by Sarah Breckenridge, Investment Manager at Erso Capital

This blog was first published on the Thomas Reuters Practical Law Dispute Resolution Blog on 8 August 2022. 

Ask around the litigation department of any law firm and someone will have a story about a time they had their fingers burnt when seeking, or having obtained, funding. You’ll hear tales of tensions and misunderstandings, which created inefficiency and disillusionment. Ultimately, it may have meant a client’s case never got off the ground. That’s in nobody’s interest.

Having recently moved to a litigation funder after two decades in a private practice firm, I’m starting to appreciate both perspectives. There’s a responsibility on both lawyers and funders to make the process easier and more transparent. Each has an important role to play in facilitating strong legal claims and reaching appropriate outcomes for clients.

 

What can funders do to facilitate the process?

Funders should always bear in mind that the lawyer’s role is to act in the best interests of their client. For that client, litigation isn’t business as usual, it’s probably bad news. Corporate clients have shareholders, a board, and other stakeholders to appease; reputations to protect; and the outcome of the dispute itself may be crucial to their ongoing success. So, when approached about funding a dispute, a funder should:

  • Appreciate what’s going on in the background. Is the client desperately seeking cash flow; weighing up risk-management options; under pressure from other business stakeholders to keep budgets low or even settle rather than fight? That may well influence the funding model offered. For example, if it is evident that risk management, and not cash flow, is the client’s main aim for seeking litigation finance, innovative use of insurance products instead of, or alongside, funding may be a more appropriate solution. Funders should not be afraid to suggest that lawyers also consider approaching an insurance broker to ensure their client has a wide range of options to meet their needs.
  • Give an early response if the answer is no: the lawyers need to manage the expectations of the client and help them decide on the next steps for the dispute, with or without funding. An explanation of why the funder has reached a negative conclusion will also help lawyers work with their client on strategy.
  • If the case looks good, give the lawyer clarity around probable timings and the process towards an offer. Will an offer in principle mean an exclusivity period? Who else will need to review and agree to move to a final offer?
  • Explain as soon as practicable the type of terms which are likely to be offered in the case. How is the return usually structured and are there specific reasons for this case for considering one over another? Based on the initial review, what are the likely conditions precedent to drawing down funds?
  • Appreciate the lawyer’s position. If the funder wants the lawyer to share some risk by acting on an alternative fee agreement (often this is to make the economics of funding work), have an early conversation. Lawyers themselves are likely to have to satisfy an internal committee to get approval to work on a conditional fee agreement or damages-based agreement.

And how can lawyers help?

  • Present applications to funders as clearly as time and budget permit. Where they exist, pleadings and procedural documents are important, but the best applications have a concise summary which allows the funder to immediately understand the parameters of the case: the amounts sought, the client’s reasons for seeking funding, the legal basis of claim, any known problems, and the enforcement position.
  • Think budgets: funders will expect to see a budget, drawn as thoroughly – and realistically – as possible. It’s in no one’s interests to make calculations from a budget which, upon further examination, proves not to have sufficient contingencies built in. Cost overruns can cause tension and possibly unwanted renegotiations between stakeholders when energy is better spent working on defeating the litigation opponent. I’ve noticed in my new role how frequently it is the funder who suggests additional budget reserves to avoid cost overrun in the latter stages of a matter. While it might be tempting to budget optimistically with the expectation it will increase the chances of securing funding, it may have the opposite effect.
  • Realistic quantum: it is important to consider the legal basis for the measure of damages at the time of application, as well as explain what views have been sought on quantum. Preliminary expert quantum reports are most helpful when they take into account the lawyer’s analysis, and deal with which alleged losses are direct and which are more remote, for example. This information enables funders to identify the realistic lower floor of damages on which to base calculations. If the funding proposition works for the lowest range of success, that gives potential headroom for unexpected additional work, and of course, better returns for everyone if the case succeeds.
  • Legal opinion: funders will be conducting their own assessment, which often includes obtaining their own legal opinion. Unless it has already been prepared, a counsel’s opinion isn’t a prerequisite to the application. However, funders will ask for any existing written views that stress-test the claim, set out the cause of action, detail the circumstances of breach and loss and address any procedural or other obstacles which are apparent.
  • Finally, it is in no one’s interests, least of all the client’s, for a lawyer to prepare an application on a doubtful case to appease the client or delay a difficult conversation. However, funders may well be willing to contribute to a realistic conversation with a client, if the message would be better received from an objective third party. An honest half hour conversation can create far more goodwill on all sides than days of preparation and review which will inevitably raise the client’s expectations but ultimately results in a ‘no’ from a funder. If in doubt, it is in the lawyer’s best interest to have a conversation with the funder before preparing a full application.

Funding decisions cannot always be turned around quickly, but good communication and an understanding of what both lawyers and funders need to achieve may help the wheels turn more smoothly.