Third party funding: an introduction

Out-Law Guide | 08 Sep 2020 | 10:29 am | 5 min. read

Third party funding (TPF) offers businesses a means of pursuing viable litigation, arbitration or adjudication claims while preserving liquidity and minimising risk.

Use of TPF is becoming increasingly mainstream in a number of jurisdictions around the world, with courts in England and Australia particularly open to funding as a means of improving access to justice. However, the rules governing the use of TPF are jurisdiction-specific, and care should be taken around compliance.

We are seeing an increase in litigation as the economic effects of the Covid-19 pandemic continue to be felt, with the ultimate conclusion of claims likely delayed, putting more pressure on cashflow. Against this backdrop, businesses are seeking to preserve liquidity and we are already seeing an increase in inquiries about TPF from larger businesses which may not previously have considered its use, but which are now seeking to avoid carrying the cost of expensive legal action on their own books.

In response to these developments Pinsent Masons, the law firm behind Out-Law, has entered into a non-exclusive joint venture with third party funder Augusta Ventures. In exchange for Pinsent Masons introducing any of its clients looking for TPF to Augusta, Augusta has agreed to give Pinsent Masons clients much better terms than are generally available in the market.

How does third party funding work?

A third party funder usually provides funding for all the costs of conducting a claim and its enforcement. If the claim is successful, the funder recovers its costs plus an uplift on the money it has invested. The uplift may vary from 60% to 500%. If the claim fails, the claimant pays none of the costs of pursuing the claim. 

Funding is now available for litigation, arbitration and adjudication, depending on the jurisdiction. Funders such as Augusta Ventures will provide funding at all stages of the dispute resolution process, from claim preparation to statements of case and submissions, through to mediation, hearings and enforcement.

Roe Mark

Mark Roe

Partner

There is considerable judicial approval in England and Wales for the use of third party funding as a means of improving access to justice for those who might not otherwise have the means of pursuing a claim.

Most third party funders offer funding on a 'non-recourse' basis, under which the client does not need to pay anything to the funder unless the claim is successful. This takes away the risk to the client of investing in a large claim only to get nothing back, either because the claim is unsuccessful or there is no way to enforce the resulting judgment or award.

Under the traditional TPF model:

  • the funder pays all legal expenses associated with pursuing the claim;
  • this includes the cost of lawyers, experts and arbitrators and, sometimes, after the event (ATE) insurance for the risk of the claimant being liable to pay the successful party's legal costs;
  • if the claim is successful, the funder will recover the cost of its investment from sums recovered plus a 'margin' of between 60% and 500% of the sums advanced.

There are a number of different TPF options available. The most typical is still 'single case' funding, which covers a single action or claim. However 'portfolio' funding is becoming increasingly common, where a funder will cover a 'book' of claims from a particular law firm or client. This allows the funder to spread its investment risk, and offer funding for lower value claims which individually are unattractive to funders.

Some funders will offer finance in exchange for a percentage of what is ultimately recovered as opposed to the funding cost + margin non-recourse model. This model is common in Southern Europe. However, it can give rise to tension in the relationships between the client and the funder – for example, over when and how much a claim should be settled for. It is not always appropriate.

How have the courts responded to third party funding?

There is considerable judicial approval in England and Wales for the use of TPF as a means of improving access to justice for those who might not otherwise have the means of pursuing a claim. This is effectively a two-part test:

  • the client must remain the primary beneficiary of the judgment, receiving more than 50% of the damages or award; and
  • the client, not a third party funder, must control the conduct of the case.

In practice, this means that reputable funders tend to prefer cases where the potential recovery is substantial, so that their margin will fall within these parameters.

The English courts have been hostile to the use of TPF in cases where this is not in the interests of the clients - see, for example, AB v British Coal Corporation, a 2007 case in which 80% of the compensation payable to a group of Welsh miners who brought pneumonicosis claims against their former employer had to be paid to their lawyers. In this sort of scenario, the English courts are likely to find a funding arrangement to be champertous and unenforceable.

Globally, the rules on TPF are very jurisdiction-specific. England and Australia are TPF-friendly jurisdictions, while TPF is also generally lawful in civil code jurisdictions like France and Germany, but the precise terms of what is permissible vary quite sharply. Hong Kong and Singapore both changed their laws last year to allow TPF in international arbitration cases only, but the reforms are in a very early stage and it remains to be seen how this will work in practice. TPF is unlawful in a number of other jurisdictions including China, Ireland and Nigeria.

How is third party funding regulated?

In England and Wales, the legal position on TPF developed in response to case law and there is no specific regulatory legislation. Instead, the industry is self-regulated by the Association of Litigation Funders (ALF).

Part of ALF's role is to oversee funders' compliance with the Ministry of Justice's Civil Justice Council's 2011 code of conduct for litigation funders. Amongst other things, the code contains provisions on:

  • funders' capital adequacy;
  • managing disputes over termination of funding arrangements; and
  • conflicts of interest, including the requirement that it is the client who remains in control of the litigation.

Which cases are suitable for third party funding?

Traditionally, third party litigation funders have preferred to fund cases with substantial damages at stake, so that they can realise their investment while ensuring that the client is able to walk away with at least 50% of the recovery amount.

Augusta conducts a three-part due diligence process before agreeing to fund a particular case:

  • establishing the prospects of successfully enforcing a judgment or award. This involves assessment of the defendant's financial assets and how readily they may be enforced against;
  • assessment of the legal merits of the matter;
  • establishing the likely amount of any award or judgment, usually based on an opinion from a forensic accountant or quantum expert.

Augusta will usually expect to see that sums recoverable are at least six times the costs of pursuing and enforcing the claim before agreeing to fund, because it wishes to ensure the client will receive at least 50% of the damages or award.

If Augusta is able to provide funding on a portfolio basis, it may be able to fund smaller claims provided that the prospects of success exceed 60%.

Funding is released to the client in different 'tranches' triggered by different stages of the claim, with funder recovery based on the amount released to the client to date. This creates an incentive for early settlement.

Cases in which TPF may be particularly beneficial include:

  • joint venture disputes, particularly where the joint venture partners are of different financial strengths or have different commercial interests;
  • intra-board disagreements, where some directors want to pursue a claim and others may not;
  • high value disputes where claims are expensive to pursue but cash is tight such as those involving energy, construction and engineering, intellectual property and tax.

Co-written by Robert Hanna of Augusta Ventures.