One of the most common misconceptions surrounding litigation finance is that it cannot be used to fund defence cases.
True, defence funding isn’t common, even among the best-known litigation financiers. But as business leaders everywhere will aver, defending a claim is every bit as vital to business growth and survival as bringing a claim—and it happens far more frequently.
It’s surprising, then, that most lawyers remain oblivious to the role that litigation finance can play on the defence side. In fact, litigation finance is as much for defending as it is for pursuing claims. This is important for many reasons—most obviously because although many companies rarely bring lawsuits, no company can avoid being a defendant in litigation (often more regularly than it would like).
Indeed, financing defence matters goes hand-in-hand with one of the most increasingly widespread innovations in litigation finance: portfolio financing. As part of a portfolio, defence matters play a crucial role.
In the UK market, the majority of enquiries Burford receives are for the hardest type of case, which is to say, single cases. These cases will either win or lose—and such binary outcomes are by their nature very high risk.
Like any other sophisticated financial service, litigation finance works most efficiently with diversified pools of assets, in which some investments may do badly, but others will do well. Diversity lowers risk, which translates to lower cost and a more attractive deal for clients. As a result, clients and firms would be far better advised to discuss funding not a single matter but a portfolio of matters.
Portfolio financing provides a facility to fund a book of cases run by one law firm on a linked basis. When funding a law firm portfolio, the matters may be on behalf of one or more claimants in related or unrelated cases. When funding a portfolio with a client, the matters will of course be on behalf of one claimant but can involve multiple defendants in related or unrelated cases.
The portfolio approach is increasingly popular with US clients and law firms. A particularly telling number in Burford’s 2014 Annual Report is this: almost half (49%) of current committed capital is invested in portfolio arrangements. By contrast, single cases comprise just 37%, with the balance of 14% committed to complex investments.
This growth in portfolio financing by Burford is indicative of growing maturity in the field of litigation finance. It speaks to the fact that firms and clients need solutions not only for singular instances of financial need, but also for offsetting risk and cost across a range of litigation matters. Portfolio financing addresses this need.
This is where the funding of defence matters plays an important part.
The costs of defending litigation can be included within the portfolio, as well as claims. Alternatively, portfolios can be structured with bespoke definitions of “success”, and cases can run on full or partial CFAs, as well as DBAs, or indeed a combination of these.
The appeal of defence funding within a portfolio is clear for in-house counsel trying to mitigate risk and cost across a range of cases.
Defence cases can be funded outside of the portfolio model, its viability can be pinpointed to what is the flip side of the decision funders make when financing claim. If the key criteria of a funding action is that it is meritorious, then the key component of a funded defence is that the case against it is a weak one. Defining what success means is the key.
Burford Capital CEO and founder, Christopher Bogart recently discussed how companies defending litigation will often ask their lawyers to consider an alternative fee agreement: “The problem is that some law firms won’t actually do alternative fee arrangements—and at the same time, it may just not be enough for some clients. That’s where litigation finance comes into the defense equation.”
Litigation finance firms can step in to fund the entire cost of defending against a weak claim in exchange for the same kind of multiplier or uplift based on predefined success.
The necessity to do this is arguably more prevalent in the US than the UK. In the US, it is a constitutional right to bring claims, frivolous, or not. In the UK, these can be struck out at a fairly early stage, and there is the barrier of adverse costs.
It requires specific skills to play in both jurisdictions, and there are challenges. For example, clients in the US may feel aggrieved paying a premium to a litigation finance company simply to ward off a spurious claim. However, the economics of that are far more attractive than paying 100 per cent of the defence costs.
Whilst research shows that understanding and use of litigation finance is rising, informing litigation partners on the case for the defence is a new stream of education within the legal industry.
Nick Rowles-Davies is Managing Director at Burford Capital (UK), and author of Litigation Funding (Oxford University Press).