The introduction of a code of conduct for litigation funding should build confidence
Over the last year the litigation funding market in England has seen a number of new entrants and in recent months some well-established funders have announced large increases in the capital available to them for investment in cases.This influx of newly available capital should be heartening for British businesses. Their ability to reduce their costs risk and exposure in litigation or arbitrations will be substantially better with more money available in the market.
Litigation funding has become more common place in England in the last couple of years, with real traction being gained in the last twelve months, particularly following its endorsement by Sir Rupert Jackson in his review of litigation costs, the forerunner to the recently passed Legal Aid Sentencing and Punishment of Offenders Act. We are seeing more companies entering this market; some come with money in the bank and some are brokers, but the biggest risk in the world of litigation funding is where a funding company represents it has funds when it does not.
It would be a disastrous situation if a funder ran out of money in the middle of a case, or simply did not pay. Aside from ruining that particular funder’s reputation in the industry, it leaves the client and the legal team high and dry.However, what is equally bad is the organisation that claims to be a funder, but has no money. These companies are not brokers and they are not funders. They serve no purpose in the litigation funding market and they are a significant danger to the industry’s credibility.
Show me the money
There has, most unfortunately, been a rise in the number of the companies masquerading around the market. These companies find a case first, misrepresenting their financial position, then they look to raise the money on a one-off basis, usually by looking to insure the capital invested with an ‘own costs’ insurance policy, thus protecting the invested funds at the very least.
The nature of the high-risk investment that is litigation funding means the process is never very fast, but these one-off schemes take much more time. Quite obviously if you find the case before you go out to find the money to invest, then the process is going to be painfully slow.
They are the worst of all worlds. To legitimate funders they damage the marketplace. To clients they are time-wasting opportunists. To lawyers they are a potential professional landmine.The emergence of these organisations has been fuelled by the perceived high rewards available to funders. It is true that rewards are high, but then so are the risks. Real funders operate their businesses on a portfolio basis in order to spread the risk.
I know the effect these companies have had from personal experience. A number of cases which we have funded in the last year came to us because the clients and the lawyers were looking for an alternative as their funder was taking too long or simply could not come up with the cash. Whilst we were happy to step in, it leaves the market with questions to ask.
Iain Stamp, CEO of UK Innovative Financial Designs Limited, had what he calls a “painful and drawn-out” experience with a funder who could not come up with money. He says: “After wasting six months, and hearing every excuse possible, we went back to the market and were lucky to find a funder with money. However, it delayed the whole litigation process considerably.”
But it is not just the clients who are affected by this. There are few lawyers who have used litigation funding, but if the first experience for those who have is a bad one, it is harder for legitimate funders to convince them of the benefits to them and their clients.
Introducing a code of conduct
So, what can be done to avoid these problems? One immediate remedy is the launch of the Association of Litigation Funders and its Code of Conduct, which contains provisions to ensure capital adequacy and the basis upon which funders can withdraw from cases. To join the Association, a funder must prove their financial resources.
Undoubtedly things will improve with these new measures. But put simply, clients and solicitors should ensure they know with whom they are dealing. They can ask for references and proof of adequate capital. Real funders have real clients who have had good experiences with them – and have been paid. Whilst funding is not right for every case, it should be considered an essential tool for every litigator and every business involved in litigation. The ability to reduce risk and financial exposure is a sensible thing to consider.