What does the future hold in store for litigation funding?

Every so often, bad news around the litigation funding industry bursts onto the pages of the legal press and sometimes national press with gusto.

Collapsed cases, Ponzi scheme allegations, loud calls for further regulation, and even more calls for Third Party Litigation Funding (TPLF) to be outlawed, are all parts of an on-going saga involving funding. To those outside looking in, it must seem like there is rarely a dull moment for we funders.

Incidents become known by semi-heroic sounding taglines such as Excalibur (as in the collapsed case against Gulf Keystone last year) or Argentum, the fund whose financial backers are facing various allegations overseas.

Funders should take it as a back-handed compliment that critics pore over such happenings.

When bad news strikes, the question which is often raised is: What does the future hold in store for litigation funding? Has the growth of the industry run its course? Will it ever enter the mainstream?

Sorry if this disappoints, but the future is far less volatile than the headline writers would have us believe.

The future health of litigation funding will be determined more by its adaptability rather than newsworthy events.

Over the past few years, changes in the world of litigation have been plentiful.

The Jackson Report, cost sanctions, fixed fees, the use (or non-use) of DBAs and hybrid DBAs, are just some of the events or models that have impacted upon litigators.

The future of funding will have more to do with the attitudes of litigators and the widening of their knowledge of the system.

The view around TPLF may be that funders have interests in a great deal of cases going through the commercial court. In truth, of the many thousands of cases that pass through the Chancery Division and Commercial Court each year, funders will be presented with only a small number and will fund even fewer.

Therefore, the impact on the mainstream hasn’t yet happened, although this may change with increased awareness, innovation, and funders looking at taking on smaller claims.

The lower value case market may be one entered into by more of the mainstream funders, but it is also set to attract further, new, players into the market. There has been much talk of hedge funds dabbling in litigation funding, but their focus is unlikely to be on the smaller claims.

In a recent survey Burford Capital conducted in the US, results showed a greater understanding, than previously, of TPLF among private practice lawyers and General Counsel (GC). But there were still many who hadn’t used it, or had limited knowledge of litigation finance. But, 68% of private practice lawyers and 35% of GCs from the study group said they had at least one case in the past, which could have benefited from litigation funding. The anecdotal evidence from the UK is similar – lawyers know about it, but aren’t quite sure enough (or aware enough) of the benefits to take it on as a feasible idea.

So while there is a relatively narrow set of criteria for cases which funders will back, there is still an untapped number due to them being missed by the ill-educated litigation teams running them.

The education around the model – and its use – is still a burning issue and it will be a continuous battle. While more accepted, TPLF will always be an industry which has to fight for its place.  It will continue to be the “Marmite” of the legal services industry.

The second main influence on the future of the litigation funding system will be of the appetite among funders to dip into emerging markets.

There is far more cross-border business being done today than ever, with countries such as China and India being part of this.

It is a fact of life that with more contracts and deals being agreed between companies, so too will increase the number of breached contracts and disputes. That is not a wish that is a fact of business life.

While figures showed business disputes rose in the recession, the upturn and international work will result in more cases being brought in international courts.

In many cases, as we have already seen in the UK, the line-up will quite often consist of a smaller company taking on a bigger rival. This mismatch is the exactly the situation for which litigation finance is designed, and the emergence of new areas for funders to invest will continue the spread from the UK, US and Australia into other parts of the world.

At the same time an upsurge in boutique litigation and arbitration practices could see greater use of funding due to the types of clients these burgeoning outfits will pick up. It is true they will attract some blue chip clients through their reputations and contacts, but they will have more which fall into the category of those that require funding.

The boutique firms that embrace funding for the right cases could well see growth in their practices, mainly due to the increased ability to take on work promoted by a use of litigation finance to improve cash-flow.

As mentioned, some of these elements concerning growth aren’t the stuff of sensational headlines.

True, there are sure to be more high-impact incidents to follow on what is an industry which attracts a large amount of interest.

But the underlying, true story will be one of steady growth, domestic cases being quietly won through good shot selection, and funders looking to branch out into new markets.

Nick Rowles-Davies is Managing Director at Burford Capital (UK) and author of Third Party Litigation Funding, due out in October.