Funding Commercial Claims: 5 Keys Facts for Litigators and In-House Counsel

Litigation funding is currently under the spotlight. Inquiries by the Australian and Victorian Law Reform Commissions¹, together with high profile funded actions against AMP and the Commonwealth Bank, have meant that litigation funding is regularly in the news. Much of the focus is on class actions and the role that funding is playing in those proceedings, including the impact of funders’ fees.

However, third party litigation funders are involved in a range of actions, including the funding of commercial claims on behalf of a company or individual. The Victorian Law Reform Commission stated that the growth of litigation funders, and diversity of services they offer, have improved access to justice and “enabled plaintiffs to bring legal action that they would not have otherwise contemplated because of the financial risks of losing”².

Funding can also ‘level the playing field’ in the proceedings. A party with limited resources is able to take on a larger defendant who may have unlimited resources. Funding allows claimants to instruct their first choice of legal counsel and to pay for expert reports and other litigation expenses that may be necessary to pursue the claim successfully.

This article sets out 5 key facts about litigation funding for litigators or in-house counsel handling commercial disputes who may be unsure about funding, and a brief summary of the funding process.

1. FUNDING ARRANGEMENTS ARE FLEXIBLE

Funding arrangements are flexible and are structured to suit the specific needs and interests of the parties and the nature of the dispute. Generally, litigation funding involves a commercial funder agreeing to pay some or all of the claimant’s legal costs and disbursements, including any adverse costs and security for costs.

2. LITIGATION FUNDING IS NON-RECOURSE

Litigation funding is non-recourse, meaning that the funder is not paid if the case fails and only paid if there is a successful recovery (whether by way of a settlement or judgment).

The method of calculating the funder’s fee varies, but it often comprises reimbursement of the funder’s outlays and a percentage share of the recovery. Alternatively, sometimes the fee is a multiple of the amount of costs the funder has invested in the litigation. The fee will usually be based on the estimated time taken to resolve the case, the claim size and the costs and risks involved in funding it.

3. RISK MANAGEMENT TOOL

These days, funding is increasingly being used as a risk management tool by well-resourced claimants who seek funding to transfer some or all of the risks associated with litigation to a funder, in particular, the risk of having to pay adverse costs if the litigation is unsuccessful. These costs can run into hundreds of thousands and in some cases millions of dollars in large commercial disputes. Therefore, the ability to spread and share these risks with a third party is attractive, even to claimants with strong cash flows.

By using a funder’s money to pay for the litigation, a business can take the litigation expenses off the balance sheet. They become the funder’s expenses. On the other hand, if the claim is successful, revenue can be recorded (typically as an exceptional item) without having incurred any downside risk along the way. This approach can contribute to in-house corporate legal departments shifting from being cost centres to becoming profit centres.

4. CASE MANAGEMENT

Litigation funders can offer more than financial support.  Many firms offering litigation funding are run by highly experienced former dispute lawyers who are focused on the timely, efficient and successful resolution of funded claims for the maximum achievable value.  While the client retains control over decision making, an experienced funder will be able to assist the lawyer and claimant in the investigations phase of a case, as well as during the course of the litigation itself.  The funder can assist in the management of a claim by ensuring that the focus is kept clearly on the real issues in dispute and by seeking to avoid time and costs being spent on the pursuit of claims that are weak or unnecessary.

The Productivity Commission has stated that “litigation can be made more efficient through the ‘commercial objectivity’ of the funder”.³

5. INVOLVEMENT IN SETTLEMENT

Funders also frequently play an active role in the settlement of claims, as their interests in maximising the value of the claims while minimising the risks of losing the action are closely aligned with those of the claimant. However, if there is a difference of opinion between the funder and claimant over settlement, then this is usually resolved by Senior Counsel. The fact that a claim is funded may also improve the prospects of it settling.  The defendant will appreciate that an experienced, independent and objective commercial entity considers the claim to be of sufficient strength to merit funding and that the claimant cannot be ‘outspent’ or worn down in a lengthy war of attrition. In these circumstances, as the funder has ‘levelled the playing field’ between the parties, the claimant is not forced to settle for less than the claim is worth.

FUNDING PROCESS

Applying for litigation funding is straightforward.  The process usually involves a claimant, in-house lawyer or the claimant’s lawyer approaching a funder by phone, email or in person.  Normally, a confidentiality agreement is entered into between the funder and the claimant at the outset and/or confidentiality provisions are contained in the funding agreement. The type of information the funder will then require to conduct its due diligence includes the nature and size of the claim, the identity of the defendant, a copy of any legal advice and any documents filed with the court (if proceedings have been commenced) and the amount and nature of the funding sought.

FUNDING CRITERIA

The decision by a commercial litigation funder to fund a case is an investment decision. Therefore, funders want to fund cases that have a high degree of certainty, both as to the legal merits and the recoverability of damages. Some funders have certain threshold criteria which usually relate to the nature and value of the claim. If the claim meets the threshold criteria, the funder will carefully and thoroughly analyse all aspects of the proceedings or the potential action that bear on the financial risks it is being asked to assume or share.

Some funders will conduct the due diligence by retaining external counsel (in some cases at the funder’s own expense). Other funders conduct due diligence predominantly “in-house”, relying on the skills and experience of their own investment staff. The factors that funders will assess include:

• The prospects of success of the claim.
• The estimated monetary value of the claim compared with the likely costs and risks of pursuing that claim.
• How complex the litigation is likely to become and the estimated amount of any adverse costs orders if the claim is lost (including by reference to the number of proposed defendants).
• The likely time to complete the case.
• Any risks associated with the enforcement of a judgment.

If the funder agrees to fund the claim, then a funding agreement is usually negotiated and entered into between the funder and the claimant. The funding agreement contains the financial terms on which the funder agrees to fund the claim, as well as the parties’ other rights and responsibilities in relation to the claim.

CONCLUSION

The high cost of litigation and the risk of adverse costs orders deter most individuals and companies from commencing litigation, even where they have a strong case.  Litigation funding can provide claimants with the opportunity to achieve a successful recovery, without having to pay legal fees and other costs as the claim progresses, or having to allocate funds to deal with the consequences should the claim fail.

ENDNOTES

1. The Australian Law Reform Commission released a discussion paper on 31 May 2018 as part of its Inquiry into Class Action Proceedings and Third-Party Litigation Funders. The Victorian Law Reform Commission’s report on Access to Justice: Litigation Funding and Group Proceedings (VLCR’S report) was tabled in Parliament and published on 19 June 2018.

2. VLCR’S report at page 14.

3. See the Productivity Commission’s final report on access to justice arrangements, released in December 2014, following its inquiry into Australia’s civil justice system, at page 610: http://www.pc.gov.au/inquiries/completed/access-justice/report.

Article written by Kate Hurford, IMF Bentham Associate Investment Manager.
Read at Lawyerly.

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