Initial Risk Assessment
Most types of Third Party funding of a litigation claim consist of funding models, which provide for the current and ongoing legal costs (including insurances) that would be otherwise incurred, in consideration of the return required from this gross investment.
Whilst the potential rewards to the solicitor and/or Third Party funder are not insignificant, the risk of such cases (as nothing is guaranteed, especially when it comes to legal disputes) is something that has to be closely monitored. Even for more standard funding models, such as Fixed Fees or Blended Rates the cap to such fees has to be liberal enough to provide for unexpected circumstances which may make what would initially be an profitable instruction into an unprofitable one.
Accordingly, there is a requirement for such risks to be assessed and closely monitored by the law firm or financier.
Portfolio of Cases
It is the case that both the law firm and a financier will hold a number of cases similarly to the funder, some of which will bear a greater risk than others.
For the law firm and financier to continue offering to take such instructions from clients on the basis of a funding arrangement, there are three essential considerations:
(i) The risk to the case
The risk to the case can involve a number of considerations as outlined below. Before any funding arrangement is entered into, the law firm or financier must be satisfied that the case has sufficient merits to warrant the risk taken (and to avoid any potential abuse of process which may arise from a weak case being issued).
(ii) The degree of risk in cases held by that law firm/financier.
Another consideration by both the law firm and Third Party Funder will be their own portfolio of cases subject to such funding arrangements. Some cases will carry a moderate or very low risk whilst others will carry a higher risk. It is an important business model to ensure that any such portfolio of risk is balanced favourably towards their benefit.
(iii) The number of similarly funded cases
This is more of a consideration for the law firm, who as an auditing standard will not want too many of their cases based on a funding arrangement which may be concluded at some time in the future.
This uncertainty can make the business appear extremely unprofitable on paper and carries an ongoing risk that no immediate payment of a large proportion of client instructions will cause problems to the law firm as a business.
The risk will largely be determined by reference to the legal strength of the rights sought to be enforced or the claim sought to be brought. Without an authoritative legal argument that stands up to the strict requirements of legislation and the common law (and European Law as of writing) then a law firm and a financier are unlikely to be willing to agree to any funding arrangement which exposes them to a risk of not recovering the sums sought.
This risk is conventionally determined by reference to the opinion of a barrister, who will be instructed to provide advice on the strengths of the case and, in the event of a litigation claim, the prospects of success.
Conventionally, as a standard, a minimum estimate of the prospects of success which will be acceptable to a law firm and financier is the barrister’s opinion that the prospects of success are at least 60%. If such prospects of success are provided, this normally means that a barrister is very confident (as this percentage is only rarely exceeded).
One other risk which must be determined as a commercial necessity is whether the monies are capable of being paid over. If a claim is brought against a man (or woman) of straw, or a company suffering solvency problems, then there is absolutely no point commencing the proceedings to obtain a judgment if the only outcome is that they become insolvent.
This commercial analysis will normally be examined by the client’s instructed solicitor before any steps are taken to seek advice on the prospects of success from a barrister.
However, aside from serving to satisfy the business requirements of the solicitor or Third Party funder, this risk assessment also assists to prevent the Court system being clogged up with wasteful proceedings that have no prospects of success and also enable the client to more clearly understand the risk they face and encourage them to resolve such disputes rather than going to Court.
Aside from such risk assessment, in respect of litigation proceedings, as part of putting the funding package together for the client consideration will need to be put to the protection for the client against his opponent’s legal costs (in the unlikely event that the claim fails).
Conventionally, such steps are taken by applying for After The Event Insurance - Insurers will commonly require Counsel’s Opinion on the prospects of success as described above. More information about After the Event Insurance can be found here.
At Francis Wilks & Jones we are familiar with the risk assessment requirements of any funding arrangements and with providing a complete funding package and can assist you in considering the strength of your case and the funding arrangement appropriate to your circumstances.
Please call any member of our commercial litigation team for your consultation now on 020 7841 0390. Alternatively e mail us with your enquiry and we will call you back at a time convenient to you.