Jacqueline Young from Augusta Ventures discusses the challenge litigation funders face to balance support for access to justice with more commercial considerations
We operate in a strong and growing legal environment. The UK legal services industry is going from strength to strength. A recent report valued the market at £35bn in 2018, with growth forecast at 5% in the coming years.
Until relatively recently, litigation and disputes funding in the UK was a largely unfamiliar concept. Now, there is clear acceptance of third-party funding as a method for claimants to seek access to justice and for solicitors to assure fee income and to increase the flexibility of their firm’s finances. This comfort has led to a business some would say was worth £1bn in 2018 – roughly doubling in size over the past three years. Despite Brexit, this growth looks set to continue.
Current political turmoil may have put some capital investment decisions on hold, but conversely, we are seeing an increase in litigation and disputes activity. Litigation funders, with a non-recourse model, de-risk the litigation for both claimants and their solicitors and, as such, increase the demand for such third-party funding across industries and
With such a demand, supply is being met by litigation funders listing on the equity markets and obtaining significant investments from institutions, who have identified the growth potential. Augusta, for example, raised £150m in 2018 and trends are for further investment into well-managed funders. This will allow additional support for claimants to be extended and at cheaper rates than were once feasible.
It is clear litigation and disputes funding is now part of the legal landscape and vital for access to justice. But a recent judgment in the case of Davey v Money v Chapelgate causes pause for reflection. The judgment focused on what is commonly called the ‘Arkin cap’, a principle which limits a funder’s exposure to adverse costs to the level of their original investment and so prevents uncapped liability on orders against their client. In Davey, Arkin was not applied, leaving the funder with exposure of more than five times their original investment.
The chattering classes suggest that this might have a chilling effect on the funding market, but I disagree. The judgment simply sends a clear message that funders must engage with proper due diligence when considering whether to fund a case and ensure that they take a prudent and transparent approach to both the legal and economic aspects of all cases before them. Funders will need to take a firm view on which cases to support, which solicitors to back and also ensure that there is a clear and full alignment with the claimant’s interests.
At the same time as ensuring careful thought is put into the financial and legal aspects of any funding decision, funders must act responsibly on the commercial terms of any investment. In Davey, Mr Justice Snowden noted that ‘access to justice came a clear second to receiving a significant return on its commercial investment’. Clearly, commercial funders are in business to generate a decent return for their investors, however, there is a line over which we must not cross, where the level of damages a client stands to receive ceases to be what Snowden called a ‘just result’, ie it becomes too small to be fair. This will vary case by case, but for many, that level will be obvious when claims are being assessed.
Funders must also give careful consideration to the issue of adverse costs risk and ensure that adequate After-the-Event Insurance (ATE) is in place to provide adequate indemnity against costs that might be ordered against the funder or claimant, in the event that the case is lost. The fact of a gross under insurance of the claim in the case of Davey clearly had a bearing on the judgment.
‘The UK legal market is strong and growing, and litigation funders have a critical role to play in the industry.’
Jacqueline Young, Augusta Ventures
Recognising both opportunity and obligation, Augusta has adopted a comprehensive diligence approach to funding. This involves specialised teams of experienced lawyers who work exclusively within various practice areas such as arbitration, class action, commercial, competition, consumer, intellectual property or the financial services or construction and energy sectors. The combination of experience and specialism ensures the efficacy and speed of the due diligence process. This coupled with a comprehensive approach to ATE ensures that there is reciprocity of interests between the funders, lawyers and claimant. In such circumstances, one must hope that the court will use its inherent discretion to observe the Arkin cap in future cases.
The UK legal market is strong and growing, and litigation funders have a critical role to play in the industry. Funders’ raison d’etre is to enable those without the financial means to pursue meritorious claims and so facilitate access to justice.
The Davey judgment acts as a cautionary tale and reminds us funders that we have an obligation to ensure that all the terms of our funding engagements are responsible on legal, financial and commercial grounds – protecting the interests of the claimant throughout – and so ensure that the litigation funding industry continues to grow with credibility.