People love an underdog. I am writing this article on the day England play Croatia for a place in the final of the FIFA World Cup 2018. Regardless of the outcome, the English team has made its country proud, as who would have thought, after so many failures, we would ever end up in a semi-final.
Underdogs have always been game-changes, especially in the law. From May Donohue, who found a snail in the bottom of her ginger-beer float in 1936 and brought a case that established the modern law of negligence, to Richard Durkin who won a 16-year legal battle against HFC Bank to have his loan agreement cancelled; those who have the courage to bring a claim and fight for justice are often celebrated.
But unfortunately, finding the funds to pursue litigation is often impossible for SMEs operating on thin margins and tight cash flows. It is estimated that businesses miss out on billions of pounds in potential damages awards either because they simply do not have the cash reserves to fund a claim or fear being hit with an adverse costs order.
Although litigation funding has been slowly become part of the legal landscape over the past decade or so, up until now, most providers have only been interested in funding high-value claims.
However, this situation is now changing, with litigation funders moving into the sub-£2 million claims space, opening the door for SMEs to work with third-party funders, taking advantage of their contracts and expertise in the legal market.
How litigation funding works
Litigation funding, or dispute resolution funding as it is sometimes known, is a simple financing arrangement whereby the funder agrees to pay the client’s legal fees in bringing a claim (usually including experts, outside counsel, and disbursements) in accordance with an agreed budget. It is worth noting that this type of funding is now also widely used in arbitration—both in the context of commercial arbitration and public international law.
The investment made by the funder is non-recourse and the outcome of providing litigation funding depends on whether the claim (whether litigation or arbitration) is successful or not:
- Unsuccessful—the client will not have to pay anything, and the dispute resolution funder loses all the money it has invested in the case
- Successful—the funder will be entitled to a return on its investment from the damages that are ultimately recovered by the claimant
There are variables on how the funding structure works; for example, a claimant’s costs can be fixed, so rather than pay nothing, their exposure is limited to a pre-set figure. It is this variance which allows dispute resolution funders to provide funding for smaller claims.
When it comes to assessing whether a claim is eligible for litigation funding, funders assess not only the merits of a claim from a liability perspective but also factors such as:
- a breakdown of anticipated costs from the solicitor
- a realistic assessment of the quantum of the claim (the amount of damages awarded)
- whether the defendant has the funds available to pay any damages awarded to the claimant and that they and their assets are in a jurisdiction in which the applicable judgment or award is enforceable.
- whether there is the possibility of a dispute regarding the jurisdiction in which the case will be heard
The key consideration for funders is the difference between the investment made in the case and the total quantum of the claim. One of the advantages of working with a litigation funder is they have a clear strategy for assessing the chance of a matter’s success and will have specialist software available to quickly calculate whether any early settlement offers will work to the client’s advantage.
When it comes to protecting SME’s against an adverse costs order, After The Event insurance is provided through the funder working with independent insurers, who themselves will have assessed the merits of the claim.
Choosing a funder
SMEs can approach a funder independently; however, the legal opinion of a solicitor or counsel will be required by a funder to confirm funding can be provided. In many cases businesses will first instruct a solicitor and work with them to select a funder who can best serve their interests.
Approaching a litigation funder in the first instance does have its advantages as they will have a group of trusted law firms they work with who can be recommended to you. Whether or not you then choose to explore the option of litigation funding is your choice. The most important factor when approaching a funder is to research their reputation for integrity and commitment to the best interests of the clients and solicitors they work with. A reputable funder knows that an SME who is choosing to pursue litigation is often doing so to ensure the survival of their organisation, and will, therefore, put the interests of the client well above their own and ensure they can access justice as effectively as big business.
BMS Funding works with the legal profession and businesses to provide funding solutions. To find out more, please contact us on 0333 222 5731.