When a High Court judge rejected a $1.6bn claim against oil explorer Gulf Keystone last month, over disputed rights to Iraqi oilfields, it was not only the claimant, Excalibur Ventures, that lost out. Its financial backers in the case found themselves facing losses running to millions of pounds – an outcome that some believe will deter investors from the growing business of litigation funding.
Winning the case could have paid off handsomely for Excalibur’s three backers: US litigation financier Blackrobe, US hedge fund Hamilton, and Psari – a vehicle for private investors based in the Cayman Islands.
But funding this lawsuit was a gamble that failed to pay off. Excalibur has already posted £18m as security for court costs and the final bill, which is to be determined soon, may be higher.
As such, the case serves as a salutary lesson in the risks that funds and individuals take on by entering into litigation funding: an increasingly popular investment proposition whereby third parties meet some of the cost of bringing a legal claim in return for some of the compensation.
Harvey Rands, managing partner at law firm Memery Crystal, who acted for Gulf Keystone, believes the ruling will change investors’ behaviour.
“I think the accepted wisdom… has been that they don’t mind about the prospect of losing, if the sum claimed was large enough to be worth a go,” he says. “Litigation funders may change their minds and become more cautious about backing spurious or hopeless cases now.”
James Delaney, a director of risk broker TheJudge, which places cases with litigation funders, suggests less experienced investors may step back from the sector.
“I don’t think it will change the way that established litigation funders fund cases,” he says, “but it might impact those dabbling in the market who might now think twice about it.”
Until the Excalibur case, the number of lawsuits backed by litigation funders had been growing.
A High Court judge is due to rule shortly on an €82m case brought by financial advisory firm CF Partners against Barclays. CF’s case has been financed by Harbour Litigation Funding.
CF Partners’ lawsuit alleges that the bank “misused” confidential information for its own advantage and “took a client’s deal for its own account” when it acquired a Swedish carbon trading group in 2010. Barclays denies the claims.
Argentum, another litigation funder, is involved in backing one of the two lawsuits being brought against Royal Bank of Scotland over its 2008 £12bn rights issue just months before the bank was part nationalised. A trial is expected next year.
Meanwhile, Vannin Capital is funding a lawsuit against Credit Suisse over a multimillion pound onshore oil and gasfield project. The investment bank is being sued by Georgian businessman Dr Zaur Leshkasheli for alleged breach of contract and negligence. Credit Suisse denies the claims which have yet to come to trial. Mick Smith, partner at Calunius Capital, another litigation funder, estimates that the size of the global litigation funding market for established funds is now around $1bn.
“Anecdotally, I would estimate there is at least another $1bn out there from hedge funds and high net worth individuals who are interested in investing in cases,” he says.
For some of these investors, the potential returns can be high. Burford, an Aim-quoted litigation funder, recently won an Arizona land dispute after a US jury trial came back with a verdict of $100m for the plaintiff, which later caused the case to settle.
From its $7m investment in the case, Burford stands to make $22m – or up to $51m if a mortgage on land that it received were to remain outstanding for a furtther three years without being paid down.
Christopher Bogart, a founder of Burford, accepts that litigation is inherently risky but says high profile lost cases make little difference as most litigation funders build up a balanced portfolio of cases.
“There’s no change in dynamics for people like Burford, for those who have a well-diversified portolfio,” he says. “Losses are part of what we do. There’s no question that there is much more awareness of litigation funding and awareness that lawyers and clients realise this is a sensible thing to be doing.”
Mr Delaney of TheJudge, notes that as more claimants use litigation funding, more cases are coming to trial rather than being settled beforehand.
But while Clive Zietman, partner at Stewarts Law, agrees that litigation funding has become part of the legal landscape, he warns that the scope for financial loss remains less well understood.
“Litigation funders have got to realise they are investing in a hazardous investment and they have a spread of 10 or 20 cases which they can win or lose,” he says.