Third-party funding for fraud and asset recovery claims in England and Wales
February 2014 | SPECIAL REPORT: CORPORATE FRAUD & CORRUPTION
Financier Worldwide Magazine
The cost of civil proceedings is one of the reasons why only a small fraction of illicit or stolen funds are ever recovered. Even large businesses, and indeed nation states, may encounter difficulties funding litigation due to budget constraints. Uncertainty of success coupled with the potential liability for the opponent’s legal costs will weigh heavily against the decision to litigate. Having to provide a security for those costs or to fortify cross-undertakings in damages where interlocutory relief has been granted – a sine qua none in fraud claims – can be a real deterrent for claimants even with better than average prospects of success.
It is unsurprising then that in England third-party litigation funding – financial assistance with litigation in return for a share of the proceeds – increasingly features in fraud-related litigation and will continue to gain prominence. A more flexible judicial approach to the law on maintenance and champerty (which traditionally rendered litigation funding agreements unenforceable) culminating in the high watermark Court of Appeal decision in Arkin-v-Borchard Lines Ltd  EWCA Civ 655, augmented by the investors’ quest for yield in the low interest rate environment, have ensured a greater number and professionalisation of funders entering the market. At the same time, the growing familiarity and experience with the process among lawyers has led to more cases being taken to the funders. A cottage industry 10 years ago, third-party litigation funding is now frequently likened to private equity.
Is third-party funding suitable for fraud claims?
As a rule of thumb, third-party funders look for chances of success of at least 60 percent and in particular that the defendant is good for the money. Well-heeled defendants, or ones covered by a professional indemnity policy, have been a salient feature of the more prominent third-party funded litigation such as, for example, the CF Partners litigation with Barclays Bank or the Stone & Rolls professional negligence claim against Moore Stephens.
In addition to good chances of success, funders will look to establish that the claimant is genuinely committed to pursuing the proceedings. Legal advisers will work with the client to prepare the proposal, which would include the lawyers’ evaluation of the merits, key documentation, inter partes correspondence if there is any, and a budget. Given the complexity of some fraud cases, the funders will often seek to instruct independent counsel to evaluate the merits. A number of meetings between the client, the legal team and the funders may be required before an agreement in principle is reached. This means that several weeks may pass before the funding is finalised and the funding agreement is signed.
Fraud claims by contrast require quick action to establish what assets defendants have and to prevent defendants from dissipating or otherwise putting the assets beyond the reach of the claimants. A typical fraud claim begins with an application for a freezing injunction and other ancillary relief before the issuance and service of the claim form and particulars. At this early stage, claimants may not be aware of the full extent of the fraud; the range of causes of actions available to them; or whether there are sufficient assets to enforce against. Given these uncertainties, as well as the need for swift response, any possibility of securing third-party funding from the outset of a fraud claim may well be unrealistic.
However, there are no rules on when the funders should become involved. The funders can be engaged as late as trial, for example, to cover brief fees and refreshers. And there can be clear benefits in engaging funders after the interim orders have been obtained. To obtain these orders the claimants would have had to satisfy the court that they have a good arguable case, which, albeit not the same as the ‘60 percent chance of success’, will be a strong indicator to the funders that the claim is meritorious.
The extent of defendants’ assets should also be established. Better still, the assets should be frozen pending trial and available for the post-judgment execution. True, the client will have to fund, or find initial funding for, the freezing injunction and ancillary relief application. But some initial expenditure on the investigation and preparation of the case proposal to take to funders is inevitable in any event; and the expenditure will demonstrate the client’s commitment to pursue the proceedings all the way. Provided the approach to funders is appropriately timed, there is no reason in principle to think third-party funding is not suitable for fraud claims.
The cost of third-party funding
Third-party funding is expensive. The more common funding fee structures are based on the greater of a percentage of the recovered proceeds and a multiple of the funding provided. Percentages can vary anywhere between 10 and 50 percent and multiples from 1.5 to 4 times the investment. Funding agreements will often ratchet up the percentages and multiples the greater the lapse of time between the agreement and the recovery.
Given that many commercial fraud cases will involve costs in excess of £100,000 on each side, claims with a value below £1m (and hence an even lower settlement value) will rarely be suitable for third-party funding. Similarly, in cases where questions of liability are not in issue – and some fraud claims, where misappropriation by defendants is manifest, will fall into this category – the brunt of the legal work would have been done at the interlocutory stage. Here the claimants may justifiably be reluctant to share the proceeds in exchange for what will be a very low risk third-party investment.
In the more complex and higher value cases, however, the cost to clients in terms of the reduced winnings will be justified by the lower cash outlays for fees and disbursements and the considerably lesser risk litigation. Of greater concern to claimants in these cases will be the funders’ ability to terminate agreements and withdraw funding – the concern shared by Lord Justice Jackson, who suggested that funders should not be able to withdraw. Third-party funding agreements invariably include clauses entitling the funders to terminate in the event that they consider there has been a substantial deterioration in the prospects of success or where the proceedings become no longer viable. But Lord Justice Jackson’s suggestion was not taken up in the law reform. A recent High Court decision in Harcus Sinclair v Buttonwood Legal Capital & Others  EWHC 1193 has held that a third-party funder had validly terminated a funding agreement under the terms that permitted termination where, in the reasonable opinion of the funder, prospects of success were 60 percent or less.
Thorough case investigation and preparation of the funding proposal together with effective cooperation with the funders should abate the risk of the funder terminating the agreement. Indeed, the Harcus Sinclair case is more an example of an uncooperative engagement with the funders than of a surprise change in the merits midway through the proceedings. As to the cost of funding, one hopes that the increased competition in the third-party funding market will drive it down to make third-party funding more attractive to a wider pool of potential litigants. However, for many individuals and businesses contemplating recovery of funds through civil proceedings, enlisting the help of a third-party funder is worth exploring already, especially if the alternative is not to seek a recovery at all.
Vlad Meerovich is an associate at Peters & Peters. He can be contacted on +44 (0)20 7822 7762 or by email: email@example.com.
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