Third party funding as an alternative litigation financing solution

Out-Law Analysis | 01 Apr 2020 | 4:56 pm | 2 min. read

The Covid-19 pandemic will lead to cash flow constraints for many infrastructure businesses. This makes funding existing and prospective claims difficult at a time when effective pursuit of claims to raise cash may well be the difference between staying in business or becoming insolvent.

The ability to access third party funding to support existing claims as well as new claims may make all the difference.

As the number of reported coronavirus cases continues to impact industry-wide operation and authorities across the world impose further measures to control it, there is inevitably going to be a serious tightening of available cash in the infrastructure sector. Force majeure provisions in contracts may relieve parties of liability in the event of non-performance, but will rarely provide contractors with any financial compensation.

Roe Mark

Mark Roe

Partner

Third party funding is by no means just for the insolvent: companies which, in the current circumstances, would prefer to harbour their cash reserves to invest in other things can use it to stop the outflow of cash currently being expended in pursuit of claims and allow capital to be used elsewhere.

This lack of cash, when combined with the industry's notoriously very modest profit margins, will quickly turn contracts cash negative - so cash, which is of course the lifeblood of the construction industry, will likely dry up very rapidly. Firms considering pursuit of a claim to recover what is properly due to them may not get a return on any monies invested in litigation for many months, and quite possibly a number of years.

It is therefore well worth considering third party funding options in the context of the present crisis. Third party funding is by no means just for the insolvent: companies which, in the current circumstances, would prefer to harbour their cash reserves to invest in other things can use it to stop the outflow of cash currently being expended in pursuit of claims and allow capital to be used elsewhere.

Pinsent Masons, the law firm behind Out-Law, has a preferred supplier arrangement with funder Augusta Ventures, which means that we can give our clients access to considerably better terms than parties can obtain by going direct to the market. Augusta has substantial funds available now to invest in supporting claims. Augusta, unlike many third party funders, is committed to providing funding to the infrastructure sector.

We believe this is very much aligned with our clients' best interests. In addition to the benefit of a dedicated facility at preferred rates, our arrangements with Augusta include a fast-tracked due diligence process, standardised funding documentation and transparent commercial terms. All this saves our clients time and money and provides a fast answer as to whether funding is available for their case.

Augusta is also very flexible in its approach to third party funding. It is happy to fund existing claims as well as new claims. It is also possible to obtain funding for a proportion of the total costs of pursuing a claim - for example, 50% of total expenditure - and to syndicate funding of very large claims.

Augusta will also provide third party funding for adjudication claims via a fast track procedure, both on a single case and on a portfolio basis. The costs will be less if a portfolio of claims can be made available for funding. Unlike litigation or arbitration, adjudication can genuinely assist a party in financial distress to obtain cash within a few months – and by using third party funding, a cash-strapped business will not need to put up the funds to run the adjudication.

Under the terms of our arrangement, Augusta will also consider providing funds directly to Pinsent Masons in appropriate circumstances. This will allow us to offer 100% conditional fee arrangements, or compensation based on a percentage of what is recovered.

We are very familiar with the intricacies of the third party funding industry, having advised clients on funding solutions in a range of cases and industries, particularly within the infrastructure sector.