Litigation Financing: The law firms that stake their clients

August 22, 2020

2 min read

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What's going on here?

DLA Piper is the newest player in the litigation funding game, teaming up with Litigation Capital Management and Aldersgate Funding Limited to establish a ÂŁ150m pot for litigants to pursue dispute resolution.

What does this mean?

“Litigation financing” or “third-party funding” is the new investment in town. The concept is simple: a third party provides cash to fund a legal claim in return for a share of the damages.

25 years ago, there was no such thing in the UK. The English doctrine of champerty excluded third party funders from “maintaining” an action. The idea was that the “purity of justice” would be undermined if funders had an interest in inflating claims or manufacturing evidence.

But the law has changed its mind. In 2011, the voluntary Code of Conduct for Litigation Funders was born to regulate the industry. And now businesses from banking, insurance, investment, and legal backgrounds are stepping into this lucrative emerging market. In 2009, the value of the assets managed by the 16 main funders in the UK was about ÂŁ180m. Now, that figure is conservatively estimated to have grown at least 743% to ÂŁ1.5bn.

What's the big picture effect?

This move is testament to the innovative, enhanced fee structures available to clients in the 21st century. Law firms are perfectly placed to dominate this growing market, to the exclusion of more general investment vehicles. DLA Piper said, “the on-going search for better economic returns and the preference for lawyers and clients to align their economic interests is driving disputes activity”.

Earlier this year, the parent company of law firm Rosenblatt launched a litigation funding business in anticipation of the spike in coronavirus-caused litigation. Fieldfisher has also announced a new damages-based agreement insurance policy to guarantee a proportion of the firm’s unbilled work in progress. The offering will add to its litigation funding service for commercial claims, FeeSolve. The head of dispute resolution posed the question, “Why should clients share a hefty portion of their winnings with funders when they can work directly with us on a more competitive basis”?

By financing disputes, law firms are offering their clients the opportunity to pursue claims that would otherwise be beyond their financial means. Businesses are also drawn to the prospect of sharing the risk of a claim and taking litigation costs off the company balance sheets. For lawyers, their challenge is to identify disputes with good prospects – a standard benchmark is a 60% likelihood of success. If all goes well it’s a win-win: more litigation work and a share of the damages.  

As an investment, litigation is unique because the outcome isn’t affected by markets or fluctuations in the economy. But like any investment, litigation isn’t a risk-free bet. In 2014, the Commercial Court held that third-party funders were jointly and severally liable to the defendant for £5m in indemnity costs. The funders had provided nearly £32m to the unsuccessful claimant in the action, but the court found that the action was opportunistic, and so the defendant should be indemnified for their trouble.

As legal budgets tighten and businesses struggle to weather the downturn of lockdown, it’s likely that litigation financing will only continue to thrive in the UK.

Report written by Rory Crawford

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