THIRD PARTY LITIGATION FUNDING
Third party litigation funding is the funding of a litigation claim by a party that is not a direct party in the litigation. One of the major benefits of third-party litigation funding is that it enables litigation to proceed that would otherwise not have been pursued.
In the US, third party litigation funding has been an integral part of the legal culture for many years. It is common for many lawyers to take on the costs of running the litigation in return for a substantial share of the award, usually a third to a half of the award. Well-known examples include John Edwards, the former US Presidential candidate for his product liability lawsuit against Sta-Rite, and Masry & Vititoe, whose $333m lawsuit against PG&E was popularised in the movie Erin Brokovich.
Aside from lawyers taking a share of the award on a contingent basis, institutions have formed specifically to fund these claims in return for a similar share of the award. Australia was an early adopter of institutional litigation funding.
In the UK, it was not until 1995 when the Courts and Legal Services Act of 1990 became effective, allowing solicitors to act on a Conditional Fee Agreements (no-win, no-fee) basis (with a capped 100% uplift / mark-up on fees). This also allowed third party funders to be awarded a share of the award.
In the UK, some institutions selectively funded litigation cases but it was not until 2010 when third party litigation funding started to gather momentum in attracting mainstream institutional investors. Since then, the number of specialist third party litigation funders, as well as institutional investors (mainly hedge funds and distressed debt funds) providing case-by-case litigation funding, have proliferated.
Furthermore, in 2013, the Legal Aid, Sentencing and Punishment of Offenders Act 2012 (LASPO) became effective, allowing solicitors in the UK to take a share of the award for the first time through Damages-Based Agreements (DBAs).
As of 2018, over 40 institutions that fund litigation cases in the UK – some specialist litigation funders but others being hedge funds, distressed debt funds, multi family-offices and private companies.
Third party litigation funding was originally championed as a valuable tool that provides access to justice for claimants who could not fund meritorious claims. Today, it is also used as a cashflow or balance sheet management tool.
HOW DOES IT TYPICALLY WORK?
Third party litigation funding works by allowing the third party to fund the cost of the litigation for a return. Typically, this return has been the greater of 3 times the funded amount or 30% to 50% of the share of the award.
This explains why litigation funding is often associated with substantial claims, for example the multi-billion pound RBS shareholder dispute. However, this also explains why the size of the claim must be sufficiently bigger than the expected costs of funding a trial.
The rule of thumb used in the market has been a ratio of claims to costs of 6:1 – in other words, a claim amount which is at least 6 times the expected cost of running the dispute. And the reason is clear – without a high multiple, the cost of the litigation (including the funders’ return) would simply not be viable.
As cheaper alternatives have come to the market, ratios of 4:1 have become possible for some. And in the case of our Fixed Interest Release Funding product, a multiple as low as 3:1 could potentially work.
However, given the basis of funding is non-recourse (lose and no monies have to be repaid, but win and the monies and a return have to be paid), the claim amount has to have a monetary value which sufficiently exceeds the expected cost of the claim to cover the return, and leave the claimant with a reasonable share of the damages.
LITIGATION FUNDING AND THE SRA
Given the potential relevance of third party litigation funding to the legal justice system, solicitors in England and Wales are now obliged to make their clients aware of the availability of third party litigation funding. This is set out in the Solicitor’s Regulation Authority Code of Conduct.
The SRA do not otherwise regulate or oversee the litigation funding market in any capacity.
LITIGATION FUNDING REGULATORY FRAMEWORK
Third party litigation funding as an industry remains unregulated in itself, although a UK industry body called the Association of Litigation Funders (ALF), was founded in November 2011. Initially, it played an important and valuable industry body when few funders were directly involved in the market.
Today, the body still provides an informal level of governance and a benchmark but with only 9 members, the majority of litigation funders today are not members of ALF. In fact, many of these funders are not exclusively litigation funding business but FCA-regulated investment firms, such as hedge funds and distressed debt funds.
Sparkle is not a regulated body but Sparkle products are administered by Acasta Europe Ltd, who are regulated by the Financial Conduct Authority.