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Finance directors uninformed of litigation funding options

All corporates need to be aware of the choices for funding legal action, says Verity Jackson-Grant -Director of Business Development at TheJudge, a litigation finance and risk management broker

Recent figures from law firm RPC have hinted at the immense scale of the litigation funding market, pointing to a combined ‘war chest’ amongst the twenty biggest independent UK litigation funders passing £1bn, up over 40% from the previous year.

RPC suggests that as more money is invested into the asset class, litigation funders will be stepping up their search for potential cases to back.

With so much choice in the market and with some funders claiming to be one stop funding shops, finance directors can struggle to see the wood for the trees when looking for the right funding for their legal action.

They would be forgiven for assuming litigation funding should be their first port of call when seeking greater certainty over their legal spend or to reduce the risk or cash drain associates with a dispute.

But companies should not overlook the use of litigation insurance to complement or as an alternative to litigation funding. Insurance is available for own fees and disbursements as well as adverse costs and is usually the most cost-effective route to remove the litigation risk from a cost budget, where cash-flow is not the primary concern.

What’s on offer

FDs should be able to rely on the advice of their legal advisors to keep them up to speed with all the options available, however, lawyers also often turn straight to litigation funding as the most obvious means of ensuring their hourly rate is paid. We have seen a number of examples recently of poor or limited advice being given, in particular, to corporate clients.

It is not just the growing profile of litigation funding that places the onus on a company’s legal advisers to provide advice on how best to manage the legal costs involved in a dispute. The Solicitors Regulatory Authority’s (SRA’s) Code of Conduct imposes broad principles setting out how solicitors should put their client in a position to make informed decisions about their fees including discussing how the client will pay for their services and explaining any arrangements, such as fee sharing arrangements, which are relevant to the client’s case.

Solicitors that fail to advise a business that they could potentially secure non-recourse funding or insurance for the legal costs run the risk of scrutiny from a very unhappy client if the case is then unsuccessful.

The business may have a legal basis to seek a negligence claim for the amount of their legal spend, as well as any costs they are ordered to pay their opponent. In extreme circumstances, they could arguably seek a ‘loss of chance’ claim if they chose not to pursue a good claim because of a combination of an inability to pay the fees coupled with a lack of advice on alternative ways to fund their claim.

Putting clients in an informed position requires solicitors to get to grips with a fast-moving market, and many are failing to keep pace. Litigation insurance is one such area that needs to be better understood.

For example, a quirk of litigation insurance is that the payment of the premium is usually “contingent upon success”. This means the business only pays a premium if they win their case. If the case is unsuccessful, the insurer pays the legal fees up to the agreed amount but does not take a premium.

Also, the premium is usually a fraction of the price of litigation funding. These nuances can have a significant impact on the decision to obtain funding or insurance and they should be explained to the decision makers within the company at the point when they are considering entering into a dispute if they are to make a truly informed choice.

Keeping options open

There are further challenges for lawyers. Many have a “preferred” funder that they turn to when a client cannot or does not wish to fund their claim. But doing so ignores the significant competition in the market and the bargaining power that can be leveraged from undertaking a search of multiple providers in order to find the best terms.

Moreover, it can prejudice the client’s ability to obtain funding from elsewhere if the preferred funder does not wish to invest in the case. It could also contravene the SRA’s Code of Conduct, which specifically states that a solicitor should refer a client to a third party, such as a funder, that can only offer products from one source only after the client has been informed of this limitation.

Could we see FDs launching claims if they feel they have overpaid for the cost of their funding? If so, these claims could be for significant sums as it is not uncommon to see price variances in the millions or even tens of millions between competing funders, even more so when comparing a funder’s success fee with an insurance premium.

It is vital that all companies, large and small, understand the full breadth of the funding and insurance options available, and how they impact on the net recovery of a dispute if they are to make informed decisions about which mechanism will meet their combined needs of removing the cost risks involved in the dispute and ensuring they retain the lion share of the damages. Unfortunately, not all businesses are receiving adequate advice from their legal advisors.

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