As reported by The Lawyer and various other media outlets, February saw the launch of Erso Capital, a litigation finance company affiliate to TheJudge Group.
While much of the media attention focused on Erso’s extensive access to capital (exceeding $1bn), it is important to re-emphasise that finance capital forms just one part of the alternative litigation funding landscape. Litigation funding will often be a crucial lifeline for those claimants requiring capital to pursue a meritorious claim. However, the reason why litigation funding and litigation insurance should co-exist (and so to Erso and TheJudge) is in recognition that there is a no ‘one-size-fits-all’ solution. Litigation and arbitration lawyers need to be au fait with all the available options to better engage with each prospective client’s decision-making process.
The decision by the Court of Appeal in Zuberi v Lexlaw helped to pacify one of the key concerns in the DBA
Regulations, namely the implications of termination by the client, and so UK litigation lawyers now also have greater certainty with regards the enforceability of DBAs, which increases options further still.
This highlights the importance of being aware of the extentof the litigation insurance market as some of the products can (erroneously) be overlooked in discussions about funding options.
DBA insurance is a product designed to mitigate a portion of a law firm’s fee risk when engaged on a contingency fee basis. This product was first piloted by TheJudge around seven years ago, which began with insurers underwriting various large value arbitration cases. More recently, the
product has been successfully used in more domestic litigations where the legal fees are in the region of £500,000 to £5,000,000. One of the main benefits and selling points is that law firms can present an absolute alignment of interests with their clients, share in the upside, while controlling their downside risk with insurance.
Also, consider the relevance of own side’s cost insurance. Such covers are often best suited to corporate claimants, as opposed to financially distressed claimants. The insurer agrees to cover a portion of the client’s expenditure on external lawyers’ fees and expenses against the risk of the case losing – or the recovery being lower than the legal fees incurred. It is basically the risk removal protection afforded by litigation funding, without the provision of capital for cash-flow to those that do not require it. The relevance to a given client will be driven by their business case analysis. For example, is the driver to mitigate risk? Mitigate risk and remove cash-flow? How important is the upside retention in the analysis? For example, what value is attributed to removing cash-flow versus achieving a greater net upside retention of any proceeds from the litigation?
Pros and cons
The above does not represent the full suite of funding options, but it should already be apparent that each option has pros and cons in any cost benefit analysis. They are also not mutually exclusive. For example, a law firm could readily decide to offer a DBA and utilise both DBA insurance as well as capital from a funder. The latter might be used for costs (expenses) whereas the former to hedge the fee risk.
So how real-world is this interplay? We saw a good example of the variances in ‘buyers’ decision-making by various claimants each pursuing a case that shared similar fact patterns. The small group of law firms that successfully secured a large pool of instructions were au fait with the suite of funding/insurance products available and demonstrated a willingness to take risk.
Of the cases in which we had direct involvement, approximately a third elected to self-fund with own-fees insurance, approximately another third elected for a law firm contingency fee (for which the law firm had contingency fee insurance) and the balance opted for third party funding. Technically, one of the contingency cases also included a blended solution, as the client self-funded hard costs backed by insurance. Hypothetically, if each client succeeds with a $50m award, their net financial recovery will vary markedly depending on the option or mix of options chosen.
So, while Erso Capital is hopefully a new and welcomed entrant to the litigation finance market, being knowledgeable and transparent about different funding options for a given client need not only be a selling feature of Erso (and its affiliate at TheJudge) but also for law firms seeking to differentiate themselves from the competition