There can come a point as with all litigation where a settlement can no longer meet the needs of all the parties involved and the only resolution can be through trial. However, an early negotiated resolution of the case with a correspondingly lower investment by the funder can often represent a better outcome for all parties, including the defendant, as there is more flexibility early on to accommodate everyone’s objectives.”

Funders also say that trials are highly unpredictable, with the key point being that – according to Perrin – litigation and arbitration hands control of the destiny of a case to a judge or an arbitral tribunal. “They are independent parties who will necessarily impose their own views on the merits of the claim,” he explains. “You win some cases you think you will lose and lose some cases you think you will win.”

Susan Dunn, head of litigation at Harbour Litigation Funding, builds on that point, claiming that funders can analyse the merits of a case, all the key arguments and counter-arguments, the costs and crucially value of the claim and but, when the case gets to trial, there are just so many additional variables: the judge’s approach; lawyers’ abilities on the day; witnesses’ performance; illness etc..

“We have a broadly 70% success rate pre-trial on cases we fund, which drops to 50% at trial,” she adds. “I’ve seen too many so-called “slam dunk” cases that ended up being lost, dragged to appeal and resulting in everyone concerned receiving much less than they anticipated.”

In mediation, the control remains with the parties. Dunn explains that all of Harbour Litigation Funding’s agreements state that, if a legal adviser recommends so, a client should consider mediation: “Mediation is a very useful tool; even if the mediation is unsuccessful, the process provides a much better insight into the genuine beefs of the other side, which are often not mentioned in correspondence.”

While funders have no direct interest in legal proceedings, many not only advocate the use of mediation but offer support in the process, including their opinion of individual mediators. Perrin, himself a mediator, adds: “As a funder we may attend mediations and have some input into settlement. While the claimant retains control of strategy, we are able to provide constructive input as to when to make an offer, and when an offer should be accepted.”

The expectation is that funders' enthusiasm for early settlements ahead of trial will encourage more mediation in future. Purslow anticipates that litigation funding will continue to grow, with bigger firms and well-resourced clients looking at alternative ways of funding litigation during the next decade.

“In the UK we are seeing lawyers becoming more interested in risk sharing with the introduction of contingency fees,” he summaries. “Change will be slow but as more lawyers take an interest in the outcome of litigation, I expect we will see lawyers focus more closely on whether a dispute is worthwhile from an economic point of view, as funders have to do, and issues such as the proportionality and predictability of costs and the timeline to recovery will come more to the fore.”

Dunn concurs, believing that the more parties and lawyers are aware of the existence of litigation funders – and the business model is that they only finance cases they think will succeed – the more it will encourage people to look at mediation and settlements.

“People presently focus too much on winning or losing a case and not enough on the realistic value of case,” she concludes.

Persuading users of the commercial benefits of mediation has traditionally fallen to mediators, providers and some lawyers. It is therefore significant and welcome that funders, whose interests are entirely commercial, arrive at the same conclusions as to it its benefits, and have thrown their weight behind endorsing the process.

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: Mediation, Litigation

Antony Collins

Written by Antony Collins