Litigation funding is where a third party provides the financial resources to enable costly litigation or arbitration cases to proceed. The litigant obtains all or part of the financing to cover its legal costs from a private commercial litigation funder, who has no direct interest in the proceedings. In return, if the case is won, the funder receives an agreed share of the proceeds of the claim. If the case is unsuccessful, the funder loses its money and nothing is owed by the litigant.
The funders’ share of the proceeds of a successful case is negotiated with the litigant at the outset. This financial reward typically consists of either a percentage of the damages recovered, or a multiple of the amount advanced by the funder, or a combination of the two.
This financing tool provides a valuable means of access to justice for claimants who may not have funds available, or may not wish to tie up funds, for costly yet meritorious claims. Its application is currently limited to commercial cases of a high value, and it is not yet suitable for consumer cases, personal injury cases or claims that do not carry a sufficiently high level of damages.
Litigation funding provides a cost-effective financing tool for claimants, and solicitors in England and Wales are now obliged to explain its existence and function to their clients so that they can take it into consideration when planning the funding of a case.
Some members of the Association of Litigation Funders also provide financing to law firms wishing to manage their exposure to conditional fee arrangements in litigation work, and can offer financing against other litigation-related risks, such as a portfolio of litigation claims.
Litigation funding is permitted under statute, case law and public policy in the United Kingdom and elsewhere. The Jackson reforms of English commercial litigation came into force on 1 April 2013, and as part of that wholesale review of the funding of litigation in England and Wales, there has been widespread recognition that litigation funding promotes access to justice by enabling litigants to manage their exposure to costs.
Lord Justice Jackson, who led the Civil Litigation Costs Review published in 2010 that led to the reforms, approved of litigation funding as an option for funding cases, and recommended self-regulation for the industry. Litigation funders in the UK are not, for example, permitted to exercise control over litigation that they are supporting, and it is recognised that the providing of capital is not control. Funders must not get involved in settlement negotiations, or cause the litigant’s lawyers to act in breach of their professional duties for example, in line with the practice, in England and Wales, of keeping the roles of funders, litigants and their lawyers separate.
Where litigation funders comply with the Code, they now have the backing of the Civil Justice Council and the law. Indeed there is a growing consensus that in the wake of the Jackson reforms, lawyers are now ethically obliged to discuss financing options, including litigation funding, with their clients at the start of a case.
The litigation funding industry has grown rapidly in England and Wales, and around the world, in the past decade. Today there are a lot of businesses holding themselves out as providers of capital to back litigation claims, and as a result it has become increasingly difficult for first-time users to discern the differences between providers.
With the number of entities promising access to capital to fund commercial disputes expanding, the role of the Association of Litigation Funders in identifying and regulating the credible players has become increasingly important. In order to be a member of the ALF, funders must have immediate access to funds directly under their control, instead of having to raise cash from third parties when presented with a credible case.
The advice to claimants and their solicitors is therefore to ask potential funders whether they are intermediaries or whether they have immediate access to funds. Where they are intermediaries who are putting together one-off consortia on a case-by-case basis, funding can take a long time to materialise as consortium members each conduct their own due diligence, and relationships can get complicated. Intermediaries are not members of the ALF.
The ALF therefore plays a vital role in ensuring that growth is sustainable and that the business of litigation finance is conducted within the rules set out by the government.