On Tuesday, 17 July, Brown Rudnick partner Elena Rey led a round table discussion on the growth of litigation funding in the UK and U.S. with an expert panel including Susan Dunn, Co-Founder and Head of Litigation at Harbour LF; and Rachael Mulheron, a member of the Civil Justice Council. More than 50 senior representatives from the global financial and services industry packed into a room in the City of London to understand more about this fast-developing market.
Litigation Funding Market
The panel noted that there has been an exponential growth of litigation funding in the UK over the last decade. The current size of the litigation funding market in the UK is estimated to be around £10 billion with a number of established funders competing in the market as well as a growing number of new funding participants coming in, including distressed funds, insolvency market players and family offices.
Several players have raised money for funding claims in the last six months. In June, litigation funder Augusta raised £150 million, Harbour Litigation raised £350 million in May, and Therium unveiled a £300 million fund in February. The shares of one of the largest litigation funders, Burford Capital, was the best performing stock on the AIM in 2017 and its share price has risen 14-fold since listing in 2009.
Products are increasingly diverse, whether clients are seeking case-specific funding, portfolio finance for multiple cases or the monetisation of their claim to provide working capital for operating or other purposes. "It is clear that investors are now eyeing Litigation Funding as a credible alternative investment in a market of poor returns from traditional asset classes, such as securities or real estate assets that are more dependent on the economic and political environment ", noted Ms. Rey.
With sufficient checks in place before beginning litigation, a stable relationship can be maintained and litigation funding ventures can be highly profitable. It is critical that the funders apply stringent selection criteria when choosing potential cases, notably:
- whether the defendant can afford to pay the award;
- the minimum realistic value of the claim, i.e. whether the pay-out is worth the time and effort;
- the maximum budget for the case and whether the funder has sufficient committed capital to cover it (many funds fail as they overstretch their capital and do not manage to get the returns in time to reinvest);
- the merit and the legal value of the claim;
- the length of the trial and the enforcement risk.
The panel pointed out that the stringent claims selection process applied by the funders adds value to the justice system as it helps to fund only valid and credible claims.
Disclosure and transparency have been key market trends in the litigation space recently, both in the UK and the U.S. Relevant requirements that start finding their way into legislative initiatives include the need for the litigation parties to disclose to court if their litigation is being funded by third parties. Litigation funders may now also be required to disclose their capital adequacy and the source of funds.
Another important emerging trend is the appointment of legal counsel by the funders, separate and independent to the counsel for the claimant. Although the interests of the claimant and the funder are aligned long-term, recent cases have shown the necessity for the funders to receive an independent legal advice during each stage and milestone of the litigation. This ranges from advice on structuring the funding arrangement and analysing the proposed security package, to keeping control over the litigation and getting involved in the settlement decisions without triggering the champerty restrictions 1 to dealing with the enforcement risk.
The legal landscape
Finally, Professor Mulheron provided an update on the UK legal framework in the litigation funding space and highlighted a number of requirements:
- Available capital must be adequate
- A sufficient complaints procedure must be in place
- Suitable termination provisions must be in place
- Terms of settlement must be agreed upon.
A bright future
With nearly £1 billion of funds raised this year alone, it is clear that Litigation funding is set to continue on its path to growth. With a clear legal framework and guidelines for participants, litigation funding is looking like an increasingly credible asset class, delivering potentially great returns for investors as well as taking the costs and the burden away from the claimants.
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