It seems as though a turning point has been reached in the way that litigation finance has moved into the mainstream of the litigation market.
For those not in the loop, litigation finance is where a funder agrees to pay the costs of pursuing a legal claim in return for a share of any recovery obtained through settlement or adjudication. A funder may also agree to pay other costs associated with the claim, including putting up insurance for costs, or taking out “After the Event” (ATE) Insurance to cover adverse costs if the claim fails.
Most litigation finance arrangements are advanced on a non-recourse basis. If the claim fails, or generally there is no recovery of proceeds, the claimant will not be on the hook with the funder.
Litigation funding therefore restores balance to commercial disputes, allowing litigants to pursue claims that otherwise they would not be able to due to the prohibitive costs that are inherent in commercial litigation, and moreover the risk of paying the other side if they lose.
One of the big advantages of litigation funding is that the opponent may cave in when he/she may not otherwise have done, knowing that the claimant is being backed by a large litigation funder with deep pockets. No sensible litigation funder would fund without having undertaken a stress test, having independently reviewed the prospects of success, which also sends a worrying signal to the opponent in litigation.
The typical funding market caters usually for high-value cases (where cost/damages ratios are estimated to be as high as 1:10) but there is also a market for smaller matters, provided the damages are sufficient for it to be worth a funder’s investment. In most cases, funders will be looking at a 1:4 costs to damages ratio in order for it to be worth pursuing, both for the claimant and the funder.
Litigation funders generally, depending on the prospects of the case, will be looking to receive their initial investment back, and then 150% on top of that as a return. Therefore, if they cover a client’s legal costs of £100,000 on a claim for £1,000,000, they will seek to be repaid the initial £100,000, as well as an extra £150,000, meaning they will take £250,000 from the settlement, leaving the client with £750,000.
The benefits of litigation funding are clear in that the client receives non-recourse funding for their action. Furthermore, the vast majority of cases settle before going to trial, meaning that a swift settlement resolution is likely. Before a funder commits to investing in a case, they will naturally do their own due diligence with their in-house legal teams and risk analysts, meaning that the client receives an added advantage of a second opinion from a seasoned and independent lawyer before embarking down the road of litigation.
