Trends in funding legal disputes

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In the covid and post covid world, the number of disputes over supply and service contracts are expected to rise – but with most businesses in survival mode, the cash needed to fund disputes is in short supply.

Historically, litigation funding had a reputation for helping polarised sectors of the corporate market: being either available only to big business or ‘class-action’ public claims or occasionally as the last-ditch attempt for impecunious clients with little chance of success to raise funds. But that is changing.

Litigation funding can be a practical cost and risk management option for your business. Whether it is third party professional funding or fixed lawyer fees, deferred payment plans or insurance cover, there are a number of litigation funding options available to support smaller businesses in need.

Latest trends in litigation funding

 The Arkin cap is the principle that where a litigation-funded party is unsuccessful, the professional funder’s liability for the opposing (successful) party’s costs should be limited to the amount funded by the professional investor. For example, if the funder agrees to cover your costs of £200,000, applying the Arkin cap, the funder would normally expect to pay the other side’s costs up to a cap of £200,000.

Previously thought to be an established and binding principle, the recent decision in ChapelGate Credit Opportunity Master Fund Limited v Money and others confirms the growing trend away from the Arkin cap. The consequence of the judgment in ChapelGate suggests that the Arkin cap will now likely be limited to cases where a funder has provided finance for only a limited aspect of the case, such as expert witness costs. For smaller businesses this may result in fewer professional funders being prepared to fund the full dispute.

Previously, professional funding could assist smaller businesses with distinct but often expensive immediate costs, such as expert witnesses. Now that the Arkin cap no longer provides the reassurance to funders of capped costs, many will likely not be prepared to offer vital funding to all but the most likely to succeed. For this reason, professional third party funding may no longer be appropriate for many smaller business disputes. 

New approaches from new investors in litigation financing

In the last few years a number of startups have emerged in the litigation funding industry. Their aim is to level the playing field, ensuring smaller and medium sized businesses are adequately funded in ‘David and Goliath’-type corporate disputes. Analysis suggests some of these companies have so far raised millions in seed round investment.

What is so attractive for investors? These new funders are, at their core, technology companies, not traditional financial funds. Using specially developed algorithms, they are able to review materials, evaluate previous cases to establish precedents and assess the overall risk more efficiently.

With a background in technology, these new funders may also be more willing to fund claims in the technology court. With a lower error margin and a manifesto that includes targeting a smaller business demographic, these startups may become the preferable alternative for SMEs facing disputes.

Top tips for small businesses considering litigation funding

 1. Tailored solution

 Many professional funders will offer funding solutions based on their own set of rigid criteria, often driven by lawyers they instruct to protect them. Any proposal that they make will often already have cost you a significant amount of money and time as they may charge an application fee and the process may not be quick.

Your business and your dispute are unique to you and you best option may be a more bespoke approach. Funding is not currently subject to specific limits, nor are you required to enter into funding of a particular type.

There are a number of funding options available to cover some or all of the costs – you should consider which mechanism would be most commercial for your business. 

2. Self-regulation

Contrary to public perception, professional funding is not in itself regulated by a governing body. The market has made a significant effort to self-regulate in the absence of specific guidance, including an association for multi-million pound dispute funders, which has a voluntary code of conduct. For smaller businesses, there is little protection, although funders must nevertheless follow general contract law principles.

You should also expect to be treated fairly and with transparency in relation to how much funding will cost you, particularly if that cost is proportionate to any success.

3. Legal advice 

Legal professionals are obliged to advise and act in the best interests of their client. This includes making them aware of alternative ways of financing their dispute. A law firm cannot promote one funder over another but can detail the options available for the client to decide which may be suitable for your business.

With third party litigation funding, the funder has no input on the management of the dispute and provision of funds is not contingent on accepting early settlement offers. Your legal advisers must act on your instructions only, so it is your decision to settle or continue the dispute.

Why you need flexible and creative litigation lawyers

Litigation funding is an area where you will be best served by instructing truly commercial lawyers. Many more traditional law firms tend to be very sceptical of the new litigation funding options. A highly practical and flexible approach from lawyers  in the new business environment, especially due to covid is best if you want to consider litigation funding.

Gannons are known for our dynamism and business approach. We understand entrepreneurs and growth businesses and have a similar ethos. We are an ideal choice if you have a commercial dispute and want to explore the best way to finance your claim as well as the legal merits.

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