Litigation funding – the financial ‘silver lining’

The advance of litigation funding over the past decade has provided a win-win solution for law firms and their clients. There’s no doubt that it has enhanced the value of the counter-cyclical hedge through increasing the quantity of litigation and the quality of law firm revenue.

Litigation funding is not only the preserve of class actions. From Augusta’s experience in the UK, we’ve determined that most standard funded claims (litigation and arbitration) involve commercial disputes. The majority of those include business-to-business claims for breach of contract, professional negligence, and shareholder disputes.

How can litigation funding help?

With litigation funding, the funder pays for legal costs, counsel fees, and disbursements. A major attraction of litigation funding is that it is non-recourse, whereby if the case loses, the funded party pays nothing. The funder generally meets the law firm’s costs and claim-associated expenses, and the claim holder can also cover the adverse cost risk (the loser pays the other side’s costs) through after-the-event insurance (ATE). In return, the funder charges a commission based on either a multiple of funds invested in the case or percentage of damages awarded upon a successful resolution. Depending on the ratio of costs to damages, the claimant would generally expect to receive around 70-80 percent of the damages, though this is reliant upon the proportionality between the claim size and cost to run.

What are the main benefits of litigation funding?

With funding, businesses can pursue meritorious claims while benefiting from:

• Increased liquidity – cash is retained to meet immediate business needs as opposed to paying legal fees;
• Positive P&L impact – funding keeps ongoing litigation costs off a business’ profit and loss as the expense is borne by the funder;
• Risk mitigation – the risk of adverse cost can be covered by a funder indemnity or funded ATE insurance policy, resulting in avoiding having to report a contingent liability on the balance sheet;
• Claim expertise – the funder acts as a project manager, collaborating with the law firm so reducing management time;
• Independent claim diligence – the work the funder undertakes provides assurance on the strength of their case as a funder’s legal team undertakes thorough due diligence prior to funding to ensure the claim has merit; and
• Control – at all times the claim owner retains control of the litigation.

Financing also means that law firms can attract more opportunities that benefit their relationship with their clients by introducing the option of non-recourse litigation funding. The funder is aligned with the business as they want a positive outcome and would prefer to spend more on good advice, where required, to achieve a successful resolution. The law firm avoids potential client conflict over billing, as the funder deals with invoices based on pre-agreed budgets.

What results can i expect to see from litigation funding?

The result is that the quantity of work for law firms should grow to offset falling advisory revenue and the quality of work is attractive as law firms are not forced into aggressive fee caps or fee deferrals. The use of funding shifts the risk from the business and law firm to the funder.

Without funding, the alternative is a lose-lose. Businesses fail to exploit and monetise good meritorious claims and law firms are left with litigation resources being potentially underutilised. Let litigation funding help you access valuable and scarce cash in these challenging times.

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For all questions regarding the topics raised in this blog, please contact Louis, Gian a member of our team of litigation funding experts.