Growing the Litigation Funding Market

 MARKET VIEW – LITIGATION 

Simon Dluzniak of Bentham IMF discusses Europe’s litigation funding market and compares it with the more mature Australian market the funder has come from

The third-party litigation funding market in this jurisdiction is, relative to Australia, still in its infancy. Hence it is incumbent upon the various stakeholders within the industry to continue to create awareness of the benefits of litigation funding in assisting and shaping its growth. After what appears to have been a fairly positive start, third-party funding (TPF) appears to have suffered a backlash of sorts as a result of a spate of so-called ‘setbacks’, most notably the loss of high-profile funded cases (for example, the Excalibur case) and the collapse of a well-known funder (Argentum).

However, Bentham Europe believes that as the benefits of TPF become better understood, both by lawyers and their clients, then the consolidation and subsequent expansion of the TPF market will be considerable.

In this article, Simon Dluzniak, investment manager for Bentham Europe, addresses some of the common questions facing the TPF market.

What is your view on the ethics of TPF? Some argue that litigation funders commercialise the justice system, how do you respond to that?

TPF has emerged as the preferred means of providing access to legal redress for those with commercial claims that would otherwise not be made. It is undeniable that certain meritorious claims, which would otherwise not have run due to financial constraints, have only been able to proceed due to the availability of TPF. Only recently, in the Supreme Court case of Coventry & ors v Lawrence & ors, it was noted by Lord Neuberger, president of the court, that initiatives to achieve a better relationship between the costs and benefits of litigation in the UK had not merely proved elusive, but had been ‘missed by a very wide margin indeed’. He further described the costs of the proceeding relative to the quantum of the dispute as ‘disturbing’.

Put simply, the justice system is prohibitive from a financial perspective to a large majority of potential claimants in this and most other common law jurisdictions. In that context, funders have and will continue to become increasingly prominent players in the litigation market. When you have a new enterprise or industry entering something as traditional as the legal market, which deals with the rule of law, then naturally questions will be raised about the ethics of it. However, I would note that the courts here have accepted litigation funding and indeed its utility was espoused in the recent Jackson Review.

The legal market is now opening up somewhat, whether via external investment into law firms established as alternative business structures, or by the ability of English lawyers to act on a contingency fee basis. We see the TPF industry as just one component of this sea change.

How wary is the legal market of TPF in light of recent industry issues such as Argentum exiting the market and the failure of the Excalibur case?

‘On balance we believe regulation benefits both litigation funders and consumers of their product.’

Certain lawyers, or certain firms, may have been put off approaching third-party funders due to perceived problems within the industry, which have been well publicised. Probably of more concern to practitioners though, is when they say they have had a direct negative experience with a funder. This may come in various forms, for example a funder taking too long to make a decision, or that decision being a ‘no’ when the practitioner assumed it would be a positive one.

But I do not think the majority of the legal profession has been scared off TPF. Applications for our funding are being submitted at a healthy rate and most lawyers I have met with have expressed approval of the concept of TPF and that, in the long term, it is a positive thing and is ‘here to stay’.

Does self-regulation work and should the industry be regulated? Who should regulate the industry?

At the moment I think it does work. The Association of Litigation Funders (ALF) is a good first step for what is a self-regulating industry, in the absence of any government initiatives to regulate it. Bentham Europe is in the process of seeking to join the ALF. The ALF, via its code of conduct, provides clear rules that govern the relationship between funder and client, outlines the parameters of what a funder can and can’t do and stipulates capital adequacy requirements.

More time may be required to assess whether stricter or formal government regulation is required. Rushing into regulation before the industry is fully developed and understood risks restricting growth. However, as the industry matures, we believe that litigation funding should be regulated just like any other financial service by the Financial Conduct Authority.

On balance we believe regulation, whether voluntary or otherwise, benefits both litigation funders and consumers of their product. Looking to the Australian market, Bentham IMF has for a long time advocated the regulation of the industry and this is the position we will adopt in the UK and Europe.

Is litigation funding preferable for clients rather than CFA or DBA and how does this play out in the post-Jackson landscape?

Litigation funding, along with conditional fee agreements (CFA) and damages-based agreements (DBA), are all options to reduce the financial risk associated with litigation and the prospect of an adverse costs order. Fundamentally, they allow people and entities with a good claim but no funds, or the willingness to risk their own capital, the opportunity to pursue the claim. The advantages of litigation funding over lawyer-based deals include that the third-party funder provides: an independent appraisal of the claim, support from well-resourced decision makers who are experts in their field, costs control management and flexible funding terms. Further, in certain cases, the funder will also offer adverse costs cover, which means the client avoids the necessity of, and complications inherent in, acquiring after-the-event cover.

Funding from a third-party funder rather than via a CFA or DBA provides financial support for the lawyers as well as their clients, but leaves the lawyers to conduct the case without any potential fetter on their fiduciary duties.

Is the TPF market in the UK becoming more competitive? If so, how is this affecting pricing?

I would observe that the TPF market appears to be competitive at present, based upon the facts that: there seem to be numerous funders presently in the market with sufficient capital to invest in multiple cases; cases submitted to us for review are being simultaneously reviewed by our competitors; and practitioners we are meeting in this market are professing to having established working and ongoing relationships with other funders.

Where there is a particular case that more than one funder has reviewed and wishes to fund, inevitably pricing pressures will apply. However, I suspect at present that this is not a common scenario, with many funding proposals not being of sufficient quality to induce a competitive bidding process.

What do you see as the biggest upcoming trend in litigation?

Multi-jurisdictional claims are common now and will continue to be litigated in the UK courts. Large multi-party claims involving complex financial instruments, securities in the equity and debt markets and financial services products will become more prominent. For example, at present two large-scale group actions are under way against two major UK banks in the courts.

We also believe the number of cartel cases in Europe will increase as a result of increased consumer awareness of legal redress in this area, plus the benefit of the recent (April 2014) European Commission Directive on ‘follow on’ and perspective changes to permit funding of open class damages claims.

In the long term, I believe that multi-party environmental cases will also increase in frequency and prominence.

What are the growth areas you foresee for litigation funding?

Litigation funding is becoming increasingly international. For example, UK funders are now funding claims in Australia and New Zealand, US plaintiff law firms are funding claims in Europe, and Australian funders are funding in the UK. So, geographically, growth is occurring and this will only continue.

In general, third-party funders are looking for ever-increasing high-value claims. Funders who possess the requisite funds and operational capacity will follow litigators into large, complex and increasingly multi-jurisdictional litigation.

Arbitration is another growth area. There is no doubt funders are seeking to invest in arbitration cases both here and in Paris. Certain funders are apparently already quite active in the funding of arbitration claims.

What are your views on how the TPF markets in Australia and the UK/Europe differ?

The Australian litigation funding market is more mature and established than its UK and European counterparts. The Australian market is probably more favourable for third-party funders also, in as much as funders are able to exercise more control over cases they invest in (based upon the High Court’s Fostif decision in 2006). In Australia, class action legislation allows for the efficient conduct of funded multi-party claims and there is probably broader recognition of the TPF product leading to increased requests for funding.

It has been said that the TPF market is presently larger in the UK than it is in Australia. My view is that this depends on how you measure the markets. In the absence of data, for example as to the number of cases presently funded in the UK, or their estimated combined value, it is hard to assess this market’s size. There are certainly more established third-party funders here, but perhaps not as many funded cases or indeed large-scale claims to justify the perception of a larger UK market. But certainly the prospect of the market growing here (and in Europe) to a significantly larger size than in Australia is probable.

Bentham Europe will operate here in a similar manner to how Bentham IMF has historically operated in Australia, by being proactive in case identification, development and strategic input. We are looking to reinvent, in a way, the market for third-party litigation funding in Europe through our heritage. We see the UK and European markets as significant growth opportunities in respect of both multi-party and single-party claims.

How do you deal with issues such as client confidentiality, conflicts of interest and the ‘control’ issue?

In each matter we are asked to consider funding, the first step is to agree and sign a non-disclosure agreement with the funding applicant. This protects the confidentiality of the information provided to us and also retains the legal professional privilege the applicant has in respect of certain of that material. We are very conscious of our clients’, and prospective clients’, confidentiality.

In terms of perceived or potential conflicts between funder and client, Bentham Europe has a stringent conflicts management policy in place. This policy was formulated in Australia through Bentham IMF, a jurisdiction in which federal legislation requires all funders to have such a formal policy in place and to monitor it continuously.

The other means by which conflicts are managed, for example where the funder and client disagree as to settling a case, is via the litigation funding agreement. Where client and funder cannot agree as to whether an offer to settle a claim is reasonable, this issue is put to independent Queen’s Counsel to provide their advice on it. This advice is binding on both parties. Note, in our experience, it is very rare for a settlement to be in dispute between funder and client. In Australia only once in close to 15 years and across over 150 funded cases has a settlement offer been in dispute and referred for QC’s advice. Otherwise, any other issues that arise between funder and client that cannot be agreed are, under the litigation funding agreement, referred to arbitration.

As for the control issue, our interest is in screening potential cases, conducting the due diligence and deciding whether or not to support those cases through investment. We accept that in the UK, a funding agreement which permits a funder to ‘control’ the funded litigation would be contrary to public policy, and we have no desire to contravene that. This is evidenced by our application to join the ALF, who have a formal and clear policy in place in this regard.

How do you respond to criticism levelled at funders that they are too risk averse, slow to make decisions, etc?

Funders need to be somewhat risk averse, any funder that isn’t won’t be around for long. The level of risk acceptable to a funder as compared to that acceptable to the prospective client or lawyer is frequently not in alignment. The divergences of views in this regard can be due to myriad reasons. However, if funders are transparent as to their investment criteria and due diligence process up front, over time hopefully the various stakeholders will better understand each other’s processes and expectations.

What riles clients and their lawyers is when funders take too long to make a decision, and that decision is ultimately a ‘no’. Their frustration can be compounded by poor or infrequent communications. This frustration is understandable, so we seek to always provide a service that turns around an answer in as short a timeframe as possible. It is a two-way street, however, the provision of a timely decision is only possible with access to all of the required material upon which to make that decision. Again, the exact composition of that information is hopefully something that is better understood between the stakeholders as their interaction continues.