18 February 2014Print This Post

Out of the shadows

Some funders don’t have access to the money they may claim they have

Posted by Neil Rose, Editor, Litigation Futures

Third-party funding (TPF) has suddenly become the black sheep of the litigation finance industry. In the wake of the spectacularly unsuccessful TPF-backed Excalibur Ventures case – a huge piece of litigation that Lord Justice Christopher Clarke described in December as “speculative and opportunistic” – questions are now being asked about what the problems that are emerging with some of the funding in that litigation mean for the rest of the industry.

This article in yesterday’s Lawyer magazine is a good case in point. But I want to take a broader perspective. In my experience this is not an industry looking to hide in the shade, but its profile has become, in the eyes of some, shady.

In the many years I have been writing about TPF, I have tried (and not always succeeded) to keep a sense of proportion. When Lord Justice Jackson was undertaking the fieldwork for his report, he asked a major roundtable of funders how many cases they had funded – between them it was less than 100.

That may have been a few years ago, but in the context of the amount of litigation in England and Wales, let alone the US and elsewhere, the number of TPF-backed cases remains miniscule – in the first four years of its existence (up to last October), the world’s largest funder, Burford, invested in 51 cases across the world. These were, of course, big cases – Burford’s collective investment in them was $386m.

There are various reasons for this, the most obvious of which is that they need to be big cases to generate the kind of potentially big returns that will attract investors. And, also, given the risk they are taking can run into millions of pounds, funders are understandably very, very picky about the cases they take on.

One of the stranger reasons I keep hearing, however, is that lawyers aren’t keen on TPF because they don’t understand it. Funders are constantly talking about the need to educate the market. But just how hard is it to understand? A funder will pay your legal costs and cover any adverse costs in return for the prospect of taking a proportion of your winnings. There’s a lot more to the detail, but as a concept, it’s not difficult, is it?

Where the market seems to be getting a bad name is through a lack of regulation and cowboys trying to make a fast buck. The challenge for lawyers is to work out who are genuine funders with money in the bank, rather than those who are essentially brokers or try and get the money together once they have a possible case. But lawyers are used to doing due diligence, aren’t they?

And they also have the Association of Litigation Funders (ALF) as a guide. Last week the ALF updated its code of conduct in three significant respects – requiring members to maintain £2m of capital, introducing a complaints procedure and ensuring the code applies to any entity with which a member is connected.

ALF chairman Leslie Perrin readily acknowledges that £2m is not enough, but it is the first step in the still-young association’s journey, and a big one at that. If there is one thing that is critical to the TPF market, it is the ability of a liable funder to pay out when necessary. So far as I know, it has not proven a problem for the eight members of the ALF – it is a hard but recognised truth that the best thing that can happen is to lose a few and be seen to pay out. It is important to note that none of the Excalibur funders are either UK based or ALF members.

The problem with voluntary self-regulation, of course, is that however strict the code of conduct, however damning the finding after a complaint, there is not much the ALF can do to a member other than expel it from the association. They can then carry on exactly as they were doing beforehand.

So does that mean we need full regulation? The only clamour for that has come from the US Chamber of Commerce, which has lobbied hard over here, buying itself platforms at various conferences and getting in front of politicians.

Having presumably failed to have an impact domestically on this issue, the chamber seems to have targeted the UK as the place to tip the first domino, using the fact that some members have operations in the UK as a pretext. But the interest in what they are saying is minimal at best – they just don’t have a place in the debate over here.

The reality is that the case for regulation has simply not been made out yet – it seems a lot of effort for such a small number of players – and the ALF needs to be given more time. Even if the Excalibur case does raise questions, might there be other ways of addressing them, such as early payments into court as a way of showing a funder is good for the money?

The immediate challenge for the ALF is to become a well-known, respected player in the litigation world so that the first question a solicitor investigating a funder will ask is whether they are a member, and if not, why. It should be in the interests of organisations like the Law Society and City of London Law Society to devote time to appraising the ALF and, assuming it passes muster, advise solicitors only to use its members.

In a world of conditional and contingency fees, it is hard to oppose TPF on the basis of principle – by its nature it does not promote frivolous litigation, and in fact arguably speeds up settlement by showing the other side that a disinterested third party is prepared to put their money where the claimant’s mouth is.

At the same time, TPF has not developed in the way envisaged when the Civil Justice Council (CJC) first championed its cause in the mid-2000s and effectively opened the door to the funders in the market today. In a report in 2007, the CJC said: “Third-party funding has the potential to increase access to justice in areas of consumer rights and multi-party action.”

But that has not really happened; unsurprisingly, funders have instead been attracted to big-stakes commercial litigation and arbitration, rather than facilitating the kind of access to justice deficits that concerned the CJC.

To me that is the failure of the TPF market to date, not any want of regulation.


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