15 August 2013Print This Post

Portfolio funding arrangements for law firms – do they work?

Does the basket of cases approach work for commercial litigation?

Posted by Matthew Amey, director of Litigation Futures sponsor TheJudge

There has been a lot of recent discussion surrounding a portfolio approach to litigation funding by law firms. Numerous funders have indicated their willingness to consider this form of finance. But are they as attractive or as workable as they sound?

A portfolio approach to funding makes sense on one level. If a funder has a basket of cases, it should follow that they can reduce the overall cost to the client for each case. This approach to spreading risk has of course underpinned litigation insurance underwriting philosophy for many a year.

However, for commercial litigation and arbitration, it’s not necessarily as straightforward as it might first appear. Firstly, many law firms will only have a certain proportion of clients open to the idea of alternative fee arrangements (whether offered by the law firm or the funder). Secondly, all commercial litigation or arbitration cases are very different from one another, both in terms of size and in terms of risk.

Litigation insurance underwriters look for predictability when it comes to portfolio approaches; they tend to primarily offer these facilities for high volumes of very similar cases (e.g. negligence cases being pursued against surveyors or valuers). If the volume is low and the case types and sizes highly variable, it becomes harder to ascertain a reasonable pricing model.

A funder might well say I’ll reduce my ‘typical’ return if we work on a portfolio basis, from X to Y”, but what if some of those cases could have secured funding for a more competitive Z had the client shopped around?

Putting all the theories and models to one side, the most crucial party in the chain is, of course, the client. What will the client be prepared to pay and how does one firm’s offering compare to another’s? Leaving price to one side, there is also the issue of due diligence. Is the funder granting delegated authority to the firm or does it have the ability to ‘opt-out’ after weeks of investigations?

There are many ways to overcome these issues to the firm and client’s advantage, but it does require having the complete picture of all funding options available and the respective strengths and weaknesses of the offers.