More corporate clients than ever have pursued third-party litigation funding in England this year, as the COVID-19 pandemic has forced businesses to think more conservatively and try to prioritize the cash on their balance sheets.
Lawyers expect the rise in litigation directly linked to the pandemic involving claims for business interruption insurance or insolvencies to continue. (iStock) Lawyers predict that, after England entered its second national lockdown on Thursday in an attempt to control a second wave of coronavirus cases, the increase in demand for legal finance is likely to continue.
“COVID will be a really important event for litigation funding,” Robert Coffey, managing partner at Cooke Young & Keidan LLP, said. “A lot of people who previously didn’t engage in funding will do so now.”
Lawyers scrambled as the first national lockdown took hold in March to provide their clients with guidance. They expected a rise in new litigation directly linked to the pandemic involving breach of contract, claims for business interruption insurance or insolvencies. Lawsuits connected to COVID-19 have started reaching the courts, with disputes over business interruption insurance leading the way.
Corporate lawyers are also closely watching the progress of two big cases over stalled acquisition deals, one involving Apollo Capital Management and the other brought by financial technology company WEX over a $1.7 billion deal to buy travel payment providers. Several companies, including Pizza Express, Virgin Atlantic and ED&F Man, have had to restructure.
Meanwhile, existing cases and legal battles unrelated to coronavirus continue to make their way through the courts, prompting a wider range of companies to look for financial help.
Robert Hanna, co-founder of Augusta Ventures, a litigation funder, emphasized that the market has matured after more than a decade in the U.K., as law firms and businesses now approach litigation funders at a much earlier stage. “Litigation finance has always been a risk management tool for claimants, allowing them to take as much or as little risk as they want off the table,” Hanna said. “But, recently, CFOs are realizing that it is also a source of much-needed liquidity, since a funder will pay for their litigation costs. This allows the firm to hang on to their precious cash.”
Litigation funding tends to be popular when companies are facing financial pressures: swathes of the economy are struggling as the lockdowns roil the economy. Many funders saw indications of corporate distress from the start of the pandemic, when markets plunged.
“Companies with big budgets, lots of cash and armies of lawyers that wouldn’t have in the past come into the funding market on an individual case basis have started expressing a keener interest in monetization deals or funding deals on a portfolio basis,” Neil Purslow of Therium said.
Purslow said that the increase in inquiries from these kinds of companies shows there were types of businesses and parts of the world where budgets are being drastically reappraised and where spending money on litigation lawyers was becoming less of a priority.
More funders have entered the U.K. market in the past decade, offering greater opportunities for potential claimants, according to Ben Lasserson, partner at FisherBroyles LLP. “Law firms are looking for more creative approaches on how they can bring in financial support for the work they do,” Lasserson said. “And what we are seeing is essentially far more flexibility around what the funders are actually happy to entertain and to do.”
Funders can also help assess the prospects of litigation, providing a second, credible viewpoint on a case for clients about their prospective claim, according to CYK’s Coffey.
There have been several tie-ups between law firms and funders in the era of COVID-19. But funders say they are working in the way they always have — financing cases only when they have done considerable due diligence, including on the law firms themselves, to make sure they are backing claims with merit and strong counsel.
“The desire to learn about funding has increased, and we’re seeing more engagement than ever before,” said Susan Dunn, founder of Harbour Litigation Funding. “Law firms are realizing that their clients might need this, in a way that they might not have had to think about but for COVID.” Dunn’s company funded the high-profile claim for business interruption insurance brought by Mishcon de Reya against Hiscox on behalf of policyholders. The policyholders were joined to the Financial Conduct Authority‘s test case against eight insurers, which was fast-tracked through the courts and is now on its way to the Supreme Court. “A lot of these businesses depend on their insurers releasing that £100,000 to help them survive. It was a very important case to get going quickly,” she said.
The business interruption cases are one of the few disputes linked to the coronavirus dispute that have actually got off the ground and landed in the courts, Dunn said. But the rise in general inquiries has kept her firm busier than ever. Harbour Litigation is using capital from the fifth fund it raised during lockdown on many new potential cases. “Just because there are good claims on liability, it doesn’t mean that they’re necessarily good claims for funding. The value of a case and the ability of the defendant to pay are the first two questions we have to have answered positively,” Dunn said. “Just because one business interruption insurance case looks positive doesn’t mean they all work.”
A major shift in practices from before the pandemic, which is expected to grow further, is portfolio funding. The arrangement allows multiple cases from one company to be funded under one agreement. Funders like it because their investment and any subsequent returns are spread across a portfolio of claims, while law firms can get claims funded more quickly.
“If you have companies with multiple claims that are strong enough, we’re happy to finance them as a portfolio, and, as the risk is lower for us, we are able to offer a more efficient funding rate,” Hanna, of Augusta Ventures, said.
The portfolio model can also allow funders to offer companies better pricing because funding companies can diversify their risk through multiple claims, according to Elizabeth Fisher, senior vice-president of Burford Capital.
Long time to go
Therium’s Purslow said there was a lot of talk during the “initial excitement” of the lockdown about insolvency cases coming through, as well as general commercial cases with breach of contract and arguments about force majeure and material adverse change. “But we haven’t seen it at the level predicted yet,” Purslow added.
Christina Bost Seaton, partner at FisherBroyles, is watching for signs of a financing model that will make big commercial disputes linked to COVID-19 viable for outside financing. She said that tort claims are easier to put into portfolios, because there is a big pot of money at the end. But so few commercial disputes end up going to trial that it’s difficult to price them out.
“In theory, you could have funders that think it’s worth going after force majeure claims. But it’s very expensive to be at the forefront of leading that kind of case, and, as much as lawyers like to talk about that type of possible dispute, very few cases are being filed so far, and even fewer are going to decision,” she said.
Those cases are likely to be drawn out, with no quick settlements, as every case tied to the pandemic will have broad implications across the industry. Many funders are also working on the assumption that the courts will function more slowly than usual.
“Any form of economic disruption or downturn usually tends to generate litigation,” Burford’s Fisher said. “But, while COVID-19 is obviously a disruption and we’ve seen an uptick in inquiries, I think it will take some time to play out.”
And England’s six-year limitation period for civil claims allows companies plenty of time to bring claims related to the health crisis. Major downturns tend to create a long wake of litigation: cases are still making their way through the courts that date from the 2008 financial crisis. Meanwhile, much of the economy is still being propped up by government initiatives. A new iteration of the furlough scheme, for example, was announced in response to a second wave of coronavirus. Other measures, such as the so-called bounce-back business loan scheme and eased taxes for small companies, remain in place.
Most funders predict that 2021 will be a busy year for claimants, particularly if those government programs wind down. “The difference between now and the last recession is that insolvency practitioners are more sophisticated users of legal finance. They understand how legal finance can enhance returns to creditors,” Fisher said.