John MacKenzie: Third party funding for legal claims is here to stay

John MacKenzie, Partner in Shepherd and Wedderburn's Commercial and International Disputes practice.
John MacKenzie, Partner in Shepherd and Wedderburn's Commercial and International Disputes practice.
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You know the joke that ends: everyone’s talking about it, everyone says they are doing it… Well litigation funding is a little like that.

So why is everyone talking about it? Possibly because some very large, high profile claims have been financed by third party funders – and possibly because some very strong recent results in this area have demonstrated the attraction of this asset class. Or possibly because high profile judges have publicly endorsed third party funding as a way of facilitating access to justice. Whatever the reason, third party litigation funding is here, and here to stay.

If you are not familiar with third party funding, then the concept is reasonably straightforward. A third party provides cash to fund a legal claim, in return for a share of the winnings. That share can be quite large, but then so is the risk. There are also some innovative twists like the portfolio arrangement that we have in place with Burford. That allows for flexibility when it comes to the share of the damages that the client gives up.

Third party funding has developed significantly. The benefits that it can provide now attract ‘Goliaths’ involved in litigation or arbitration as much as ‘Davids’. Third party funders offer considerably more options, like portfolio funding, pre-judgment monetisation of claims and ATE (After The Event) insurance for own-side costs. Equally, the range of disputes in which, and the parties for whom, third party funding is available has grown exponentially.

For all companies, litigation finance can be a godsend. Instead of leaving a claim festering in the corner, that claim can be pursued. In some cases, funders will advance cash, meaning an instant boost to cash flow. If there is a portfolio of claims, then the funders will considering making the funds available for defence of claims as well as pursuit.

In Scotland, there haven’t been as many funded claims as there have in England. That isn’t particularly surprising. There just aren’t as many court actions in Scotland as there are in England. But there are some procedural differences between Scotland that mean that England is ahead of the game at the moment. Addressing the difficulties with the current form and structure of the courts has been a long-running project with many different reforms coming through. While the original review group was pretty scathing about the then state of the court system, much has changed. Summary Sheriffs, a Sheriff Appeal Court, the All Scotland Personal Injury Court, and just recently an online small claims case tracker.

The Civil Litigation (Expenses and Group Proceedings) (Scotland) Bill is the latest innovation. The introduction of the concept of damages-based agreements and provisions for group proceedings should give comfort to clients, lawyers and funders that the legal structures are in place to allow for a wider range of claims.

Damages Based Agreements (DBAs) are another form of contingency fee. Under a DBA, a client only needs to pay for the legal services if they are successful. The amount payable is determined as a percentage of the recovered damages. It is most commonly referred to as “no win – no fee”. In England it is currently not possible to have ‘partial’ or ‘hybrid’ DBAs. Under the Scottish reforms these will be available, which gives welcome flexibility.

The introduction of group actions is another important development. Litigation funders are keen to fund properly constituted class actions, mainly due to the size of financial claim that comes with scale. In an important case involving a data leak, the High Court in England ruled that some 5,518 former and current workers could bring a claim against Morrisons for the worry and stress caused by the data leak. While class actions are usually associated with catastrophic events, environment damage or product liability, the introduction of claims based on data leaks opens up a whole new area of litigation. With the recent blanket coverage of Cambridge Analytica and Facebook, the profile and awareness of the value of personal data and the importance of security has never been greater. The reforms of the courts might have come along just in time.

John MacKenzie is a partner in Shepherd and Wedderburn’s Commercial and International Disputes practice.