As the EU rehashes old myths of no win-no fee litigation, London stands to benefit

In the EU, there are still many misconceptions about litigation funding. Here in London we must see it as a way for companies to manage risks and costs, writes Glenn Newberry

At the end of last year, German MEP Axel Voss weighed in against the litigation funding industry – and third party disputes funding – reigniting old debates and myths, many of which had, we thought, been debunked years ago.

The market for third-party funding for legal cases is huge, and has doubled in the last four years. In economically volatile times, it is a useful lever for businesses looking to take costs and risks off their balance sheets.

The practice is nearly as old as the legal profession itself. Allowing a third party to bear the costs of a dispute between others who could otherwise not afford to – in exchange for a commission – was common in ancient Rome, and lasted in England until the Middle Ages. However, it was criminalised in 1275 to prevent vexatious claims – a ban that lasted until the late 1960s. But the ancient laws of “champerty and maintenance” were also stifling access to justice, and from the 1990s onwards, it was recognised that provided suitable safeguards were in place, there was no reason disinterested parties should not pay for legal actions.

This aspect is perhaps at the root of many misconceptions about litigation funding – for example that it is only for people who can’t afford to go to court, or for class-action-type cases. It is also why politicians frequently fear the sector as open to abuse. They envisage a spectre of wealthy investors and lawyers plotting to control cases, ignore the client and receive a bonanza payday either way.

In truth, litigation funding has mostly become a sophisticated way for companies to manage risk and costs by aligning their risk profile with that of their lawyers. Leveraging third party capital to fund a dispute, in return for a share of the rewards, means companies can pursue litigation without downside risk or any upfront outlay. But the options available are becoming ever-more sophisticated, allowing companies to share risk and reward, and manage fees – and it is now open, in part, to defendants as well as claimants.

Formerly investors would look to bear the whole cost, in return for around 3-4 times that as a return – still beneficial to the claimant, but only really applicable to certain matters. Now there are a whole host of options which enable clients, lawyers, investors and insurers, to share risk and reward in a truly collaborative way.

There are Conditional Fee Arrangements, which allow for the payment of fees, in part or in whole, depending on the outcome of the dispute – effectively no win, no fee, but with a higher adjusted payout when successful. Damages Based Agreements mean firms negotiate for a portion of the damages received if the case is won, no fee in the event of a loss. These agreements are usually combined with insurance for the client against being liable for costs if they lose as well.  As such, as a legal solution, these are truly “off book” and derisked.

All of these approaches involve investors, insurers and lawyers taking on most –  or often all – of the downside risk of a loss in return for increased remuneration in the event of a win. Clearly they will only do this having undertaken a full risk analysis, and done due diligence, on the probability of success, which is in the client’s favour.

Stifling a growing market sector, which enables many companies to better manage their finances, is a poor use of European parliamentarians’ time. But in the event it does happen, it is all the more reason to make sure London has a thriving market.