Litigation funding – to finance or assign a claim?
Litigation funding in its widest sense simply means exploring all options to fund the various costs of litigating a matter to trial, enforcement and final recovery. Those options can include one or more of the following:
- The litigating party (“the Client”) can pay some or all of the costs on a usual private client basis, ie paying the costs from their own resources as those costs are incurred;
- Solicitors can be engaged on a Conditional Fee Agreement (“CFA”) or Damages Based Agreement (“DBA”) basis, or with part of their costs accrued on that basis and part paid as the costs are incurred;
- Counsel can be engaged on a Conditional Fee Agreement (“CFA”) or Damages Based Agreement (“DBA”) basis, or with part of their costs accrued on that basis and part paid as the costs are incurred;
- After the event (“ATE”) insurance cover, to pay any adverse costs award in the event of the case being lost, can be sought on the basis of the premiums being wholly or partly deferred;
- Security for costs can be provided using a specifically tailored ATE policy;
- Court fees and other disbursements can be paid by the Client or by a litigation funder (“Funder”);
- Any of the above costs can be paid by a Funder;
- The Client may be able to assign part or all of the claim.So, what are the pros and cons of the two approaches – funding and litigating a claim v assigning the claim?
Funding and litigating a claim
The Client can decide how they can fund each element of the various costs of litigating the claim.
The Client can decide how to seek and respond to any offers of settlement, or to proceed to trial, including proposing and attending a mediation.
Any realisations, net of costs, will benefit the Client.
Solicitors and counsel can be instructed on a CFA or DBA basis. The uplifts need to be taken into account when considering the total costs of litigation.
A Funder can be used to pay costs which cannot be managed using the above tools or where the Client decides they want to reduce part of the personal risks of litigating by using funding.
The existence of the funding agreement can be disclosed to the respondent(s) to help to demonstrate that the Client can proceed to trial, which can assist in bringing the parties to a negotiated settlement.
The Client will benefit from the experience and knowledge of the Funder.
If the case is lost, there is nothing to repay to the Funder.
Insolvency claims which cannot be assigned by a Trustee in Bankruptcy can be pursued using third party funding.
The Client has to instruct the legal team and make decisions, after receiving and considering advice. The Client may not be experienced in, or comfortable making, such decisions. This may be a drain on management time which could be better focused elsewhere.
Each funder has a different target case / market – each will have their own set of criteria. For many Clients and their legal team, litigation funding is still an unknown. Approaching and negotiating with Funders can be a slow and time consuming process with no certainty that an acceptable offer of funding will be forthcoming.
When the commercial terms are agreed the Funder will table their formal funding agreement which can be a long and complicated legal contract. The Client may need to incur the costs of their solicitor advising them on the terms.
If the merits of a case change the terms usually allow the Funder to renegotiate the terms or decline to fund the case further.
When a case is won the Funder will be paid their agreed return out of realisations.
ATE may need to be sought and put in place. Most funders will not be willing to support the issue of proceedings without ATE being in place or an indemnity from a reliable third party. This can add cost and delays to the process.
Selling or assigning
An outright sale may be attractive as it will result in an immediate realisation (albeit often a small proportion of the value of the claim) and enable the Client to bring the matter to an end and close their file – closure can enable a business to focus its resources elsewhere.
A sale or assignment can also be completed but on the basis that the Client will benefit from a positive outcome, perhaps receiving a percentage of the eventual realisations. That has the benefit of the Client sharing in any upside.
Unless a prospective purchaser is likely to be put off by such an approach, before assigning, the Client can test the market and compare any offers – perhaps asking the potential respondents to make an offer to acquire the right of action and / or tell them you are minded to assign the right of action and see if an offer of settlement is forthcoming.
The purchaser will take over the management of the case, including instructing the legal team and making all decisions on the future conduct of the case.
The client usually retains no control over the conduct of the litigation or the terms of any settlement.
If the assignment is absolute the client has no financial interest in the outcome.
If the assignment provides for the Client to receive a share of any realisations, the Client cannot then consider the matter closed and may spend management time monitoring progress or, in the case of an insolvent estate, incurring professional costs in keeping the insolvency open.
The terms of the deal should be clear – what, if any, costs (and uplifts) will be deducted from any realisation before the Client shares in the spoils?
There may be obligations on the Client to continue to provide documents or assistance to the purchaser which may dilute the benefits of bringing matters to a rapid conclusion.
The Client needs to be satisfied that the purchaser is good for any indemnity given against any adverse costs risk, and should be satisfied that there are no unacceptable reputational risks, or the purchaser needs to obtain an ATE policy with the terms approved by the Client.
Certain claims vested in a Trustee in Bankruptcy cannot be assigned
At the end of the day, the choice to assign or fund in one or more of the ways set out above must be an informed commercial one from the client with the benefit of the expertise of the advising solicitor. It is, of course, a professional duty on the solicitor to explore all funding options. Every case is different, but with the economic pressure facing so many business clients at the moment, this is a vital debate to undertake and one where solicitors and other advisors can really add value.
Want to know more about the advantages of third-party litigation funding?
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