Posted on the 21st August 2015

You would think that litigation funding would be an easy sell: taking on all legal risks and costs to help businesses resolve a dispute should sound quite attractive to a firm faced with a legal challenge. But sadly there is an image problem. This is partly due to teething issues typical of emerging industries, and partly through misconceptions. As with any industry, however, some do it better than others. Here’s how to tell if your funder is really providing value.

Missing information or misinformation?

Perhaps the biggest problem facing funders is that businesses are simply not aware that litigation funding exists. Funders have traditionally approached lawyers instead of businesses, assuming that lawyers were best-placed to discuss funding options with clients. However, lawyers aren’t always the best ‘middle-men’. The funding message has not always got through; and when it has, it’s not always explained properly.

Lawyers sometimes imply that funding is there to cannibalise the rewards arising from successful claims. This notion stems from the approach of some funders, who charge a multiple of their investment, regardless of when cases settle. If a business hopes to recover £3m, the funder may need to invest £350,000. If the funder wants a three-time return on their investment, they will seek £1m. That’s fine if the defendant offers to pay £3m, but what if the claimant wants to accept a £2m award in return for settling early? That figure would normally be acceptable, but if £1m is going to the funder, it’s less appealing. It becomes difficult to find a figure everyone accepts and the case risks going to trial unnecessarily. This costs time and money and increases the risk.

Many lawyers use such examples when talking to clients. But they should be the exception; not the rule. Less than 5% of cases go to trial: making funding agreements economically viable for settlement is absolutely vital. Fortunately, staged funding agreements provide a solution: these ‘ratchet’ up over time. Clients give less away, but they also know that if they ‘gamble’ and push their opponent too hard the case will continue unnecessarily and the funding will ratchet up. The client’s interests are thus aligned with the funders: both want a commercially viable settlement that works for everyone.

Specialist knowledge is deep not wide

When approaching litigation, it’s important to get the right lawyer. Lawyers specialise. Good commercial litigators have their niche. Whether it’s breach of contract cases, professional negligence or commercial arbitration, this is a necessity of practice as law continually evolves and only specialists can keep abreast of developments in their field. At Annecto Legal we are similarly focused: we only provide information on funding and insurance. Litigation funding and insurance has evolved tremendously over the last few years: innovation is at a peak with new products and services constantly coming to market.  It’s very rare for lawyers to be experts in all aspects of legal funding, and that’s why you need a specialist, such as Annecto Legal. They understand current developments and can ascertain how you can best benefit from them.

The landscape today

Litigation funding today makes use of staged funding agreements (where clients give as little as 5% of damages to a funder, rising in stages to up to 30% if the case actually goes to trial); a speedy decision-making process; light-touch oversight in funded cases, rather than onerous reporting requirements; profit share with solicitors, giving lawyers access to ‘hybrid-DBA’ style returns without the full DBA risk; and the flexibility to fund cases that don’t offer a simple cash return on successful conclusion.

Crucially for SMEs, funding is no longer limited to those seeking massive awards. For SMEs a loss of £50,000 can be as devastating as a loss of tens of millions of pounds to corporations. The lower valuation of these cases means they can be funded without prohibitively long due diligence. Cases that wouldn’t have seen the light of day now make it to settlement.

Finally, whatever the outcome, the cost of making the claim looks much better on balance sheets. Legal fees, expert witnesses, court fees all reduce EBITDA but recoveries occur below the EBITDA line. When a funder takes on all of these costs and risks, they are removed from the client’s balance sheet. You can avoid these negative figures and the risk of breaching banking covenants: something that appeals to accountants and potential investors.

For many clients, modern litigation funding presents an opportunity to eliminate the financial disadvantages they may face when pursuing a case against a larger and more moneyed opponent – without sacrificing too much of their award.

Annecto Legal can provide litigation funding for claims of £50,000 and over. With access to a large network of specialist lawyers and experts, it represents the best chance an SME claimant has of getting an agreeable settlement – or their day in court. Contact a member of the team today