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Third-party Litigation Funding « Back
May 2012
 
Continued economic uncertainty has seen an increase in litigation as companies use legal means to recoup losses, press their contractual rights or fight off attacks in a difficult market. However, those seeking to pursue litigation face high costs – a problem further compounded by the economic climate. A resulting development has been the growth of third-party funding which brings both benefits and drawbacks for struggling companies lacking the means to fund such actions. How will activity in this area evolve through 2012 and beyond?

Rising demand

A rise in demand for third-party funding has been seen across the globe – from jurisdictions where the model has been long established, to those where it has only recently become commonplace. The US, for example, where third-party funding emerged as early as 1997, has seen a dramatic rise in the demand for both commercial and consumer litigation funding in recent years. A real boom has occurred in the UK, where the model has only very recently taken off, and this activity is attracting international funders. “There were scarcely any funders operating the UK before about 2007, and by 2010 the number was still less than a handful,” says Richard Myrtle, the managing director of specialist litigation insurance broker Universal Legal Protection. “By the end of 2011, that number had increased to about a dozen and by the end of 2012 the number is expected to double to about two dozen. This number does not include a number of so-called ‘intermediaries’ passing themselves off as funders. Funders from other jurisdictions, notably the US, but also Australia, had been waiting for an opportunity to enter the UK market and took it. The US funder Burford, for example floated on the London Stock Exchange in 2009.”

What then, are the underlying drivers for the growing appetite for third-party funding? Economic factors have of course played their part. Companies are more willing to enter into litigation against one another when times are tough and since the financial crisis, public and private sector debt, along with undercapitalised banks, have made it much more difficult to raise funds. Companies entering litigation have therefore been forced to seek alternative funding. “The increasing availability of third-party funding in recent years has coincided with an increase in the number of companies and individuals who have been unwilling or unable to fund litigation,” says Clive Garner, a partner at Irwin Mitchell. “While some of those using third-party funding just want to hedge against the risk of an unfavourable outcome, there is no doubt that the prevailing economic conditions have provided fertile ground for the growth of third-party litigation funding.” Part of the rise in demand for litigation may flow from the trend towards companies employing more sophisticated valuation and cost management techniques early in the litigation process, a trend accelerated by the economic downturn.  And the behaviour of funders has evolved in recent years, perhaps also a response to the financial crisis. Where funders traditionally sought the highest returns by investing in commercial disputes with good prospects for success and high levels of reward, some have begun to diversify their portfolios, investing in a broader range of claims including, for instance, personal injury group actions.

The wide range of benefits associated with litigation funding also have an important role in attracting advocates. Third-party funding offers corporate clients the opportunity to move the financial risk and cost of litigation off their balance sheets. Law firms are given the opportunity to take on large, complex cases using capital from third-parties. To add to this, litigation is seen by investors as an innovative, untapped asset class with great potential. “Other factors have played a part,” notes Selvyn Seidel, chairman and founder of Fulbrook Management LLC. “These include the greater attention and credibility given to the industry by the media, reputable educational institutions and educators, and an increased number of journal articles. There is also now greater transparency in the industry, coupled with more industry data being published and analysed, and new products and services being offered by the industry.”

Jurisdictional disparities

The acceptance and use of third-party funding differs between regions. Its employment is much more readily available in some jurisdictions than in others. Third-party funding has been available in the US, Canada and Australia for some time and is well recognised as a means of funding cases and providing access to justice. While it is growing in popularity, third-party funding in the UK remains in its infancy. There is currently a limited market in South Africa, which, in terms of case law, seems to be mirroring the UK, and third-party funding is also growing in Europe, the Middle East and certain jurisdictions in East Asia.

Differences in global legal systems make it only natural that large disparities in funding models exist between jurisdictions, as Mr Seidel points out. “The legal systems applicable to third-party funding are hugely different. For example, in the US there are situations allowing for treble damages, there are mostly jury trials in the cases, and there is very lively and expensive discovery. In the UK, there are no treble damages, virtually no jury trials in civil cases, and quite restricted discovery compared to the US. In the US there are contingency cases allowed, while in the UK only conditional fee agreements, and the proposed expansion to contingency fees is still quite limited. In the UK there is the loser pays rule, which has no place in the US, except on very limited facts.” Further, Mr Seidel explains, funders based and operating in the UK are distinct from their US counterparts in a number of ways, including scope  of interest and capacity, economic structures and criteria, anticipated returns, financing agreements and cross-border ability. All of this ignores the differences that exist in other jurisdictions.
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1 comments | Sort by: Newest | Oldest | Most Recommendations
Lulaine Compere
United States
02 May 2012 13:22 GMT 
Reveal full post
Recommend (3)
Litigation funding has been and is a growing industry. Investors are flocking to it because of the returns they are getting because of the down market and increased regulation of certain sectors. There are many benefits to litigation funding because it helps alleviate a problem that the legal profession has by design. Many mainstream avenues for funding like banks and credit unions do not understand


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