As third-party funders enjoy robust growth within a buoyant disputes climate, Legal Business assesses current attitudes towards litigation’s controversial bankrollers.
Third-party litigation funders have suffered bad PR for more than 40 years. Often depicted as lurking in the shadows of the courtroom, waiting to collect their share of damages, lawyers have historically been curiously wary of funders since their inception.
This perception has softened a little more recently, with Supreme Court President Lord Neuberger referring to them as ‘the life-blood of the justice system’ at Harbour Litigation Funding’s first annual lecture in May. But while Neuberger’s words signalled a growing acceptance of third-party funding throughout the legal community, many funders themselves feel there’s still much work to be done.
‘If you look back to when litigation funding was in its infancy, a lack of transparency and accessibility meant that litigation funding struggled for credibility,’ says Matthew Reach, head of legal at Argentum Litigation Services.
Harbour’s co-founder Susan Dunn is particularly vexed by it all. ‘Why do we get so emotional about litigation?’ she says. ‘Many businesses fund all aspects of their activities – why is litigation this thing that gets people so exercised? I can’t get my head around why there’s this great spotlight on what we do when there’s so much protection. The judge is there – if he thinks somebody is up to no good, he has all sorts of powers to stop that. We keep going on about more regulation when you’ve already got all these mechanisms of protection for the funded claimant. It bemuses me.’
Like it or not, with more than £1bn worth of funds available globally to invest in commercial cases, third-party disputes funding has become a fundamental fixture in the economics of litigation. And there are plenty of opportunities ripe for the picking. According to a recent survey by City law firm RPC, major commercial disputes taken to the High Court have risen by 23% in the last year as the six-year limitation period for launching credit crunch-related claims looms. So for funders, it’s just the small matter of finding the winning ticket.
Lifting the veil
One particular aspect of funders’ behaviour that fuels the climate of suspicion is that they are steadfastly opaque about which cases they’re funding or seeking to fund. Nonetheless, the odd case slips through the cracks and becomes public, providing some insight.
The most recent funded case to become public was the High Court battle involving Clifford Chance (CC) client Excalibur Ventures, which brought a $1.6bn claim against Texas Keystone and Gulf Keystone over the rights to exploit and develop petroleum fields in Iraqi Kurdistan. In one of the longest-running trials of 2012/13, when Justice Christopher Clarke dismissed Excalibur’s multiple claims in front of a packed courtroom at the Rolls Building in September, the gallery cheered in delight. But the result was every funder’s worst nightmare. Working on the case was CC partner Alex Panayides, who had helped Excalibur secure £50m of litigation funding through a number of ad hoc investors, including New York-based hedge fund Platinum and litigation funding specialist BlackRobe, alongside Greek shipping brothers Andonis and Filippos Lemos. Not only did they lose their investment, but controversially it emerged that Panayides’ brother was found to be an employee of funder Lemos.
‘Excalibur was a stonking great loss,’ says Calunius Capital’s chairman, Leslie Perrin. ‘It was a funder’s complete catastrophe. It was the type of case that is thought to be at the epicentre of what funders do – a David against Goliath fight, with David willing to litigate but not being able to do so.’
A sore blow was dealt in Excalibur, but equally it has given funders food for thought. Perrin adds: ‘These days, funders are beset by very solvent companies who are able but not willing to stand their own costs risk. Funding is recognised as a rational hedging instrument now – it’s not David versus Goliath, its Goliath against Goliath.’
Excalibur also gave funders a credibility boost generally, as the matter was considered a highly risky claim – exactly the type of case that they usually steer well clear of. In fact, traditional funders typically reject 80% of applications; to be considered a potential candidate for funding, a claimant’s chances of success should be at least 51%. James Delaney, broker and director at TheJudge, explains: ‘Often, funders will only opt to fund the sure-fire winners. Because Excalibur was such a mess, there’s a question mark over whether it will deter that kind of speculative investor on an ad hoc basis, leaving it to the established players to run the funding market.’
Prior to Excalibur, Innovator One was a high-profile funded case which didn’t quite go as planned. In a £50m professional negligence claim taken by 555 claimants against City law firm Collyer Bristow, allegations were made that the firm was in breach of financial services regulations. Reported to be the largest third-party funded case of 2008 with $8m (£5m) worth of litigation funding secured from Allianz ProzessFinanz (which later withdrew from the European funding market), brokered by Calunius Capital and TheJudge. The claim was dismissed by the High Court in 2012, leaving the funders facing a hefty costs bill. Leave to appeal was given but Collyer Bristow ended up settling the case in July 2013, just days before it was due to be heard at the Court of Appeal.
‘What losing cases show is that litigation funding works because the claimants in these cases had their costs paid for by somebody else, so they didn’t lose any money and the adverse costs order would have been paid by funders and the insurers. Even in the worst catastrophe, funding in a sense works,’ says Perrin.
Both Excalibur and Innovator One serve as reminders of why third-party litigation funding is viewed as a speculative and risky business. And, as Nick Rowles-Davies, a consultant at Vannin Capital, explains: ‘Funders don’t disclose who they’ve funded so all we’ve seen publicly is catastrophic failures. It’s only in those cases that the funding is disclosed. Funders don’t want to gloat – and there are potential privilege issues. Part of what makes funding attractive is that it’s private. It’s very much referred to as a dark art and there hasn’t been much light shone on it until recently.’
Nonetheless, Harbour’s Dunn takes a more pragmatic view of these cases. ‘These losses are good,’ she says. ‘They may not feel good to the funders at the time but there’s a lot of assumptions made about funders in general – that we only want to fund sure-fire winners, that we’re too conservative. But they show how unpredictable the business we’re in is. That’s important – it reminds people why we charge what we do – those losses are total losses and you need as broad a portfolio as possible to support the inevitable losses in any given portfolio.’
Join our club: the Association of Litigation Funders
Described as a quasi-regulator-come-quasi-trade association, the Association of Litigation Funders (ALF) was established to promote good practice across the funding industry in November 2011. A code of conduct for members of the ALF was also published and included multiple key criteria suggested by Lord Justice Jackson during his civil litigation costs review.
With nine funders in the group’s membership directory, fronted by three of the industry’s biggest names – Leslie Perrin (Calunius Capital), Susan Dunn (Harbour Litigation Funding), and Timothy Mayer (Woodsford Litigation Funding) – the ALF has provoked some criticism from funders and litigators alike, who believe the body lacks teeth yet simultaneously acts as the benchmark from which to choose credible funders.
Put plainly, not just anybody can join – to be considered as a potential funder of the ALF, parties need to satisfy certain criteria, namely a minimum certifiable capital adequacy of £2m. In other words, no brokers allowed.
‘The ALF has been effective within limitations,’ says Perrin. ‘It’s toughening up its Code and starting to be a force to be reckoned with. It has achieved quite a lot in terms of differentiating between brokers and funders. Before the Code of Conduct, lots of people who called themselves funders didn’t have any money. We’ve more or less moved those people into another segment of the market. I’m not knocking them, they do a valuable service – but they aren’t funders and they shouldn’t pretend to be.’
The Code also affords rights to the funder too, allowing them to terminate funding and approve settlements as long as they behave reasonably and only withdraw from funding in specific circumstances. Potential claimants would be happy to know that when a dispute arises over a termination or a settlement, a binding opinion must be obtained from an independent QC, who has been either instructed jointly by the parties or appointed by the Bar Council to assess matters.
Funders are further prevented from taking control of the litigation or settlement negotiations, and from causing the litigant’s lawyers to act in breach of their professional duties. Nonetheless, because of their monetary interest in the case, they will expect to be kept informed of its progress. Straying from that provision and neglecting to keep the funder in the loop can lead to withdrawal of capital reserves completely.
It all appears at first glance as a fair balance between the needs of the claimant, lawyer and funder. However, there’s one major snag – adhering to the code is entirely voluntary. There are also questions over how effectively a self-regulated body can assess and enforce a potential breach of its rules. Jackson initially endorsed this voluntary code but noted that the question of full statutory regulation should be re-visited if and when the market expands.
However, as Enyo Law litigator Annabel Thomas argues: ‘The code is better than nothing. There’s always scope for improvement. It could be tightened up considerably but I always say to a client: “If you deal with a funder, make sure they’ve signed the code of conduct.”’
Harbour’s Dunn counters that the code doesn’t need greater regulatory power. ‘These are private commercial arrangements – we’re not in the consumer law area. Lawyers using funding like knowing that there has been some verification on the capital adequacy of a funder and they like knowing that the agreement used has been independently reviewed to be compliant with the code. We’ve done our job.’
Even more comforting is the fact that the UK’s funding industry has a much more reputable standing than that of other jurisdictions, such as Australia and the US where there is very little in the way of a quasi-regulatory and trade association like the ALF to provide stability and confidence in the market.
Argentum Litigation Services’ Matthew Reach comments: ‘The situation in Australia is very different to the UK because funders generally have an unfettered right to terminate. In that sense funded litigants there have less protection than they do here. Some would say that, historically at least, this enabled funders to exert more influence over the way funded claims are handled by solicitors. But our [the ALF] code was designed in the UK to give claimants more protection and make the funders’ position resemble more closely that of a traditional private paying client.’
The US, meanwhile, is even more unpredictable. ‘The US is slightly schizophrenic in its approach to all of this and is figuring out what it thinks about funding per se,’ says Dunn. ‘This is because there’s a state by state approach to things, so they struggle to have a consistent approach on how they deal with funding.’
So, while there persists fundamental practical and theoretical questions surrounding the usefulness of the body, the ALF is still at the early stages of gestation.
‘The ALF’s work for the last year has been putting in place a self-regulatory regime to give confidence to the market and to the public,’ says Vannin Capital consultant Nick Rowles-Davies. ‘Now, they’ll start the focus on promoting the association. You’ll see that change – there’ll be strides taken.’
Ones to watch
Undeterred by publicly humiliating defeats endured by others, the UK’s funding industry has a small but heavyweight band of players, all of which are listed in the Association of Litigation Funders’ directory, a body established in November 2011 to promote good practice (see box, ‘Join our club’). As membership requires funders to prove certifiable capital reserves and follow a code of conduct voluntarily, it offers a degree of confidence to the legal market that only the healthiest and more reputable funders can join. With nine members in the club so far, it is expected that hundreds of millions of pounds will be poured into litigation funding.
Both Vannin Capital and Harbour unveiled substantial funding boosts in 2012. Since its creation in 2006 by current chief executive and former Shearman & Sterling lawyer Brett Carron, alongside former Wragge & Co lawyer Dunn, Harbour has seen applications rise from 25 to 40 in the last year alone, and in 2011 invested £40m in litigation claims worth over £1bn.
But while Harbour claims to be the UK’s biggest litigation funder with capital reserves of £180m, Vannin, which launched in 2010, was allocated £100m reserves in 2012 – four times what was originally planned. The revised capital reserves will enable Vannin to expand in the US, and it confirmed in October 2013 that it is funding a £450m negligence claim brought by the owner of the largest oil and gas project in Azerbaijan against Credit Suisse International over the sale of Caspian Energy Group.
In May 2012, Harbour announced that it had successfully closed a new fund, raising £120m of additional capital, which would primarily be invested in UK-based commercial disputes. The fund portfolio will comprise over 50 litigation and arbitration cases with a minimum damages value of £3m. The fund has a six-year life span, with an annual targeted spend of over £40m over a three-year commitment period. Investors in the fund include endowments, family offices, private wealth managers and high-net-worth individuals.
The most high-profile ongoing case in Harbour’s portfolio is a £164m claim against Barclays over allegations that the bank misused confidential information in its 2010 takeover of Tricorona. Dunn told Legal Business in April that Harbour had decided to fund the Barclays case based on its usual case criteria assessment – a strict fourfold approach that considers whether the defendant is creditworthy; if the cost of the case is proportionate; if the case has strong legal merit; and how experienced the legal team is.
Burford Capital, meanwhile, announced its half-year results in September 2013, showing an 86% increase in income from the litigation portfolio alongside a 65% increase in profit before tax to $9.7m ending June 2013. The company has committed $373m to investments since starting life nearly five years ago and averages a return of $1.61 for each dollar invested. The AIM-listed funder also embarked on an acquisitive streak too, having purchased UK legal insurance provider FirstAssist Legal Expenses, now Burford UK, in February 2012.
Calunius Capital established its litigation risk fund in December 2010 with £40m of capital to invest in disputes. One particular high-profile quarrel that it has backed is the long-running legal action between Elvis Presley’s estate and RCA records, a claim that alleges Elvis was unjustly exploited by the record company. Filed in August 2011, the estate seeks more than $9m in backdated royalties and a share of future revenues. ‘We are finally getting revenge for “the King”,’ Perrin told The Guardian in 2012.
Therium Capital Management, meanwhile, agreed its first mandate to manage an account for an institutional investor in April 2012, acting as an exclusive investment adviser for an initial £5m fund investment in a portfolio of litigation and arbitration-related claims. It aims to increase the size of the fund to £15m.
Elsewhere in the market, Woodsford Litigation Funding scaled up its resources in 2012 by acquiring IM Litigation Funding – which pioneered third-party funding in the UK – including the name, its goodwill, website and ongoing rights in certain invested claims. It also recently appointed John Beechey, president of the ICC International Court of Arbitration, to its investment advisory panel in the hope of further boosting its capabilities. With more than 2,750 bilateral investment treaties (BITs) currently in force, disputes are inevitable. As such, investor-state arbitration is a highly lucrative field for the likes of Woodsford to place its bets. Company director Jonathan Barnes says: ‘Like a number of other funders we remain positive on commercial and investment treaty arbitration.’
Then there’s Guernsey-registered Juridica, the first specialist litigation fund to float in the UK and listed on the London Stock Exchange. Its half-year results ending 30 June revealed the company had invested or committed approximately $161.4m into cases across 16 investments, with a gross internal rate of return from completed investments at 82%.
Some funders are even straying into new territory. In May, Argentum agreed to bankroll a multi-million pound claim against The Royal Bank of Scotland (RBS) in London’s High Court. With the floodgates opened for cases against the bank following its government bailout in 2008, investors are seeking to recoup their losses following its nationalisation. Argentum is funding one of two major actions – a group of 21 claimants, including several UK and international financial institutions and pension funds, who are suing RBS over a rights issue in April 2008, in which RBS sold its shares at £2 per share. The claimants allege that the prospectus on which the rights issue was based was ‘defective’ and contained material misstatements and omissions. Stewarts Law filed the claim in March, led by head of litigation Clive Zietman and instructed 3 Verulam Buildings’ Andrew Onslow QC.
That Argentum is funding this is particularly unusual given it will be on a previously untested area of law – the prospectus provision within the Financial Services and Markets Act 2000. Section 90 of the statute stipulates that prospectuses must be accurate, providing an avenue for claimants to sue for losses incurred on the basis of any defects.
The case is currently being watched very closely by other investors as it could lead to an influx of new claims and a shift towards US-style class actions against banks.
Argentum’s Reach explains why the funder opted to back this precedent-setting case: ‘When we committed to the RBS case, we knew it could herald the opening for more financial services type litigation. The UK judiciary has not always been receptive to those types of claims. We thought that might mark a turning point. We’ve had a lot of applications for “section 90-type claims”. That’s the shareholder claim that makes life a bit easier for the aggrieved investor. Those types of claim represent a significant proportion of our investments this year. Everybody seems to agree that financial services litigation is opening the door to new funding opportunities.’
Stewarts Law’s Zietman knows all about taking on financial heavyweights with third-party backing, having recently won a case alongside Mishcon de Reya against Commerzbank, advised by Linklaters. After a four-year long battle with 14 London investment bankers who had been fighting for €52m (£43.9m) in unpaid bonuses, the Court of Appeal ruled unanimously in April 2013 to uphold an earlier High Court verdict which found the bankers were entitled to their bonuses. For that case, TheJudge successfully secured a multi-million pound litigation insurance policy to support the bankers in their claim.
Zietman believes the RBS case will start a new trend: ‘Funding is there of course for people who have no money primarily, and the funders are looking for good cases and the right kind of claimant, ie the claimant who has an excellent claim for a large sum of money but who hasn’t the money to pursue it.
‘The RBS case shows even big commercial organisations are now starting to look at funding as a way of offloading some of the risk of litigation. They’re prepared to give away some equity in order to control costs. It’s not just the impecunious claimants interested in funding – it’s reaching out to wider appeal.’
Toni Pincott, a partner and forensic accountant at StoneTurn Group, which provides litigation support and advice, agrees and says: ‘It’s not just distressed claimants anymore. Funding is now attracting businesses who are looking at funding as an option for their business in terms of risk sharing. I wouldn’t call it a coming of age, but the development of funding as the more mainstream product is what’s caught my eye from people who are bringing litigation.’
‘It used to be the case that the funding market was largely kept afloat by mid-tier and boutique firms where they don’t have the same level of resources as large US firms, so they can’t carry huge risk,’ says TheJudge’s Delaney. ‘Over the last 12 months, I can’t think of many top 100 firms that haven’t sent an application for funding through us which signifies why it’s spread. Everyone is participating in this market.’
As for the judiciary’s view on third-party funding, CMS Cameron McKenna’s head of litigation Tim Hardy says: ‘It’s been mixed. I’m sure there are some members of the judiciary who are deeply sceptical about it. There’s still the stigma attached to it. But it’s quite indicative [of the times] that Neuberger is saying to the rest of the judiciary, “You’ve got to face up to this, it’s a reality, it’s a good thing. It shouldn’t affect your judgment.”’
With funders gaining more and more traction, and enabling those with or without capital the opportunity to pursue a claim while lessening the risk of massive legal fees, it’s fitting that members of the judiciary, such as Lord Neuberger, should begin to beckon funders out of the shadows and into the fold. LB
sarah.downey@legalease.co.uk
Tricks of the trade: the funders’ solution to damages-based agreements
Three years after the Jackson review, reforms to litigation costs finally arrived in April this year. But one particular reform, damages-based agreements (DBAs), which entitle a lawyer to claim a percentage of their client’s damages by way of fees, has caused great uncertainty among lawyers over whether the existing rules permit a hybrid model, blending reduced fees with DBAs, or whether they must be strict no-win no-fee arrangements.
Having replaced the ‘loser-pays’ status of success fees under conditional fee agreements (CFAs), nervousness among firms is not unfounded. By having no means of generating revenue throughout the various stages of litigation, many risk-averse lawyers simply won’t enter into a full DBA for fear of facing serious cashflow problems.
Law firms, including a number of the Magic Circle, have since submitted lengthy submissions to the Ministry of Justice (MoJ) calling for a hybrid version of the DBA to be introduced, including the option to blend fixed fees or hourly billing with a DBA.
But while the MoJ takes its own sweet time re-reviewing litigation cost reforms, third-party funders have entered the fray to offer their own version of a hybrid DBA.
Burford Capital launched what it claims is the first form of a hybrid DBA for the UK legal services market in October, offering to share risk with law firms. Described as an agreement between the law firm and Burford, it sets out ongoing payment terms for the firm as well as a portion of the damages award (the ‘law firm award’) that will go to the firm in the event of success. Significantly, the ‘law firm award’ will come from the proceeds initially collected directly by Burford.
‘This allows firms to hedge the litigation risk they have already taken, and one that allows them to take on additional risk and reward – which we call the Burford hybrid DBA,’ says Burford’s chief operating officer Andrew Langhoff.
He adds that the company is witnessing a growing interest in opportunities to fund law firms directly ‘as law firms become more sophisticated about litigation finance’.
‘We have undertaken law firm funding investments in the UK. We don’t believe any other legitimate UK litigation funder (by which we mean a member of the Association of Litigation Funders of England and Wales) has undertaken a direct investment to law firms in this market,’ he says.
And while some funders would argue whether Burford’s model is a DBA, Harbour Litigation Funding’s co-founder Susan Dunn maintains they have been ‘following that sort of approach for a long time. We funded elements in tribunals where contingency fees have been permitted, so we’ve been very used to it.’ She adds: ‘None of this is particularly new or interesting. What people want to know is can these regulations be improved, and we’re all for making them more user-friendly.’
According to a City disputes partner, the MoJ and the judiciary have no objections, with funders offering their own version of partial DBAs while the MoJ improves the current system. Its own changes to the regulations are expected to happen in spring 2014.
And while litigators await this reform of DBAs, it’s clear that many won’t be sticking their necks out with clients anytime soon.
‘The first year post Jackson was always going to be an odd time,’ says Annabel Thomas, a litigation partner at Enyo Law. ‘When the DBA regulations came out, they were so badly drafted and didn’t reflect anything that people were actually expecting, so there’s been a full stop. At the moment, who is prepared to do a potentially unenforceable DBA? It’s so unattractive at the moment.’