Posted by James Delaney, director of Litigation Futures sponsor TheJudge
On 10 September 2013, Mr Justice Clarke dismissed the $1.6bn claims made by Excalibur Ventures against Texas Keystone and Gulf Keystone.
The enormity of the claim value and legal issues aside, the case is also one of the largest (if not the largest) third-party litigation funding deals ever arranged. The precise level of funding has not been disclosed but commentators are suggesting it could be as high as £50m.
So what does this loss mean for the funding market?
It’s believed that the vast majority of the funding was not in fact obtained from what would be perceived as the ‘traditional’ litigation funding market (that is the market of companies which specialise solely in investing in legal cases in exchange for a share of the rewards). Instead, the funding appears to have been secured from a syndicate of private investors and investment funds that wouldn’t necessarily brand themselves as litigation funders per se.
Ad hoc investments in litigation are not uncommon. Indeed, TheJudge is regularly approached by hedge fund managers seeking to dip their toes into funding litigation, having been tempted by what appear to be very high returns on investment from an uncorrelated market. However, the result in the Excalibur case shows the stark reality of just how high risk litigation investments can be.
The rejection rate by most litigation funders exceeds 80% of the applications they receive. Bear in mind the cases presented to funders will typically be accompanied by the lawyers’ endorsement of a 60% likelihood of success, and it’s clear that lawyers face a steep hurdle to obtain a funding deal in the first place.
If an established funder has already rejected a case, it can severally prejudice the chances of securing offers elsewhere, as invariably any subsequent funder will be concerned that they’ve missed something the negative funder spotted. In some cases, we obtain an offer of funding from all of the funders we approach whereas, in others, only one offer is made; it’s a highly subjective process. They key to avoiding prejudice is a simultaneous application to different funders.
Naturally, funders understand that litigation risks exist and unexpected results aren’t altogether uncommon, so the Excalibur case is unlikely to have any material impact on the main litigation funding market. In fact, it may serve as a positive in helping funders justify why they charge such high returns on individual cases.
Like an angel investor might say, the chance of any start up business ultimately succeeding can be 10% or lower and, for that reason, investors need a good return to pay for the failed investments. The logic is similar for funders. While funders of course choose which cases they want to fund, it’s not as though they are spoilt with cases where the prospects are considered to be 70%+. Indeed, such assessments in heavyweight litigation are very rare.
If Excalibur holds any legacy from a litigation funding viewpoint, it might be to instil a greater sense of wariness by investors who are looking to step into the litigation funding market in the future – despite the large rewards, litigation funding is far from a sure bet.