The In-house Counsel Litigation Conference, hosted by the International In-house Counsel Journal and sponsored by Stewarts, featured panels on a variety of topics relevant to general counsel engaging in litigation. One of the panels covered the issue of how to de-risk litigation spend.
Each member of the panel represented a different player in the litigation funding market, and each contributed a different perspective to the discussion about the ways in which the risks of litigation can be reduced and diversified.
The panel comprised: Julian Chamberlayne, Partner and Head of KM and Compliance at Stewarts; Rosie Ioannou from litigation funders Vannin Capital; Alan Pratten from insurance brokers Arthur J. Gallagher; Maura McIntosh, Professional Support Consultant from Herbert Smith Freehills LLP; and James Thackray, Lead Disputes Counsel for Vodafone UK.
The audience heard an overview of the key considerations for each panellist when assessing prospective claims, followed by their views in relation to funding issues and options for three case studies.
Competing considerations at play
James Thackray explained that boards of corporations are principally concerned with maximising their return from litigation and will want to model the various possible scenarios in order to make an informed decision on strategy. When considering the financial impact of litigating it will be important for companies to know when fees are likely to spike so that they can regulate cash flow. Corporate clients will also always have the reputational impact of any claim at the forefront of their thinking.
Alan Pratten considers there to be two broad types of corporate approach to the purchase of litigation-related insurance: (i) “PLCs”, who view litigation as outside their traditional approach to insurance and so may be less open to spending on insurance products, and (ii) “investment and pension funds”, who tend to be more conservative and extensively utilise insurance solutions to mitigate litigation costs. Insurers can offer a range of solutions including opponent’s costs; disbursements and own side costs; appeal protection or arbitration default insurances.
Maura McIntosh emphasised the need for solicitors’ firms to be flexible and proactive in finding solutions, rather than reactively exploring funding options once the client has exhausted its ability or desire to pay monthly bills. Whether funding is needed to reduce costs or just to give financial predictability, solicitors’ firms need to help the client navigate these issues.
Rosie Ioannou has seen a huge increase in not only the number of clients seeking litigation funding but also the types of clients. Whereas it used to be a tool for the impecunious litigator, that is certainly no longer the case with more and more investment banks and multinational corporations seeking funding as budgets are squeezed. Taking out the downside allows businesses to view litigation as an asset not a liability.
Case study 1 – A £5m commercial dispute in the English courts for a Bermuda corporate with 70% prospects of success for the claimant with each side expected to run up £3m of costs.
Rosie Ioannou stressed that a case worth £5m is not necessarily too small to secure funding but every case must meet standard investment criteria which Vannin will probe closely. In investigating the economics of the claim, a funder will always enquire about the assets and creditworthiness of the defendant, the strength of the claim from a liability perspective (as verified by an independent and experienced expert in the relevant field) and will consider the impact that the applicable governing law and jurisdiction may have on the prospects of success. In reality, given the costs of running this particular case to trial (i.e. £3m), it is unlikely that economically this particular case would merit funding for either the funder or the client.
From an in-house perspective, corporates would be looking for an early settlement, which would make it unsuitable for funding. When funders are assessing risk they have to budget for the claim to go to trial so cannot design a package with early settlement in mind.
Alan Pratten thought that opponent’s costs and/or own side disbursements policies would likely be most attractive to this claimant, although issuing a policy to a client in the Bermudan jurisdiction can be complex. Depending on the client’s preference, insurers could offer a number of pricing options from paid up-front premiums or paid premium stages through to fully deferred and contingent (D&C) policies, or a mixture of paid and D&C policies.
The use of insurance as security for costs could also be a possibility, with the issuance by the insurers of a Bond, Deed, Letter of Intent or policy endorsement making the policy non-cancellable/avoidable.
Maura McIntosh commented that this combination of claim value versus costs would probably mean it was not practicable for a firm to offer a damages based agreement (DBA). While a conditional fee arrangement (CFA) with an uplift may be economically attractive for the firm, it might not be attractive to the client, given the potential for the fees to eat into any recovery. Such a funding arrangement could also act as an obstacle to settlement, which is not in any party’s interest. An agreement for fixed or capped fees, perhaps by stages, might be the best way to give the client greater predictability and control over costs.
Julian Chamberlayne added that costs management of a case like this would also give helpful costs insight and control. Early Part 36 offers should also be considered.
Case study 2 – A s.90 Financial Services and Markets Act (FSMA) claim on behalf of institutional investors with a value of up to £5bn and potential adverse costs for each side of £50m.
With large adverse costs limits like £50m, Alan Pratten commented that they would want to explore the capacity in the market as early as possible. The standard limit for many ATE insurers is £3m so this policy limit would likely come from multiple insurers. Insurers would examine the policy wording closely, particularly with regard to how it deals with severability of the proposal and action.
Maura McIntosh said a defendant might wish to consider applying for disclosure of the funder’s identity with a view to seeking security for costs from the funder, particularly as the claimants’ liability for adverse costs is likely to be only several rather than joint, giving rise to challenges for the defendant in recovering its costs if ultimately successful. Alan Pratten responded that, after-the-event (ATE) policies can act as security for costs (as seen in the Premier Motors case). However this may not be a commercially attractive option as the cost of a deed of indemnity will typically add 10% to the premium, which is more than the cost of borrowing for some corporates.
Given the lack of precedents to rely on for s.90 FSMA claims, both insurers and funders would be wary. In very high value claims like this one, funders would be likely to instruct an independent economist to stress test the valuation. Funders and insurers would also want assurances that any steering committee set up to make decisions on behalf of the claimant group had a sound composition and procedure, and that the claimant group was well advised by a firm like Stewarts, with experience of the case management issues in group litigation including in relation to Group Litigation Orders (GLOs).
From a defendant’s point of view, the corporate defendant would be looking to make provision in their accounts for fees. A defendant will also want to ensure that any costs budgets are prepared on a basis that is sufficient to allow individual issues to be explored to an appropriate extent. There is often a tension in such actions between the claimants, who will tend to wish to focus on the generic issues, and the defendant, who will want to ensure that individual issues are not ignored where they are essential in assessing its potential liability.
Case study 3 – UK corporate making a follow-on claim for damages for around £100m against a cartel, either as part of a group or independently, after a European Commission decision with potential adverse costs of £15-25m.
Maura McIntosh commented that a DBA might well be attractive to a law firm in this scenario. Where a pure DBA was seen as too risky, the firm might be able to manage its risk by partnering with a litigation funder or insurer.
The capacity of the insurance market is often problematic in cartel claims with a broad and diverse claimant group, but Alan Pratten would expect £15m to be available. He thought all premium options would be possible, and that a mixture of paid and D&C premium to be the most suitable solution for the client as is prevalent at the moment. The way in which the policy defined a “win” and set out the waterfall procedure to the various funders and insurers would be of the utmost importance to any potential insurer. Rosie Ioannou mentioned that in these circumstances a small numbers of funders may be able to offer up to £3m cover from their portfolio ATE cover, which can make all the difference for a claimant’s ability to cover off the potential exposure.
James Thackray highlighted the concerns over control of the litigation that the UK corporate may have if they are part of a large group.
Interested in attending next year?
In-house Counsel Litigation Conference 2018