Litigation Funding – Case law opens the door to new opportunities

 

 In recent years the legal profession has seen a significant increase in the number of cases brought to court with the assistance of third party litigation funding. More and more firms, in-house counsel and clients are opting to use outside funding to hedge their risks.

This form of third party legal financing allows a party to litigate or arbitrate free from the upfront costs traditionally associated with bringing a claim. When accessing funding a claimant typically agrees to pay a percentage of the final amount claimed for, which is awarded back to the fund if the case is successful. Where a case is unsuccessful the claimant is not required to pay.

To ensure that they make a return on their investment most third party legal financiers will have a set of criteria by which they judge the potential success of a case and using this they will select those claims which they feel have the most merit.

If you look back more than a decade ago the use of third party legal financing was fairly rare and the number of funds offering assistance was very limited. The market for funders is still fairly small, but in the last half a decade a number of firms have sprung up, backed by confident investors.

One of the prime reasons for this meteoric rise is the financial pressure faced by legal firms and their clients in recent years and a change in attitude towards risk and reward. The legal market has never seen a greater growth in competition, both from new firms and alternative business models, which are looking to offer clients a more diverse mix of services.

This has put intense pressure on fee income for private firms, while in-house counsels continue to be limited by ever-shrinking budgets. In turn many chambers may have seen a down turn in work coming in or a change in attitude from those who instruct them on the handling of the case.

These conditions have led many within the legal profession to reassess their view of legal financing and as a result we are seeing more and more firms advising clients to access finance where they feel it is suitable, particularly in larger cases or where there is a significant portfolio of legal work required.

Buoyed on by the confidence of their legal advisors and peers many businesses are now utilising funding and the high-end corporate world in particular has taken a keen interest. This may seem odd as many of these firms could afford the costs, however the funding allows them to defer spending until a case is successful, improving their ability to trade.

However, one barrier continues to stand in the way of third party litigation funding and that is cost. The additional costs and risks of litigation funding have  always fallen squarely on the shoulders of claimants and it would be fair to say that this has put some claimants off bringing a case using financial help from a third party, but this may be about to change.

In 2016 the courts saw an interesting development in a dispute between Essar Oilfield Services and Norscot Rig Management Ltd, in which the High Court ruled that Essar must pay the litigation funding costs of Norscot. This is the first time that a losing party has become liable for a claimant’s third-party legal financing costs.

In the initial ICC Arbitration case, Essar Oilfield Services v Norscot Rig Management Ltd, the arbitrator found in favour of Norscot Rig Management Ltd and ruled that Essar was liable to pay damages to Norscot Rig Management Pvt Limited for repudiatory breach of an operations management agreement.

The arbitrator ruled that Norscot should be awarded £4 million, of which £1.94 million of litigation funding costs should be recoverable in full against Essar under both the combined effect of the Arbitration Act 1996 (the Act), section 59(1) and section 63(3) and article 31(1) of the 1998 ICC Rules or article 37(1) of the 2012 ICC Rules.

Prior to the case Norscot secured third party funding, which consisted of an advance of £647,086.49, which was repayable either at 300% of the sum advanced from the damages recovered, or 35% of the damages, whichever was the greater.

During the case the arbitrator said that Essar had intended to financially cripple Norscot and as a consequence, “Norscot had no alternative, but was forced to enter into litigation funding… The funding costs reflect standard market rates and terms for such facility.”

“The conduct of the respondent before and during the dispute was a blatant attempt to drive Norscot ‘from the judgment seat’. … They pursued their claims with courage and determination. They undertook a huge financial burden and gamble in entering into the funding arrangement.

“It was blindingly obvious to [Essar] that the claimant …would find it difficult if not impossible to pursue its claims by relying on its own resources. The respondent probably hoped that this financial imbalance would force the claimant to abandon its claims.

This decision was appealed by Essar, who claimed that the arbitrator had exceeded his powers such that it constituted a ‘serious irregularity’, which would cause substantial injustice to Essar if the litigation costs had to be paid.

The arbitrator argued that the additional litigation funding costs were fully recoverable as “other costs of the parties” under Section 59(1) © of the Act and refuted Essar’s claims that it amounted to a ‘serious irregularity’.

The ruling was then taken to the High Court, which concluded that the arbitrator had not exceeded their jurisdiction and that it was not an “erroneous use of an available power” for them to interpret that Norscot’s third party funding legal financing costs fall under the definition of other costs’.

Judge Waksman QC, sitting as a Judge of the High Court, concluded: “Therefore, as a matter of language, context and logic, it seems to me that ‘other costs’ can include the costs of obtaining litigation funding. The expression should not be confined by some legal straightjacket imposed by reason of what a court might or might not be permitted to order. All that this conclusion entails is that such litigation funding costs falls within the arbitrator’s general costs discretion.”

Whilst this ruling is interesting it unfortunately does not offer any binding precedent beyond the boundaries of the relevant arbitration forum, and yet the implications for this decision may be far reaching.

By making this judgement, the Court has shown that it is willing to accept the idea that third party/litigation funding costs, are in very limited circumstances, recoverable from the losing Defendant

Based upon this, it is extremely likely that more parties using litigation funding will test and  attempt to extend the circumstances where costs of third party funding are recoverable, especially in cases where one party has been ‘crippled’ by another, as was claimed by the arbitrator in Essar Oilfield Services v Norscot Rig Management Ltd and many will now seek to recover their funding costs under s59(1)(c) of the Act.

If this trend continues then it is inevitable that more third party litigation funders will look to enter the market, backed up by an army of investors who have the confidence to back up this unique form of investment.

In response we may also see questions asked about the disclosure of funding arrangements prior to proceedings taking place to enable a respondent to be aware of the ultimate costs it is facing in seeking to fight a claim. This may make respondents who know that the claimant has such funding more wary of the costs implications of losing.

We may in the future even see the development of this doctrine to a point where the recovery of third party costs from an unsuccessful party becomes almost common place or at least a viable option for more parties, with differing circumstances.

For the legal market this will hopefully mean greater access and a wider variety of funds available, which are able to cater for a broader audience of clients, both large and small.

Meanwhile, law firms, barristers and in-house counsels will hopefully be able to tap into larger budgets to assist clients, which will mean that more resources can be put into securing a victory for their clients.

The golden age of litigation funding may be just on the horizon. This once ‘obscure’ form of funding, which was considered the last hope for a cash strapped client (although this was rarely, if ever, the case), has become an established way of seeking redress without the financial risks associated with a self-funded case.

By James is Head of Investment at Managed Legal Solutions Limited (MLS)

 About James Gbesan

James is Head of Investment at Managed Legal Solutions Limited (MLS) where he is responsible for the firm’s entire investment portfolio. Working directly with both those seeking funding and investors he ensures that the funding process is as smooth and straight forward as possible taking the lead role in case assessment, claim management and reward recovery on success.

James developed experience of the sector in the American litigation finance industry, having previously completed training as a barrister. He is a keen advocate of litigation funding and regularly provides advice to businesses and legal professionals on the options available to them.

About Managed Legal Solutions

Managed Legal Solutions (MLS) is a specialist provider of litigation funding that funds a wide range of actions, including professional negligence, insolvency, tax, breach of contract, tort, matrimonial and private client claims.

All MLS funding is supplied on non-recourse basis and following a successful claim MLS will take an agreed share of the claim proceeds. If the claim is unsuccessful MLS does not seek to recover its investment from the claimant.

 

 

 

 

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