The American Lawyer magazine recently headlined a story suggesting that Juridica, a Guernsey-based litigation funder which mainly funds US cases but is headed by English barrister Lord Brennan, was halting investment in any new cases with a view to managing its existing portfolio. The news, the magazine says, follows a number of losing 'bets' by the group and resultant pressure from shareholders.
Is this a dose of reality for funders, reminding them that litigation is a risky business, and will it
lead to a pull back from the burgeoning market for third-party funding? Have funders rushed in and had their fingers burnt?
Litigation risk
That litigation is risky is all too plain. The ones you think you'll win, you lose, and vice versa. The answer for most of us is summed up in one word: settle.
The modern litigator is a problem solver, with trial just one of the options available. 'You'll get better odds at Ladbrokes' is the oft-repeated comment
that accompanies placing trust in the trial process and a trial judge to decide in your client's favour, particularly if the trial turns on oral evidence.
If the lawyers' payment is subject to a contingency, the lawyer becomes the funder,
and no doubt this changes their behaviour. If the contingency is not cash based (i.e. payment of fees falls due on judgment or settlement), the merits of the case come to the fore. If the contingency is cash based (i.e. fees are payable on receipt of cash following judgment or settlement), the risk for the lawyer becomes substantial. They sit in exactly the same position as a third-party funder. In that position, the question of whether you will win may become secondary to the question of whether the other party is good for the money.
According to The American Lawyer, Juridica's problems appear to have been with the merits of cases, as outcomes have been below expectations. Perhaps this is a sign that the primacy given to the credit worthiness of the defendant is misplaced, or it may be just ordinary litigation risk. Halting taking on new claims makes it sound like Juridica feels there's something wrong with the selection process.
Potential returns
While the position of Juridica is not typical, it may show the need for some caution in case selection. Despite this, the returns on this investment class appear good, with the litigation-funding firm Burford reporting a gross return of 29 per cent.
The risk may be high, but so are the potential returns.
We do much work with funders and we have
not noticed any falling away of investment or enthusiasm: third-party funders have money to invest. Much of Juridica's investment is in the US,
as is Burford's. It remains the position that a US jury award offers potentially huge returns but requires substantial investment.
In the UK, the returns may be less but so may the investment. On the other hand, the 'loser pays' rule requires the purchase of expensive insurance.
The cover required may be massive in a large claim. Herbert Smith Freehills, which is acting for Royal Bank of Scotland in a claim brought by the bank's shareholders, has recently re-adjusted its costs in defending the claim to £90m. If the claim is lost, the claimants will have to pick up the tab. That sort of cover will require syndication in the funding and insurance market and that is not easy to arrange.
It's eye-watering stuff, and this may be one of the underlying reasons for some musical chairs recently in the firms representing the claimants.
From strength to strength
The third-party funding market is maturing: some starters have dropped away, but on the basis of the potential returns, there is some serious money looking for a home.
The US Chamber of Commerce continues to wage war on third-party funding and associated class actions in Europe. In the US, there is a Senate inquiry into the industry. The business and insurance lobbies undoubtedly have political clout in
their opposition to funding and class actions.
They produced a failed, last-ditch effort to neuter the class action elements of the Consumer Rights Act 2015 (CRA).
But, despite these efforts and the Juridica story, third-party funding goes from strength to strength. There are a number of developments which appear to be taking mainstream funding along the path.
First, there is the internationalisation of litigation: cases involving product liability, as with the Volkswagen emissions scandal, or alleged cartels, such as the air cargo carriers fined for price fixing, will often be multi-jurisdictional. This provides opportunities for funders to back proceedings in one or more jurisdictions or to collect claimants in various jurisdictions into one. The air cargo claims are proceeding in Europe in two jurisdictions: the Netherlands and England. Both are funded by third-party funders.
Second, a cadre of core funders with experience and money is developing. While Juridica may have pulled back, it remains typical of the modern third-party funder now reflected in the likes of Harbour, Bentham, Burford, and Dublin-based CFI. These are international companies, which in two cases are quoted on public exchanges. CFI is a partnership between two law firms from Australia and Canada experienced in funding both large and smaller cases across many jurisdictions. Bentham Europe has recently entered into a partnership to pursue the VW shareholder claim in Germany, and has entered into an arrangement in the UK to pursue Tesco shareholder claims.
These latter examples lead to the third development: the increasing number of class actions across Europe, which promises potentially very large claims that are the natural territory for funders. To get off the ground, these claims require heavy investment beyond the pocket of the ordinary claimant law firm. The new opt-out legislation in the CRA may offer funders even
greater opportunity.
The third-party funding industry is young and has taken a little time to find its feet, but it is now an established part of the litigation picture, albeit for larger claims. Unfortunately, for smaller claims there are limited offerings, and this remains largely the domain of lawyers taking risks with conditional fee agreements and damages-based agreements (DBAs) combined with an insurance product to cover the downside.
David Greene is senior partner and head of group action litigation at Edwin Coe
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Introducing statutory regulation for third-party funders
The CRA has introduced ‘opt-out’ collective actions before the Competition Appeal Tribunal (CAT) for breaches of the Competition Act 1998. This means that proceedings can be brought on behalf of a class of claimants who do not need to take any steps in, or have any knowledge of, the litigation in order to be represented. This is contrasted with ‘opt-in’ proceedings whereby the claimants have to actually sign up to the action.
This potentially has wide ramifications for third-party litigation funding, since it might now be possible for funders to back claims on behalf of a large number of claimants who have not chosen to participate in proceedings (and indeed might not know about the proceedings being taken on their behalf ).
Comparing the possibilities that may be open to funders with the ways that solicitors may fund cases raises some interesting issues.
Solicitors, DBAs, and class actions
The ability of solicitors to act on a ‘contingency fee’ basis (i.e. to act in exchange for a share in any award) is regulated by the Damages-Based Agreements Regulations 2013. DBAs are, for example, subject to a statutory cap and solicitors may not recover more than 50 per cent of the sums ultimately recovered by the client (a cap of 25 per cent is applicable to personal injury claims and 35 per cent to employment claims).
Solicitors are also, of course, subject to statutory regulation and a mandatory professional code, and are answerable to their professional body.
Interestingly, though, the CRA expressly prohibits solicitors from entering into DBAs for opt-out class actions. This prohibition was driven by a concern that permitting DBAs in such cases might create improper incentives, and might cause solicitors to pursue unmeritorious claims.
Funders and class actions
Compare this with the possibilities open to funders. First, funders are not subject to statutory regulation or any mandatory code. Currently, some third-party funding is self-regulated by the Association of Litigation Funders (ALF), which provides a voluntary code of conduct. To date, the ALF has seven members, which is less than half of the known operators. While the voluntary code of conduct goes some way towards addressing the concerns that lack of regulation can raise (for example, capital adequacy requirements and a prohibition on interfering with the lawyer-client relationship), it lacks any teeth for dealing with a breach of the voluntary code.
The ALF is only able to impose a maximum fine on its members of £500 (payable to the ALF) for violation of the code of conduct and, while it can terminate membership for non-compliance, it does not prevent a funder from then providing third-party funding.
A ‘nascent’ industry?
Lord Jackson’s review of civil litigation costs in 2009 noted that third-party litigation funding was still ‘nascent’ in England and Wales, and as such a voluntary code would be satisfactory. However, he also stated that if, in the future, the use of third-party funding expanded, ‘full statutory regulation [might] well be required’.
Six years later, an analysis carried out by the Justice Not Profit campaign estimated that the 16 main funders operating in England and Wales have approximately £1.5bn under management, which would suggest a 743 per cent growth since 2009, though statutory regulation remains absent.
Second, although the CRA itself doesn’t address whether funders could support opt-out class actions, the CAT has published a guide to proceedings which specifically contemplates that class actions might be supported by third-party litigation funding.
This raises the interesting paradox that solicitors, who are subject to mandatory statutory regulation, fiduciary duties, and the DBA regulations, are excluded from acting in opt-out class actions in exchange for a percentage of damages because of the improper incentives this might create, but funders – which are not subject to any such regulation or duties – are free to support such actions without any limitations or caps.
Accordingly, the question arises as to whether this strikes the right balance. Third-party litigation funding is no longer a nascent industry, and there is no reason why incentives to support unmeritorious litigation should exist for solicitors but not funders. Surely there must be a case for at least levelling the playing field between solicitors and funders by making both groups subject to equivalent regulation?
The views expressed are personal and do not reflect the views of Sidley Austin, its partners, or clients.
 Ken Daly is a partner at Sidley Austin, Brussels, and a solicitor in England and Wales
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Regulation could hinder evolution
There is some natural scepticism towards third-party funding. The high-profile case of Excalibur Ventures v Texas Keystone [2014] EWHC 3436 Comm highlighted how it can
lead to unmeritorious claims being pursued, and in 2014 questions were raised over the source of litigation funder Argentum’s financial capital.
Access to justice and the ability to seek redress are fundamental principles of a fair society and essential for a functioning economy. The concern that litigation funding will somehow fuel a ‘compensation culture’ is not a logical conclusion. Litigation funders will only benefit from successful claims, and so will only invest in matters with solid merits, which therefore deserve the chance to seek justice.
As litigation funders ourselves, we come across the odd horror story of claimants being tied into unfair agreements, which damages the perception and reputation of our industry among the legal profession.
We battle these preconceptions every day and have structured our business model in order to address these very issues. Solicitors have a right to expect that their funder will assess every investment, be transparent on the source of funds, place the full committed capital into the law firm’s account on approval, and only invest in matters where the claimant will walk away with a fair return.
For extra security, solicitors should also examine whether their funder has opted to become regulated by the Financial Conduct Authority and whether their agreements are Credit Consumer Act-compliant in order to be enforceable.
Mandatory regulation of the industry would force all funders to be as transparent on their terms and to be held accountable for their actions.
However, the industry itself has developed in response to the changing legal landscape of irrecoverable success fees, after-the-event insurance premiums, and increasing court fees. There is a risk that regulation at this stage will limit or hinder natural evolution and healthy competition, which would be to the detriment of those who would benefit most – the claimants.
Ultimately, third-party funding offers valuable support and options to claimants and law firms alike. It is not to be feared or mistrusted, but should in fact be embraced as part of the arsenal available in litigation.
 Jeunesse Edwards is director of strategic engagement for Augusta Ventures
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