In our new spotlight series, we sit down with some of our leading Commercial Disputes lawyers to discuss topics and trends that play a significant role in their practice. In our first edition, we spoke to Partner Richard Leedham about litigation funding.
Richard is head of Mishcon de Reya's commercial litigation team. He advises on commercial disputes, often with international and fraud elements, with a particular specialisation in insurance. He recently acted for the Hiscox Action Group in the historic FCA test case on Covid-19 related Business Interruption claims and is currently acting for over 100 investors in film finance partnerships in a case listed by the Lawyer as one of the top 20 of 2022. Richard has been at the forefront of innovation in the litigation funding field and was instrumental in the development of MDR Solutions I, a litigation finance venture bringing together Mishcon de Reya with litigation and arbitration funder Harbour.
Initial impressions
I first came across litigation funding in around 2008/9, when I was working on one of the earliest big conditional fee agreement (CFA) cases before the Commercial Court. After that, I got involved in a large group action which involved litigation funding, which really demonstrated that funding can enable claims to be brought where it wouldn't otherwise be possible, particularly when paired with after-the-event insurance (ATE) to cover off the risk of an adverse costs order. It has definitely been a constant theme in my insurance coverage and shareholder/ securities litigation practices.
There have been various changes to the funding and costs landscape in England and Wales since then, with the implementation of the Jackson reforms and the end of recoverable CFA success fees and ATE premiums, but the fundamentals remain the same and my early impressions of the utility and benefits of funding endure. The courts are supportive of funding, provided of course that funders don't cross the line in terms of directing the case, and while you do need to make sure you are choosing a reputable funder, funding can really help. Detractors might argue that funding encourages spurious claims, but in this jurisdiction, the combination of the loser pays principle and the availability of security for costs means that only good claims survive, and funders know that!
For the time being, the funding market is self-regulated, and I think that works well – the market needs flexibility and while it's something that has to be kept under review, there isn't currently a need for anything more. One of the key focusses of regulation is the funder's capital adequacy, but claims don't often fail because the funder runs out of money, they fail because the claim isn't good enough, or because the client doesn't understand how the funder operates. For commercial and sophisticated clients it isn't an issue.
Some cases can't be brought without litigation funding
Of the many cases I've worked on that have involved funding, none of them would have worked as well if they hadn't. Indeed, I don't think any of them could have even been brought! Take the claim brought on behalf of the Hiscox Action Group, for example. We were dealing with businesses that were shut as a result of Covid and were relying on insurance payouts, which weren't being paid (hence the claim). The claimants simply couldn't have afforded to bring the claim if they hadn't had funding.
Group actions and litigation funding work really well together and again, the Hiscox Action Group is a good example. As individual claims, the potential recoveries mean it won't always make sense for a funder to take on the case, but the economies of scale offered by a group action mean that funders can see a return. But it doesn't just have to be cases where the client couldn't have funded the claim themselves. Litigation funding can also work for high net worth individuals, investors and shareholders, as well as risk averse corporate entities. When these sorts of clients have already lost money, often the last thing they want is a high costs bill and the risk of averse costs. However, they may be happy to give up some of the upside of a successful claim.
That's not to say funding works for every claim. For some clients, the money is really important, and they aren't prepared to give up a proportion of their damages, and in those circumstances, funding won't really work.
There are also other cases that should work well with litigation funding, but which we don't currently see very much. These are the claims that bigger corporates have on their books that they are not really doing anything about and which will probably end up being written off. Instead, corporates could be using litigation funding to make some sort of recovery. The reasons why they aren't are unclear. Perhaps there is still a bit of ignorance around litigation funding, a feeling that funding is too good to be true, and maybe a reluctance to invest any management time in the claims.
Access to justice
The end of civil legal aid has meant that litigation funding is now often the only option for some claimants. Parties need money to fight a claim, particularly against well-resourced defendants who aren't afraid of flexing their financial muscle. In circumstances where civil legal aid is now a distant memory, litigation funding gives parties access to justice.
MDR Solutions I
Having worked on a number of cases with the benefit of litigation funding, we at Mishcon de Reya had seen the potential upside for the funder, but MDR Solutions I is about more than the cash benefits. By offering funding we can generate new business. And there are also obvious benefits for our clients – we can get better funding terms, and because we know the funder backing our vehicle, we know how they work, what documents they need, and the procedures they follow, we can secure funding much more quickly. With other funders, the process is much slower.
Funding structures can get quite complicated but in my view, the simpler the better. I like damages-based agreements (DBAs), which mean the client doesn't pay any fees and gets a percentage of the damages. It's much clearer and easier to understand than the more traditional funding structures where the funder's return is based on a multiple of the amount spent, or a percentage of recovery, whichever is higher. Unless you are dealing with a huge money claim, that multiple can often end up taking a big chunk of the claim, which amongst other draw backs may make things much more difficult to settle.
The future
I think the market will continue to diversify as litigation funding becomes more mainstream, which should push prices down. Of course, it is an interesting time economically. Some funders entered the market during a period of historically low interest rates in part in the hope of securing higher than market returns for their investors. We'll have to see what happens in circumstances where rates are now going up, but litigation funding is certainly here to stay.
One interesting area is the role of ESG in litigation funding. Of course, traditional funders like to be able to tell their investors that they are investing in ESG-positive claims, but there are also increasing numbers of funders with different agendas, who perhaps aren't seeking a return so much as seeking to effect change and call big companies to account. They are willing to invest time and money investigating and pursuing inventive ways of doing so, going beyond traditional claims where the economic return is key. It will be fascinating to see how this plays out.