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How Third-Party Litigation Funding Can Be Used By Businesses

Pursuing litigation using funding provided by a third-party has rapidly gained a strong foothold internationally in the commercial world, becoming increasingly popular in the USA and Australia over the past few years. British lawyers and businesses have on the other hand been reluctant to embrace third-party litigation funding models, for reasons that can be traced to the ancient law of ‘Champerty’ and ‘Maintenance’.

Maintenance refers to a third-party with no interest in a case, encouraging litigation. Champerty is the funding of a lawsuit on the condition that the funder will receive a share of any damages won.  Both Maintenance and Champerty were not decriminalised in the UK until 1967; however, they are both still enforceable at common law, meaning that a third-party funder cannot be seen to influence the outcome of a case in any way.

Despite this historical context, the UK is now seeing third-party funding open up opportunities for businesses to protect their interests and pursue damages rightfully owed.

Types of third-party funding for litigation.

Litigation Funding

The number of litigation funders in the UK has grown substantially over the last few years.  Traditionally, litigation funders would only deal with cases involving significant returns (£2 million plus), but new funders are now forming, whose aim is to support SMEs with potential claims of £10,000 to £1 million.

Using funds from investors who take a risk on a particular case being successful, litigation funders will provide the money needed to pursue a claim and take a percentage of the claim if it is won.

The advantage of going to a litigation funder is that many have their own specialist software that can establish quickly whether or not a claim is likely to be successful, as well as quickly calculate whether a settlement being offered will work to your advantage.  Knowledge by the other party that the claim is funded can often encourage an early settlement as they know the prospects of the claimant’s probable success have already been evaluated.

The disadvantages of litigation funding are that many funders will still only deal with large claims, but as mentioned above, this is changing.  The funder will also look into whether the other party can cover not only the claim but costs and any applicable interest.

Although litigation funders are not externally regulated at present, the Association of Litigation Funders (ALF) published a code of conduct in November 2011 (as amended in January 2014) which sets out the standards of best practice and behaviour for third-party funders.

Crowdfunding

Crowdfunding has been very successful as a platform for businesses and communities to raise finance, and for individuals to invest money.  Organisations can pitch ideas that require investment to thousands (if not millions) of potential worldwide investors.

CrowdJustice was launched in 2015.  If the investment target for a case is met, the funds will go directly to the solicitor's client account and are securely held on trust for the claimant.

The main disadvantage of using crowdfunding for litigation is that the concept and industry is completely unregulated.  The Financial Conduct Authority has previously published a policy statement setting out its approach to crowdfunding; however, litigation funding is not specifically mentioned.  Commercial cases can be extremely complex, hence it is vital that investors fully understand the risks involved.

Removing the risk

The biggest advantage that litigation funding gives to all organisations, no matter what the size of their claim, is the opportunity of funding litigation without affecting the company’s balance sheet.  For SMEs who lack the cash reserves to mount claims against resource rich opponents, third-party funding can provide a way for them to access the justice system and stand up for their commercial rights and reputation – comparatively risk-free.

After the Event Insurance (ATE)

After the Event Insurance (ATE) provides claimants using litigation funding with protection against paying a proportion of the successful parties costs subject to the limit of indemnity.

It is important to note that since 1 st April 2013, the premium for ATE insurance is no longer recoverable from the losing party. The premium comes out of the damages awarded; it is not a recoverable cost of litigation.  Potential claimants must factor this cost in when weighing up whether or not to pursue litigation.

In Conclusion

Third party funding for litigation has provided SME owners and company Boards with the confidence that not only can they pursue a litigation claim without affecting their balance sheets but there is a high chance that their claim will be successful (otherwise it would not have been approved for funding in the first place).

Another point litigants must remember is that a majority of claims are settled out of court, and as pointed out above, the opposing party may be encouraged to offer settlement early on if they know the claim has attracted funding.

Though still in its infancy in the UK, it is clear that third-party litigation funding is an established part of the litigation landscape and will most likely grow especially given the new funding models such as crowdfunding.  As this growth inevitably occurs, so will tighter regulatory controls, meaning claimants, solicitors and investors interests will have greater protection.

To find out more about third-party funding, please contact a solicitor by searching through Solicitors Guru today.


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