It’s been a turbulent year for third-party funders, from court battles shining a spotlight on risky investments to new entrants and exits. Legal Business scopes the changing landscape for litigation’s bankrollers.
In early autumn, high-flying disputes lawyer Harvey Rands was taking a vacation in upstate New York. While many spend breaks catching up on books and perfecting golf swings, Rands, one of Memery Crystal’s highest billers, held in his possession an embargoed draft of the Excalibur costs judgment, a Commercial Court ruling on one of the most controversial pieces of litigation in recent years. Crucially the ruling, made public on 23 October, found third-party funders liable for indemnity costs in what became a precedent for an industry historically dogged with a controversial reputation.
By this time, Rands, who represented the costs claimants, was already back in London and working on another matter. Having had the chance to mull over the result for some time, he reflects: ‘It sends a warning to the funders. Frankly, if you put it in perspective, funders will take this in their stride. They’ll perhaps price the cost of their funding a bit higher and want a larger cut of the action.’
Unlike the original court case, where a packed courtroom witnessed Justice Clarke dismiss Excalibur Ventures’ multiple claims at the Rolls Building in September 2013, no one turned up to hear the costs judgment. ‘The judge made it clear he wouldn’t have time to read out the judgment in what’s affectionately known as the consequential argument,’ says Rands. But, the reaction ultimately generated much comment from the profession. While the consensus view in the industry is that the case won’t have a huge impact on professional funders known for promoting good practice, many admitted it adds a new dimension into the debate over how speculative the business is.
Here lies Excalibur
Fully named Excalibur Ventures v Texas Keystone & ors, the 2013 High Court battle saw Clifford Chance (CC) client Excalibur Ventures mount a $1.6bn claim against Texas Keystone and Gulf Keystone over the rights to exploit and develop petroleum fields in Iraqi Kurdistan. One of the longest-running trials of 2012/13, lasting 12 weeks, Justice Clarke dismissed the claimant’s case as ‘an elaborate and artificial construct… replete with defects, illogicalities and inherent improbabilities’.
This public defeat also saw nine funders, including New York-based hedge fund Platinum Partners, litigation funding specialist BlackRobe, and Greek shipping brothers Andonis and Filippos Lemos, lose their investment, and controversially it emerged that CC partner Alex Panayides, who helped secure the £50m funding pot, had a brother serving as an employee of funder Lemos. Such was the peculiarity of the case, that what came to light was a lack of due diligence and the extraordinarily high chance of success afforded to it by CC. It was described by Justice Clarke as ‘spurious claims pursued relentlessly to the bitter end’.
‘The fact that a number of funders who you would have expected to get involved did not get involved shows that normal rules weren’t in play for this case,’ argues Jeremy Marshall, a litigator who recently joined Australian funder Bentham’s European arm from Irwin Mitchell. ‘It might have been because the numbers were so large that all parties lost their sense of objectivity, but since the factual position and merits appeared clear from the outset, I would expect searching questions are now being asked as to what funders were not told.’
Principally, the judgment finds funders liable for indemnity costs because they backed Excalibur’s claim in return for a share of potential rewards of the litigation. Secondly, and equally as significant, a funder’s obligation to contribute to the successful opponent’s costs should be up to the same amount the funder paid to the unsuccessful claimant, known as the ‘Arkin cap’. This means the public interest in litigation funding should be weighed against the right of a successful opponent to obtain recovery of costs from the losing party or its funder. ‘The judge recognised that litigation funders are between the rock of indemnity costs and the hard place of champerty,’ says Rands. ‘The message in his judgment should cause litigation funders to avoid hopeless cases and focus on those with strong merits.’
For many, this is an expected turn of events and Calunius Capital chairman Leslie Perrin asserts: ‘Everyone is trying to big up Excalibur, but there is very little in the judgment that should have surprised anyone who really understood funding. Surely if a funded party is held liable for indemnity costs, then the funders might be liable on that basis, too? You’re trying to manage risk here so you make prudent assumptions’.
Clive Zietman, a disputes partner at Stewarts Law who is currently embroiled in the ongoing third-party-funded group action against The Royal Bank of Scotland (RBS), adds: ‘Excalibur won’t have much impact. If you think about the general risk in the cases they’re underwriting for a big reward, well, this is just another feature of the whole melting pot of risk they need to factor in. There’s a whole lot of money out there for funding and they’re all chasing the same cases: impoverished client, excellent merits on the case and big claimant numbers. There’s only so many cases that tick all the boxes.’
Whether Excalibur dissuades the profession from seeking third-party funding, the reality is external funding is not going anywhere. The disputes market is enjoying a robust performance and 2013 saw a sharp rise in high-value commercial litigation as major disputes arising from the recession filter down to the courts in greater numbers, according to research released in April by RPC.
Statistics compiled by the law firm show that 1,353 cases were launched in the Commercial Court in 2013, up 16% on the 1,167 cases started in 2012. It further indicated that banking litigation will continue to be a key area for high-value claims, as PPI mis-selling, Libor and interest rate swap scandals faced by financial institutions continue to rage on, creating a pipeline of opportunities for funders.
Don’t bother – damages-based agreements bomb while after-the-event insurance proves hardy
One of many attempts at reforming litigation costs in recent years, damages-based agreements (DBAs), which entitle a lawyer to claim a percentage of their client’s damages by way of fees, have so far fallen well short of their initial billing.
Having last April replaced the ‘loser-pays’ status of success fees under conditional-fee agreements, it was unclear whether the rules permitted a hybrid model that would allow lawyers to blend fixed fees or hourly billing with a DBA. Essentially it serves as a risk-sharing exercise between the claimants and the advising law firm, which would, in theory, allow lawyers to hedge the litigation risk they have already taken. Without this option, traditionally risk-averse lawyers have shunned DBAs, not willing to chance running into cash flow problems during litigation.
While Lord Jackson recently remarked at The Law Society’s commercial litigation conference in October that the government should not be swayed by ‘powerful vested interests’ opposing the introduction of a hybrid model for DBAs, in November the Civil Justice Council announced that the government has ruled them out altogether. ‘DBAs are still a nightmare,’ says Enyo Law partner Annabel Thomas. ‘Regulations are a mess. There was talk that revised regulations would come out but take-up of DBAs is tiny. It just doesn’t work.’
Frustrated funders are trying to take the situation into their own hands. Burford Capital and Harbour Litigation Funding already adopted the model, while Therium has recently launched its own version, with founder and chief investment officer Neil Purslow commenting that this ‘is a major plank of where we’re going – sharing reward and risk with law firms’.
With a general election set for May 2015, it is unlikely the issue will get anywhere near the upper reaches of the government’s agenda, meaning lawyers will have to decide for themselves.
Most veteran litigators have decided clearly that they aren’t using hybrids at all until the regime has been clarified, with some wags dubbing them ‘Don’t Bother Agreements’.
More positively, after-the-event insurance (ATE), the policy taken after a dispute has arisen to protect against the risk of having to pay the opponent’s legal costs if you lose, is more easily wrapped up into litigation, with funders bringing simplified products to the post-Jackson environment.
‘The market for ATE is pretty good at the moment,’ says Calunius Capital chairman Leslie Perrin. ‘People’s appetite changes, you sometimes can’t tell what affects it – perhaps their internal issues. But we can place anything we want to place.’
Taylor Wessing disputes partner Laurence Lieberman agrees that ATE remains an important feature for the profession and adds: ‘Since Jackson, the premium is no longer recoverable from the other side but funders still require it to be put in place. It remains an innovative and developing market.’
‘They don’t want to lose money’
Funders also point to more positive attitudes towards the sector from the judiciary as another mark in the industry’s favour, leaving behind archaic perceptions of champerty and maintenance.
At Harbour Litigation Funding’s second annual litigation funding lecture in May, Lady Justice Gloster delivered a speech in front of an audience at Gray’s Inn on the evolving landscape of commercial litigation, one year after Supreme Court President Lord Neuberger referred to funders as ‘the life-blood of the justice system’. Exploring whether the UK courts are meeting the demands of the international business community for delivery of effective dispute resolution procedures, as well as assessing whether the courts are enabling an appropriate legal environment, Gloster’s speech was minimalistic in her views on funders compared to Neuberger.
Gloster further noted that British lawyers report roughly £3.5bn in annual income from clients abroad, and the UK should naturally wish to offer a justice system where domestic and international businesses have the confidence to resolve their disputes. Overall, her comments signal a growing acceptance by the judiciary on alternative forms of pursuing justice.
Nevertheless, many of the City’s disputes lawyers are not so easily convinced. One high-profile Magic Circle disputes veteran tells Legal Business: ‘I don’t want to waste your time. I have never used funding, I don’t like it and I never will.’
CC partner Simon James asserts similar sentiments, and observes: ‘I don’t think people who have to deal with funders welcome the idea greatly because it’s an extra complication on top of what might already be a complicated case and involves different, sometimes competing, interests. But if it’s the only way the clients can pursue a claim… it’s something solicitors have to put up with. Solicitors have got better at offering it. Solicitors have become better at introducing their clients to ways of funding their cases, if that’s necessary.’
He is further sceptical of the judiciary’s acceptance of funding: ‘The judiciary has reluctantly accepted – with the disappearance of legal aid – that third-party funding is a necessary means of securing access to justice. If someone potentially has a good claim and it’s the only way the client can pursue it, the judiciary accepts that the involvement of a third party is better than the claim disappearing altogether.’
Set against that, the view can often be more upbeat on funding at pure-play disputes outfits than corporate law firms more used to defending large companies.
Stewarts Law’s Zietman believes many solicitors don’t advise their clients properly at all on the prospects of funding, and counters: ‘Too many solicitors are complacent and aren’t properly aware about damages-based and conditional-fee agreements – the Magic Circle are not properly acquainted with this and they’re not up to speed. I don’t get it. Funders are sophisticated and they often refer cases to be assessed independently and have them filtered to stop bad cases proceeding. The UK is not like the US where funders just shoot from the hip with impunity and there are no cost consequences.’
No matter. Even against any negative rhetoric put forward by many of the most seasoned disputes players, the funding industry continues to grow, not just through financial performance but through the emergence of new market entrants as well.
Plenty of room
This year notably saw leading Australian-listed funder Bentham IMF establish operations in Europe, and in particular the UK and The Netherlands, after sealing a joint venture with US hedge funds. Based in London, the new arm set about recruiting a local disputes veteran, hiring Irwin Mitchell’s Marshall, formerly the head of disputes at the firm’s London office, as its chief investment officer. Targeting high-value commercial litigation and international arbitration claims, the funder has outlined plans to focus on cartel cases, multi-party actions, and securities litigation with a claim value of over £5m in single-party cases and more than £30m in multi-party cases.
‘We’ve always said there’s plenty of room for good players in this market,’ says Harbour co-founder Susan Dunn. ‘We’re funding cases in Australia and that’s the way it’s going – becoming much more international that it’s entirely sensible for Bentham to seek a role to play here.’
‘Bentham is a great addition,’ says Nick Rowles-Davies, managing director at Burford Capital, who himself was recently recruited from fellow funder Vannin Capital. ‘It hasn’t been around as long as some funders but has a fantastic track record. It shows real funders with cash see this as a market to be in – it’s a positive sign for the industry.’
Although Argentum denied any involvement with the fundraising activities of Centaur, events came to a head when it volunteered to leave the ALF, leaving it with seven members. The process was, according to many funders remaining in the ALF, relatively swift and easy. Having previously provoked some criticism for its lack of teeth, if the funding industry wanted the ALF to be taken seriously as a body, the timing couldn’t have been better. In early spring the ALF took steps to address suggestions that it lacked transparency by introducing a new complaints procedure and capital requirements.
The newly created complaint process, written by Wilberforce Chambers’ Joanna Smith QC, will see complaints undergo an initial investigation by the body’s general counsel (GC), and referred to an independent legal counsel, who must be a litigation partner or a QC. Although the sanctions themselves are viewed as what could charitably be described as modest, with potential punishments, including suspension of membership and fines payable of up to £500, the ALF’s regulatory changes require funders to maintain access to £2m in capital and, more significantly, disclose the source of that funding.
‘We’re certainly not in it as part of the compensation culture,’ comments Bentham chief information officer Marshall, whose organisation expects approval from the ALF in due course. ‘We’re looking at securities cases from a corporate governance perspective. We will not be funding speculative claims in the hopes that we can waltz off to the Bahamas.’
It doesn’t appear that the majority of remaining funders – Burford; Vannin; Harbour; Redress Solutions; Calunius; Therium Capital Management; and Woodsford Litigation Funding – will exit the market anytime soon.
Founded in 2007 by former Shearman & Sterling lawyer Brett Carron (who is now GC at Arrowgrass Capital Partners) alongside former Wragge & Co lawyer Susan Dunn, Harbour invested £40m in litigation in England and Wales last year with an aggregate claim value in excess of £1bn. It now has £180m of capital for investment in litigation and arbitration claims. It further appointed Rocco Pirozzolo from insurer QBE, also a former working party member of the ALF, involved in implementing the Jackson reforms to civil litigation costs, as its new director of litigation funding.
US funder Burford announced strong returns for the half year in June, with a robust 89% increase in profit before tax to $18.2m while income for the six months was $27.4m, a 40% rise compared to last year. Alongside the recruitment of Rowles-Davies from Vannin in April to lead its business origination activities in the UK, the firm is currently in the process of beefing up its business development, marketing and public relations teams. Demand for Burford’s capital was reflected in its $62m injection of new capital during the period, constituting a five-fold increase compared to 2013.
Vannin itself in October announced the hire of Rosemary Ioannou from Allen & Overy as senior counsel, as well as Freshfields arbitration lawyer Yasmin Mohammad in June. Mohammad was the second hire to Vannin’s Paris arm in less than a year after fellow arbitration lawyer Iain McKenny joined from Latham & Watkins. Woodsford, meanwhile, having upscaled its resources in 2012 by acquiring UK third-party funding pioneer IM Litigation Funding, this year recruited CMS insurance duo Nicholas Moore as claimant investment officer and Vere Wheatley as chief commercial officer.
Calunius, which in April raised an extra £50m to fund litigation and arbitration, this year recruited German lawyer Diana Gruen as a case assessor.
Therium, which in 2012 agreed its first mandate to manage an account for an institutional investor, acting as an exclusive investment adviser for an initial £5m fund investment in a portfolio of litigation and arbitration-related claims, is understood to be funding the widely publicised Lloyds Bank group action with an initial capital injection estimated at around £12m, alongside a New Zealand-based investor.
Woodsford Litigation Funding has invested in hires including John Beechey, president of the ICC International Court of Arbitration, to its investment advisory panel and acquired IM Litigation Funding – which pioneered funding in the UK – in 2012.
Future gazing
It is clear the appetite for litigation funding by lawyers will not match up with the rhetoric of the funders themselves for the time being. Taking a look at what the industry’s biggest players will typically invest in these days, from financial services and professional negligence litigation, to investor-state treaty arbitration and cartel-based competition claims, the collective pursuit of big-ticket returns (although run against a stringent ‘strong merits’ criteria) means they will understandably continue to be choosy about the types of cases backed.
Financial services litigation will continue to serve as a long-term investment for funders, with RBS and Barclays remaining a fixture on the disputes scene for the foreseeable future. Lloyds Banking Group (LBG) is now facing similar woes with High Court proceedings recently filed for £6bn in damages against former directors Sir Victor Blank, Eric Daniels, Timothy Tookey, Helen Weir, George Truett Tate and LBG over allegations of losses suffered as a consequence of the bank’s acquisition in January 2009, and the subsequent recapitalisation of the merged entity. According to many sources in the City, supermarket giant Tesco is now likely to face a claim as a result of the £250m profits over-statement this year.
There is also a rebound in low-value claims, and Burford for example, has launched a range of products to deal with those cases ranging from £25,000 up to its traditional big-ticket litigation. ‘We’re currently letting it filter through to the market – we’ll see what the uptake is,’ notes Rowles-Davies.
There is little doubt, however, that as funders refine their techniques and broaden their disputes portfolios, they will continue to face challenges. From brushing away images of ambulance chasers and speculative gamblers to criticisms of the industry’s transparency and regulation, funders exist in part for the obvious reason that there is robust demand for litigation advice for claimants that struggle to fund conventional litigation.
The rise in London’s status as a global disputes hub over the last ten years, together with a more combative regulatory approach towards large companies, have only further fuelled that demand.
As Rands concludes: ‘Claimants don’t care where the money comes from. Those claimants requiring funding are only really worried about one thing – how much of the spoils they have to give up. Many funders frankly have no bargaining power and for particularly attractive claims, they fall over themselves. They simply want the cheapest deal and to be assured funders will see it through to the end of the trial. It’s really no skin off the claimant’s nose.’ LB
sarah.downey@legalease.co.uk