In the world of litigation funding, one tough question comes up time and time again, mainly in cases involving highly impecunious parties but also commonly in so called ‘windfall cases’ and CIS-related disputes amongst others. The question is who will shell out the initial investigation costs needed in order to demonstrate that there is a viable cause of action with good prospects of success which will be attractive to third party funders or ATE insurers.
Funders and insurers prefer to receive proposals for cases that have been analysed by a good quality legal team, which include a positive and thorough legal opinion on the merits, some analysis of quantum (where necessary based on a preliminary expert report) and a clear and identifiable route to enforcement, as well as a considered budget for seeing the case to conclusion.
Typically, the claimant is prepared to pay the costs necessary to enable their law firm to produce a comprehensive deal pack that the firm or a broker can use to search for competitive funding or insurance offers. However, in many cases, a client that is seeking litigation financing simply cannot afford this initial investment, or may not wish to risk that the investigative costs will be wasted if a funding or insurance deal ultimately cannot be secured. This “chicken and egg” problem arises with some frequency and there is no perfect solution.
Although a funder that sees particularly good potential in case might, in theory, be willing to invest a small amount of money on a speculative basis to finance a more thorough legal review or preliminary expert valuation, in practice such arrangements are very uncommon, difficult to obtain and likely to only be available where there is sufficient groundwork already undertaken to demonstrate the case’s potential (which itself will have come at a cost).
The most likely approach will be one of three things:
1. Retrospective funding
Funders and Insurers may be willing to retrospectively fund or indemnify some or all of the costs incurred prior to the funding deal being signed, in recognition that the claimant and/or law firm will generally have had to invest reasonable time and money in preparing the case for funding.
This concept is very well-established in the insurance market, however many litigation funders will also do the same thing, by agreeing an immediate drawdown on inception of the Litigation Funding Agreement to reimburse sunk investigation costs.
Whilst this may provide a useful solution for a claimant with real confidence in their case and that ultimately succeeds in securing funding and/or insurance, the claimant is still of course at risk of the investigation ultimately not establishing a sufficiently strong case to attract funding. This solution also works well where the law firm is willing to effectively conduct the investigative work on a speculative basis, on the understanding that they will be made whole for their time incurred once a funding deal is signed.
2. Tranches funding with review points
As an alternative to committing to finance the case all the way to Trial from the outset, a funder or insurer may be willing to provide an initial “tranche” of investment to take the case up to an agreed stage in the proceedings, such as disclosure, on the basis that the case will be reviewed at that stage and a decision taken as to whether further funding will be provided.
This is a good solution for claimants who are just not prepared to fund anything but it is important that lawyers who consider this option do not leave their clients over a barrel. It is advisable to pre-set the future premiums or funding costs so that the client isn’t committed to a funder without clarity on what the aggregate cost of the funding could eventually be if the case proceeds beyond the stated review stage.
If the funder or insurer is willing to take the extra risk then it will usually build in extra return for doing so but the tranche funding approach keeps the level of risk that they are taking in perspective, so it is easier to secure a fair arrangement for all parties.
3. Decline to speculate
Of course, sometimes the market will deem it simply too expensive or too speculative to fund investigation costs. Then the question is whether there are any other stakeholders who have an interest in helping jump start the case such as a creditor, the solicitor, a shareholder etc.
Ultimately, the most competitive offers coming out of the market are going to those claimants willing to invest the necessary sums to make sure they are giving the funder/insurer an easy decision to make about the investment. To get the best deal from the market and especially via a broker who can really push for the best terms on your behalf, you want the markets to be struggling to win your business. Good presentation and some initial investment could save the claimant as much as 50% compared to a claimant with a similar case who won’t commit to the comparatively small “on risk” outlay upfront. Claimants who are being advised that they have a good case might want to prioritise the long term savings.