What to Consider When Pitching for Litigation Funding?

Demand for litigation funding remains strong, supported by an increasing awareness among major corporates and law firms of the economic and risk management benefits to their businesses. Most crucially, however, market demand remains greater than the supply of funds available – and this imbalance between claimants and fund providers is likely to remain for the foreseeable future: it is estimated that there is about a trillion dollars of litigation undertaken annually whilst there is only about 20 or so billion deployed to this space. As they say, do the math.

Whilst the best cases will always attract the interest of many funders, those considered more average will invariably need to compete for scarce funds. This article sets out some experience-based insights into how funders evaluate potential cases and offers guidelines on how best to present a proposition to increase the probability of success. Consideration is given, inter alia, to the technical merits of a case, its potential duration, likely settlement quantum and whether it can be easily realisable, the cost of litigation, and the defendant’s and claimant’s circumstances.

At the heart of the issue from a funder’s perspective is a simple risk and return calculation: to evaluate the risks involved in funding a case in the light of the potential returns on offer. There are, however, many iterations of decisions required to fully test the proposal, made the more challenging as, in many cases, the funder is making and testing assumptions about the case, its likelihood of success and its potential to deliver the anticipated returns. This requires layers of scrutiny from an initial arbitrage decision, through to rigorous internal scrutiny undertaken by the funder’s underwriters and potentially the use of external counsel. Every detail of the case needs to be scrutinised by the funder’s investment committee to ensure alignment with the fund’s objectives.

In the first instance, the funder needs to make a judgement about whether the case has “technical” merit. Does it stand up to even a cursory objective examination of whether the case is winnable, or is it too speculative? Note, however, that the evaluation of the technical merits never really ends, it simply becomes more rigorous and probing as the process progresses. Most funders are unlikely to fund speculative cases.

Assuming that the case is considered meritorious, at the heart of the funder’s investment decision is (i) the potential quantum of the settlement, (ii) the anticipated budget for legal and professional fees required, and (iii) the probability that any settlement secured can be realised. All funders will have a multiple of returns on fees required to meet their investor’s expectations and whilst some flexibility on this is possible subject to other variables, it is a critical first hurdle in securing the funder’s attention.

What can be the most difficult to gauge are the enforcement and collectability risks. A case may be winnable with stellar economics, but if any judgment is too difficult to enforce, or the defendant lacks sufficient accessible assets to meet their obligations as directed by the court, then stellar economics are meaningless.

Similarly, the issue of duration risk must be factored in. Litigation funding investments are made on the assumption that, all things being equal and the case being well-managed by the lawyers, a case is likely to be settled within a fairly predictable time window. That expectation will differ depending on the type of case in question; for example, BIT cases tend to take longer than, for example, a straight-forward commercial dispute located in a familiar jurisdiction (US or UK law) in which a great deal of case law exists.

Which leads to a further consideration for funders when evaluating whether to invest in a case – the jurisdictional risk. Legal jurisdictions in which there exists a good deal of precedent case law, with a transparent and robust legal system, are invariably favoured over those with less developed legal systems, more opaque procedures, and less predictable outcomes where courts may be subject to political pressure. 

And finally, the funders invariably run the slide rule over both the law firm to be used in prosecuting the case and the claimant. Does the firm have the requisite experience and track-record in such cases and how successful has it been? Does it have the requisite service delivery experience and platform – a particularly important consideration where a case is, or has the potential to become, multi-jurisdictional? Does the firm have the bench strength to cover should the lead lawyer be unable to progress?

Aligned to running a rule over the firm/lawyer is to also understand the motivation and circumstances of the claimant or claimants. What are their expectations? How realistic or otherwise are they? Have they undertaken litigation in the past and with what outcome? Is there anything in their background that may lead a court to question their honesty and integrity?

At the heart of the matter is how do those applying for litigation funding approach and engage with potential funders. A simple answer to this is to do so as comprehensively and honestly as possible. The preparation of a well-structured memo (often the funder can provide the most useful form in which the memo should be presented) outlining the elements of the case, the key stakeholders, a case strategy and (often neglected) a strategy for how any potential settlement will be secured and collected are all critical elements.

As a final observation and well-intentioned piece of advice, openness, and full disclosure at the outset of the application process is critical. This transparency ensures that any potential issues are highlighted early on (to which the funder may well have a solution) and it ensures that trust is established and maintained, as any discovery of material and undisclosed information later in the due diligence process (it invariably comes out) is likely to seriously prejudice securing funds.