The past few years have seen a marked growth in the European litigation funding market which now includes not only significant funders (such as Harbour, Burford Capital, Woodsford, Longford, Omni Birdgeway and Therium), but a variety of related entities specialising in this field, such as hedge funds, funds seeded by hedge funds, insurers, funding brokers.
In terms of the scale of capital involved, it is now a significant market (over USD 39 billion globally) with a real range of players and new market entrants. Specialist funders focussing on a particular class of litigation (such as Intellectual Property, bondholders recovery or insolvency claims), funders who will provide funding for non-commercial disputes (such as the well publicised Akhedova divorce case, where Ms Tatiana Akhmedova received litigation funding for her divorce litigation against her husband, Farkhad Akhmedov, before the English High Court where she sought the enforcement of a GBP 453 million judgment), funding for class actions for regulatory, consumer, financial or data privacy breaches made by listed companies – these all form part of the varied funding market.
With the value of court cases and cash directly held by UK litigation funders increasing to nearly GBP 2 billion in the past year, it is clear that this industry will continue to grow with an increasing number of funders entering the market and financing a variety of disputes in different jurisdictions.
The Russia/CIS market has traditionally been considered a higher risk market. However, given the broader involvement of funds and family offices experienced in that jurisdiction in the funding industry, it is expected that litigation funding will become increasingly commonplace for disputes arising out of Russia/CIS, particularly where such disputes are determined by way of international arbitration and/or the courts of the jurisdictions such as the UK and the USA, France and Switzerland.
How it works
Traditionally when two parties enter into litigation, each pays for its own costs of the litigation proceedings. If litigation funding is involved, an independent finance provider, which has nothing to do with the litigation, is permitted to fund the legal expenses and other costs of one of the parties (often the claimant but it can be the defendant as well) subject to an agreement that if the financed party wins the case, then any award is shared with the funder.
This type of funding is often paired with after the event insurance, where the party pays a premium to secure cover against the risk of liability for adverse costs in the event of a loss.
Litigation funding presents significant opportunities both for litigants to control litigation costs and to protect their bottom line, and for funders to increase return value. For litigants this may be a way to fund their litigation without without committing a significant portion of their revenues to litigation expenses for a potentially unknown period of time.
Types of return
One of the main attractions of litigation funding as an investment for the funder is the potential for higher returns than traditional asset classes. On average, funders tend to receive around 3 or 4 times its invested capital or at least 20% IRR plus recovery of the legal costs if the case is won.
Litigation funding is an asset class that is still widely overlooked by investors but it offers returns that are not correlated to economic and political instability and actually perform well in distressed markets. That attraction is particularly clear during times of financial crisis, market downturn and volatility.
Issues to have in mind when negotiating litigation funding for your claim
The course of litigation contains a number of procedural milestones and situations when the interests of a funder and the funded party may diverge, which can cause differences of opinion to arise regarding how to best proceed with the litigation. Independent legal counsel can assist by assessing the merits of the claim and advise on enforceability of any litigation funding arrangement at the outset of the opportunity, structure an appropriate security package, provide ongoing advice on key milestones (e.g. settlement opportunities), test the litigation approach and strategy, structure legal costs to minimise the funder's exposure, maintain control over the litigation process and advise on the enforcement risk.
Issues for potential funders
As the litigation funder’s return is inextricably linked to the success of the case, strict investment criteria must be applied when assessing the merits of funding a case. Each potential funder will approach their decision with different strategies and criteria, but the most important will include:
- the ability of a defendant to satisfy a judgment and/or an award if the litigation is successful;
- the minimum realistic monetary value of the claim, i.e. whether the pay-out is worth the time and effort;
- the maximum legal budget for the case and whether the funder has sufficient committed capital to cover it (the illiquid nature of this asset class can cause funds to fail where they overstretch their capital and receive slower than expected returns);
- the merit and the legal value of the claim; and
- the length of the trial and any enforcement risk.
The actual value of the claims attracting litigation funding are normally significantly higher than the funding amounts themselves, with the average value of claims ranging from between GBP3 to GBP 5 million for the smaller cases and between GBP 30 to GBP 50 million for the more complex cross border cases.
In certain cases, such as IP/patents, shareholder disputes or cases involving disputes in high risk jurisdictions, such as Russia/CIS, claims in excess of GBP 100 million are not uncommon.
How we can help
Brown Rudnick is uniquely placed to offer introductions and access to capital and a wide range of funders, as well as knowledge of the ATE market and an ability to advise on all aspects of obtaining funding and related insurance, including the negotiation of terms.
The solutions offered by litigation funding can help remove some or all of the financial risk associated with litigation. As such, it can help strengthen a claimant’s position through its mitigation of the costs and risk involved in pursuing justice.
Through Brown Rudnick’s relationships with the most active and leading litigation funding firms in the US and UK we are able to offer litigating clients the ability to fund part or all of their litigation costs, to ease burdens and meet their end goals. Similarly, as one of the first firms to offer comprehensive advice to our clients in this area, Brown Rudnick’s cross-disciplinary approach, global reach, and depth of experience make us well placed to counsel both investors and lenders in matters related to the growing field of litigation funding as an asset class.
The views expressed herein are solely the views of the authors and do not represent the views of Brown Rudnick LLP, those parties represented by the authors, or those parties represented by Brown Rudnick LLP. Specific legal advice depends on the facts of each situation and may vary from situation to situation. Information contained in this article is not intended to constitute legal advice by the authors or the lawyers at Brown Rudnick LLP, and it does not establish a lawyer-client relationship.