Issue 2: December 2020
COVID-19: Litigation Funding Opportunities in a Pandemic
The volume of litigation normally increases during tough economic times. The global pandemic will undoubtedly see a rise in insolvencies, fraud, and breaches of contracts. This will ultimately mean there is more need to pursue litigation to recover sums owed as, although genuine disputes will always arise, in this climate debtors may more often resist payment with spurious claims.
Equally, the costs of litigation are increasing and funding defended litigation to trial can be high. However, the costs of losing can be even greater. In fee-shifting jurisdictions such as the UK, the losing party will have to pay their opponent's costs as well as their own. Therefore, many businesses may simply forego pursuing meritorious claims in order to conserve their legal spend/risk.
Due to the pandemic's widespread effects, businesses across all sectors will feel cashflow pressures. Most will require money simply to keep their businesses afloat. Using litigation to enforce one's business rights could be considered an unnecessary risk and drain on capital, despite the potential upside of a successful litigation. It can be hard to convince those with financial responsibility that investing the company's hard-won profits without creating any tangible asset, with only a chance of recovery, is a wise step. Recently, 72% of in-house lawyers reported that their companies have failed to pursue a meritorious claim "for fear of adversely impacting the bottom line"[ref 1]. This may have a short-term cashflow benefit, but the long-term impacts of simply writing off a loss can be more damaging.
However, a number of options allow businesses to take legal spend off the balance sheets and free up vital cash, while not accepting a loss caused by another party.
Detailed below are practical solutions that businesses can use to manage the cashflow demands of litigation, without compromising their rights. Many litigators are familiar and up to date with all of them, but adoption is still not that high, which suggests that law firms' clients still need to get comfortable with this kind of risk transfer.
Some professional finance companies will fund litigation or arbitration in exchange for a share of the winnings. Lending is non-recourse, meaning that if the case is unsuccessful the investment is written off. The sums available can range from a few hundred thousand pounds to tens of millions on a single case, and even more across a portfolio of cases.
Funders will typically seek a return of between 15%–40% of the damages of a successful case. There are a number of funders in the market (around 30 in the UK alone), which will each have their own appetite and remuneration structure. As recently as March 2020, the top 15 litigation funders in the UK were reportedly holding around £1.9 billion of assets (up from £1.3 billion in 2017/2018)[ref 2].
Finding the right funder can be difficult and requires skill. Some law firms will have preferred relationships, but this will not necessarily mean they are the right funder or even the most competitively priced. Furthermore, presenting a case to the funder in the right manner will affect the likelihood of acceptance, and potentially the terms offered.
Funding the enforcement of awards/judgments
Winning the dispute often does not guarantee financial benefit. Almost two-thirds (65%) of in-house lawyers have reported that their companies hold unenforced judgments of US$20 million or more[ref 3]. Even more in-house lawyers (72.4%) see as an "important or very important benefit of legal finance", that it can be used to "finance pursuit of unpaid judgment debts"[ref 4].
Litigation funding companies can provide finance to enforce judgments even if they have not funded the main action. Some funders specialise in this specific area of work and have specialist asset-tracing and enforcement teams.
In addition to financing enforcement, some litigation funders can advance some of the funds against an award or even purchase a judgment outright. This can immediately benefit a business' cashflow and financial position. Selling a judgment or arbitration award also provides certainty and removes the risk of not recovering anything.
Portfolio debt recovery schemes
This practice – where a whole portfolio of book debt is funded in one deal – is becoming more commonplace. The client has no upfront costs, but many more debts can be actively pursued (rather than being written off, or collection delayed until budgeting allows). In this scenario, the client will retain at least 70% of all recoveries. Marsh JLT Specialty itself has provided a number of large corporate clients (including law firms) with fully funded debt recovery solutions.
Litigation insurance options
A number of insurance-backed solutions exist that can alleviate risk and cashflow issues. For example, if a business' external legal team is willing to work on a contingent basis, with the fees dependent on a successful outcome, it is possible to provide an insurance policy for some of the contingent fees if the case fails. Therefore, the cashflow burden on the business is removed, but the law firm still has the certainty of getting some payment in the event that the claim fails.
In the UK and other common law jurisdictions, the loser has to pay their opponent's legal costs. Insurance is available to cover this. In some instances, the premium for the insurance can be fully deferred and contingent, meaning that it is only payable if or when the claim wins. If the case loses, the premium would not be payable, but would still respond.
In a climate where unsuccessful litigation can increasingly lead to claims, especially where adverse costs are involved, adverse costs insurance somewhat reduces the risk of unhappy client litigation arising.
Businesses do not need to be discouraged from enforcing their commercial rights by the potential costs. Cashflow burdens should no longer be a reason that a dispute is not pursued. Funding and insurance-backed solutions can remove the cost and risk of litigation.
Law firms have a duty to ensure their litigation clients' best interests are protected by obtaining competitive pricing and options. This demonstrates compliance with regulatory obligations, including the Insurance Distribution Directive[ref 5]. If you require assistance with any of these issues, please contact your usual local Marsh representative.
Author: Sanjay Desai, Head of Litigation Insurance and Litigation Funding, Marsh JLT Specialty
5 See: "Are you ready for more regulation?" [Marsh.com]