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COVID-19 Disputes: Litigation funding helps companies monetise claims in an emergency

  • Market Insight 15 April 2020 15 April 2020
  • Asia Pacific

  • International Arbitration

At a time when cash flow is paramount, litigation funding allows companies to enforce their rights without diverting valuable resources, and even to monetise claims immediately in an emergency.

COVID-19 Disputes: Litigation funding helps companies monetise claims in an emergency

The Covid-19 crisis is already damaging many sectors of the economy: aviation first of all, but also insurance, tourism, retail and energy, to mention just a few.  The price of oil has already slumped dramatically as a result of a falling out between Russia and Saudi Arabia, creating a perfect storm for the energy sector.   How individual companies fare in these conditions will depend partly on their circumstances and the degree of support available from the state, but it will also depend on the decisions they make during the crisis.  Some companies, inevitably, will make rash decisions, terminating or breaching contracts without legal justification, and sometimes where there is no practical need.  This harms other companies, of course, who will have to deal with the consequences, which may well involve seeking damages through the courts or arbitration for legal wrongs.

Problems

In general, when the economy dips or experiences a sudden shock, companies bide their time before commencing legal proceedings.  Litigation and arbitration cost money, and claimants often have to wait until business recovers and they have sufficient funds to hire lawyers and pay court or arbitration fees. Costs recovery is not a solution to the problem, because that occurs at the end of proceedings, regardless of when costs are in fact incurred. 

As a result, even companies with strong claims sometimes wait even right up until the end of a limitation period (generally six years) before launching legal action, in the hope that by that stage cash flow problems will have eased.  Unfortunately this has certain undesirable consequences, the most obvious of which is that companies do not obtain legal redress at the time they need it most.  Another problem is that witnesses' memories fade over time, and their evidence becomes stale and unconvincing, potentially undermining the claimant's case.  It is also inherently risky to leave legal proceedings to the last minute in case there is an argument about how long a limitation period runs, or a limitation deadline is inadvertently missed. 

Even if companies do start legal proceedings promptly, these can be long drawn out, and companies often have to wait several years before receiving the compensation due to them.  In current circumstances, where courts around the world are closed or dealing with urgent matters only, 'the law's delay' is likely to be greater than ever, especially where judgments or awards need to be enforced across national borders.

Solutions

To square this circle, third party funders can play a vital role, depending on the strength of a claim and the sum in dispute.  This is something that companies should be aware of if they are to maximise their chances of obtaining compensation for legal wrongs, and doing so quickly, at a time when cash flow is critical and compensation is urgently needed. 

Disputes funding has developed considerably in recent years, and in particular since the financial crisis of 2008.  There are fewer legal constraints on what they can do in some countries, in particular Hong Kong and Singapore, which have recently lifted a ban on funding in international arbitration and certain court proceedings.  But funding itself has become more flexible, and suitable for a wider range of cases. 

Until a few years ago, funding was generally available for single claims only.  This meant, in effect, that it was offered only to claimants with a case that was demonstrably strong and where any judgment or award obtained could be easily enforced against the defendant.  That is still the case where claims are funded on an individual basis.  Despite occasional complaints about funders encouraging a litigation culture by supporting weak or speculative claims, the opposite is true in practice.  Why back a dubious claim when there are plenty of robust ones in need of financial support?  

In addition, claims had to be relatively large to attract funding, to ensure that there was a reasonable recovery to cover the funder's costs, return and the client's damages. 

This all meant that funding was available in only a narrow range of cases, and arguably ones that would have settled quickly anyway.  However, funding is much broader in scope now, allowing smaller claims to be supported as well as larger ones.  This has been made possible by the evolution of portfolio funding, whereby a funder backs not just one big claim, but a number of claims of varying strength and value.   Here, the funder looks not at the prospects and size of any single claim, but at the strength and value of all the cases combined.  Because risk is spread across different legal proceedings, there is less chance of a legal upset and of the funder losing the entirety of its investment, so a more broad brush approach is appropriate.

Change of mind set

This evolution in funding not only widens its potential scope; it has also led to a change of mind set for many potential claimants.  Whereas claims would often be neglected in the past, filed under 'too difficult' or 'too expensive' until legally impossible to pursue, now they can be presented to a funder who will review their merits from a neutral point of view  -  itself a valuable exercise.  The funder then makes an offer, if appropriate, to fund those claims that it finds commercially attractive.  Defences can be covered too, if necessary, as part of the overall mix.

From the claimant's point of view, this has the great merit of moving legal proceedings off its balance sheet and minimising their impact on cash flow. It is true that litigation is always disruptive given the time and effort involved in collecting documentary and oral evidence, and if settlement is not achieved, also giving evidence at a hearing.  But if proper arrangements are made with funders or insurers to cover such matters as expert witnesses' fees and potential liability for an opponent's costs, the proceedings will at least be risk-free from the claimant's point of view.   Naturally, there is no such thing as a free lunch, and at the end of the day it can be galling to share legal compensation for real loss with third parties who have no connection with the dispute.  However, in many cases compensation would never be obtained without a funder's help, especially where smaller and less certain claims are concerned.

The lawyer's role

In addition to changing claimants' thinking, the growth and evolution of funding has also altered lawyers' approach to disputes.  That is partly because they sometimes share risks with funders, entering into a conditional fee agreement in tandem with the funding agreement itself.  This allows them to charge an uplift on their usual fees if a case is won, but a discounted fee if it is lost.  However, it is also because lawyers are responsible for setting up funding in the first place.   This is quite challenging.  Obtaining funding can be a lengthy process, and the due diligence that a funder carries out takes a considerable amount of time, especially if a claim is complex or a number of claims are being considered. 

In addition, the detailed terms of the funding arrangement have to be negotiated.  These are not just standard clauses.  Many have to be drafted carefully to reflect the nature of the claims, the claimant's particular circumstances, and most importantly, each participant's appetite for risk. 

Monetising claims

Some of the details of a funding agreement can turn out to be very important in practice.  They will determine, for example, how an opponent's settlement offer is dealt with, or when a funder may walk away from a case if the claim collapses or becomes commercially unviable.  These things need to be thought through carefully before funding is agreed.  

Even the choice of funder can be significant, because some are better capitalised than others and all funders have different working practices.  Sometimes law firms have an existing relationship with a funder, which speeds up the negotiation process and helps things run smoothly once legal proceedings gets going, but funding from other sources should also be considered so that the best and most suitable funding deal can be obtained for the claimant.

Of particular interest in difficult times, when margins are tight and cash flow is paramount, is the willingness of some funders to provide money up front, as an advance on damages recovered.  In the right circumstances, this allows a claim to be monetised immediately.  If funding is to cover a portfolio of claims, that can also be flexible, with more claims added as and when they arise.   

This kind of flexibility, and the ability to offer money up front to claimants who desperately need it, are typical of the benefits that new funding models offer.  Of course, funding is not a panacea and will not be suitable for all claimants and disputes, but it should help a significant number of businesses get through these difficult times.

Authors: Partner Ben Knowles and Professional Support Lawyer Giles Hutt

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