Biglaw, Litigation Finance, United Kingdom / Great Britain

Is London A Sunnier Clime For Litigation Finance?

Litigation finance is gaining acceptance in the U.S., but in the more innovative U.K. market, the practice is "booming."

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Ed. note: This article is part of a series presented by Lake Whillans Litigation Finance devoted to addressing common questions that arise in connection with commercial litigation finance.

When is comes to experimenting with the law firm business model, the U.K. — at least relative to the United States — is a hotbed of innovation.

Back in 2007, the United Kingdom enacted the Legal Services Act, an attempt to liberalize a legal market then-characterized as “outdated, inflexible, over complex and insufficiently accountable.” The sweeping legislation allowed law firms, among other things, to redefine themselves as “Alternative Business Structures.” This ABS model permits non-lawyers to take a role in the management and control of law firms and allows the possibility of firms raising capital from external investors.

Such outside investment is of course against American professional rules prohibiting lawyers from sharing fees with non-lawyers. Unlike other businesses, U.S. law firms must rely solely on business revenues and debt facilities to fund operations. As previously noted in this space, this lack of access to capital markets is among the number of disincentives to firms entering contingent fee arrangements.

In addition to this comparatively radical re-engineering of the law firm business model, the U.K. market also appears to be more open to other modes of innovation, including the adoption of litigation finance. It is hard to imagine someone of similar stature within the U.S. legal profession coming out as resoundingly and unambiguously in favor of litigation finance as Lord Neuberger, President of The Supreme Court of the United Kingdom, did when he declared the practice necessary to “secure the development of an inclusive, pluralistic society governed by the rule of law.” (On the other hand, one Lord Thomas of Gresford deplored the “insidious advance” of this “essentially American concept.”)

By contrast, in the United States, litigation finance remains controversial, despite its growing relevance. Although the practice is permitted in a majority of states, the president of the U.S. Chamber of Commerce Institute for Legal Reform recently fretted, “Is this a course we want to take in the U.S. for our civil justice system? Do we want it to become a profit-making entity for private hedge funds?” Well, if you put it that way … no? But as the chairman of a London-based litigation funder scathingly asserted back in 2012: “The ILR should actually be called the ‘Institute for the Prevention of Legal Reform,’ because it’s one of those oxymoronic institutions that does exactly the opposite of what it says on the tin. They are notorious in trying to clamp down on access to justice, and have been trying to have litigation finance banned in any form in certain U.S. states.”

Though we yet lack much in the way of hard data on the growth of the practice, there are myriad other indications of a warmer climate for litigation finance on the right side of the Pond.

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The U.K. finance companies themselves are practically exuberant. Most notably, the U.K. market leader Harbourside, in announcing it was tripling its amount of available financing to £180m, crowed, “We have a big pot of cash and are looking to invest. There are quite a lot of people setting up their stalls now. [T]here’s probably £500m in the UK ready to pay for third-party litigation.” Some attribute this optimism to London’s emergence as a global legal center “drawing in Russian and Middle Eastern disputes attracted by Britain’s reputation for impartial justice – has multiplied the possibilities for investment.”

It is not just the litigation finance companies themselves — who are obviously far from disinterested observers — who take this sunny view of the practice’s future. A number of U.K. Biglaw partners have let it be known that they would bet long on the future of third-party funding in the U.K.

Here is Robert Hickmott, a London partner at Quinn Emanuel on the mainstreaming of litigation finance:

Third-party funding has been available for a some time now but has only become mainstream in the past few years. This is because both the market and the products have become a lot more sophisticated. It used to be considered an option for only particular types of cases – insolvency-style claims or impecunious litigants – whereas it is now considered at an early point in most commercial litigation cases. It makes sense for any business to want to share the financial risk and operational burden of pursuing a claim by using external capital.

Clive Zietman, a partner at prominent litigation boutique Stewarts, sees a role for litigation funding in those proverbial “bet-the-company” cases:

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[Blue chip clients] are increasingly interested in funding as a way to help manage their legal spend. They are, in our experience, less concerned with day-to-day low-value claims, which they are comfortable funding from their balance sheets. Where they are starting to look at funding [is] in managing the costs of high-value claims that expose the business to substantial legal costs along with potentially high adverse costs liabilities. These are reputationally conscious clients who have previously seen funding as a bit of an unknown, but as the market becomes more established are starting to consider it a realistic proposition.

The LSA is a persuasive indication that the U.K is closer to the forefront for innovation in the market for legal services. The growth of U.K. litigation finance appears to be part of the same phenomenon. While litigation funding in the United States is undoubtedly gaining ground and acceptance, it’s over there where the market can be characterized as “booming.”

This column is sponsored by Lake Whillans Litigation Finance. To learn more about us, and litigation finance generally, visit us at our website, lakewhillans.com. To ask a specific question, suggest a topic, or simply say hello, drop us a line at inquiry@lakewhillans.com.

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