Our latest instalment of the Class Actions Shieldcast series features Lara Melrose, Litigation Finance Portfolio Advisor at Orchard Global. In the episode, Lara offers a clear explanation of each of the key stages in the funding engagement, provides her advice for legal team navigating the market and explores what is happening globally in this fast-growing area of financing.
This was an episode packed full of information about the industry and advice for litigation practitioners engaging with financing so I wanted to break it down into clear sections and highlight some of Lara’s most valuable points.
What is covered in this article:
- What is litigation funding?
- The 4 stages of the litigation funding process
- Key assessment criteria funders consider when evaluating a claim proposal
- Where technology fits into the equation
- 5 key considerations for lawyers before engaging with a funder
- Market insights
What is litigation funding?
Lara set the context for the conversation by explaining what litigation funding is:
“It's a tool that's available to claimants, whether that's individuals or corporates, to provide access to justice and level the playing field between well-resourced defendants and claimants who would otherwise lack the financial capacity to bring a meritorious claim.”
Group claims are an important mechanism to enable individuals who can’t fund a claim themselves to come together with others with similar claims arising from the same circumstances to proceed as a single group and share the costs of litigating. Group claims are “attractive” to litigation funders because they offer an opportunity to deploy large amounts of capital and potentially generate high returns.
Lara was quick to caveat this by highlighting the high levels of risk involved in bringing a group claim. They can be hugely complex and extend over a long duration. The role of the funding team is to evaluate the potential of a claim through assessing its risk profile and financial modelling – this process is what Lara explained next...
The 4 stages of the litigation funding process
To give some clarity to the end-to-end funding process, Lara described four key stages of engagement with a law firm. She also gave some rough timings for each explaining that “if your funding process is six weeks, that's pretty good”.1. Origination – usually before proceedings take place [on-going work]
This stage is fairly straightforward. Lara described it as, “going out to the market and finding the cases that require funding”. Funders will spend time networking, going to conferences and doing some desk research to identify and secure new opportunities.2. Due diligence and pricing [1-2 weeks]
Lara described two separate phases of conducting due diligence and assessing a claim. In the first instance, law firms are expected to present a pack of documents to give a relatively high-level overview of the case. This will include key underlying documents, any pleadings, a legal opinion prepared by a barrister and a quantum report or analysis.
Once these have been reviewed and there is sufficient indication that there is an opportunity for allocating funding, the funding team will take a look at pricing. Lara explained that there are two key elements to this:
“The first is assessing the risk associated with the claim and then pricing the funding that's required according to that risk.”
Lara furthered this with an additional point around ensuring that “a sufficient proportion of the damages remains for the claimant”. This point around focusing on getting the highest amount of compensation to the claimants was something Lara highlighted throughout our conversation.
Based on the economic modelling, the funding team will make an offer of funding. If that's accepted, that's recorded in a term sheet which is agreed with the law firm and/or the client.3. Deal execution [3-4 weeks]
One the term sheet is agreed, a second round of due diligence takes place, going deeper into “the legal, technical, financial elements of the claim”. Lara gave the example that a barrister could be instructed at this stage to provide a legal opinion on the merits of the claim or success rate.
As part of the deal approval process, a meeting with the funder’s ‘investment committee’ will take place where the case is presented. The committee will interrogate the case to ensure that there is the right balance between risk and reward and will approve or decline the case for funding.
There are several transaction documents which need to be negotiated and signed. These are the Litigation Funding Agreement (the terms in which the funding is being provided) and the Priorities Agreement which sets out the recovery order that the proceeds from the claim will be distributed between the funder, ATE insurer, the law firm and the claimant.
Once a claim is funded, the final stage for Lara’s team is “hands off”. She explained that the funder's role is not to control the case, but rather remain relatively passive in the dispute. Funders aim to engage with law firms who they "rate really highly”. The funder’s team may be consulted on strategic decisions but the ultimate decision making remains with the client.
Key assessment criteria funders consider when evaluating a claim proposal
I asked Lara to delve a little deeper into how funders assess the potential success of a claim and uncover some of the key information funders look for when determining whether to allocate funding. Here are a few suggestions lawyers should focus on when preparing their proposals:
1. A promising fact pattern: Litigation funders look for a strong factual basis and legal merits for the claim.
2. A realistic budget: Funders want a well-planned and realistic budget that includes contingencies for unexpected expenses.
3. Defendant's profile: Funders assess whether the defendant has the financial resources to meet a judgment against them.
4. Settlement strategy: Funders look at the potential for a settlement and assess the impact on the funding required as opposed to the reward won.
5. Claimant profile: Funders scrutinise the book build strategy and consider whether the law firm has key relationships to leverage.
6. Support from consumer association, trade body, or prominent industry representative: Funders assess whether the initiative has genuine support that will enhance its credibility and success rate.
7. Compelling narrative: Funders consider whether the claim has a compelling story and an effective strategy to communicate to the target class members.
8. Reputation: Funders also consider whether the claim will negatively impact their reputation.
Where technology fits into the equation
An additional consideration Lara mentioned was the use of technology to automate some of the key processes in managing the litigation proceedings:
“I think there's a massive role for technology, particularly in the group action space, and that's probably at all stages of the litigation process.”
Funders want the claims that they are supporting to be streamlined for greater time and cost efficiency but also, critically, for reduced risk. Lara pointed to technology to support in this and explained that there have been “lots of new developments which have all been really positive”.
5 key considerations for lawyers before engaging with a funder
1. "Not all funders are created equal"
When considering litigation funding, law firms need to be discerning in their choice of funder. While there are many reputable funders in the market, others may have a limited track record or lack the necessary expertise in a particular type of claim.2. Do your own due diligence
Lara said: “As much as we conduct due diligence on law firms, law firms should also conduct due diligence on their funders”. This may include researching the funder's track record, evaluating their financial stability, and assessing their reputation in the market. A good funder should be transparent and willing to answer any questions a law firm may have about their business practices.3. Regulation
Law firms should also consider whether a potential funder is a member of the Association of Litigation Funders (ALF), the self-regulatory body for the industry in the UK. ALF members must adhere to a strict code of conduct, including obligations around transparency, disclosure, and fair treatment of claimants.4. Communication
It's essential for law firms to have a clear understanding of the funding process and likely timelines before engaging with a funder. This can help manage expectations and ensure that the funding process runs smoothly. Law firms should clarify their expectations and timelines with the funder before signing any agreements. Lara’s word of advice was that: “It's all about having a good communication and relationship and partnership with your funder.”5. Build a strong pack of materials
Law firms need to prepare a “really comprehensive, well thought through and organized package of materials” to present to potential funders (as set out in the previous “Due diligence and pricing” section). A key point Lara made was:
“The clearer and more comprehensive the presentation of the case is, the more likely it is to be funded, and the process is likely to be more efficient.”
We concluded our conversation with a look at the market more generally. Lara revealed three key areas that I want to highlight as trends and ‘ones to watch’ over the coming year or so as the market continues to mature.1. The growing litigation funding market
The market hit a new high last year with new capital raised by established players in the market as well as new entrants. Lara explained that “alongside that growth is the continued development of the class action regime. It is no coincidence that the two go hand-in-hand”.
Lara also mentioned that the barriers to entry for litigation funders are high – funders need to understand the jurisdiction and the litigation process, have a really strong network to originate claims and a flexible and creative approach to funding cases. Whether there will be a slow down in the market growth is yet to be seen.2. Funder involvement early on
The involvement of funders early on in the litigation process is a positive development because it ensures that cases are built and structured in a way that facilitates the funding and ensures a collaborative relationship between funder, law firm and ultimately the clients. Funders also occupy a gatekeeper role in testing the proposals that are put to them; “Funders don’t survive by backing spurious claims”.3. Co-funding
A key trend to watch out for is the rise of co-funding for litigation claims. Lara said:
“I think the rise of large, complex claims...[with] correspondingly large litigation budgets, presents a positive opportunity for co-funding and risk sharing and collaboration amongst funders in the market.”
This is something to keep a close eye on as the number of cases proceeding through the CAT (Competition Appeal Tribunal) continues to grow. The industry is becoming increasingly collaborative to help facilitate these claims, develop best practice and see cases successfully settled on behalf of class members.
On that note, if you want to talk more about what’s happening in the market or learn more about how Shieldpay is collaborating across the industry to streamline claimant journeys with compensation payouts, get in touch here or find me on LinkedIn.
These insights are just a snippet of the conversation I had with Lara on our recent episode of the Shieldcast Class Actions series. If you want to listen to the full episode, you can stream the conversation here.
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