Solicitors Journal | Matt Reach
A portfolio approach to DBA funding has advantages over the case-by-case model
Litigation departments in law firms are taking stock of the changes introduced by LASPO, assessing the impact on their practices and trying to identify where the most lucrative opportunities lie in the new costs landscape.
Much has been said about the impact damages-based agreements (DBA) might have on the way claims are funded.
At Argentum, we have developed third-party funding products that embrace the introduction of DBAs. In short, we are looking to provide third-party funding directly to solicitors for DBAs or across a portfolio of DBAs. Such products will be less relevant to a handful of the largest city firms with substantial cash-flow, but are likely to be an attractive prospect for mid-tier and regional firms.
Our research indicates that the majority of law firms in England and Wales, particularly those outside London, are unlikely to have sufficient financial resources to support a portfolio of DBA cases that might take several years to conclude. Overheads must be met and staff paid, but DBAs could mean that work in progress is locked up for a long time and, if firms select the wrong claims, the impact on their finances could be catastrophic.
In light of our research, it was clear to us that certain categories of law firm would benefit greatly from third-party funding for DBAs. It would represent a significant opportunity to share or transfer the risk involved in running a DBA case. In other words, should a funder provide some working capital to support a DBA case, say 50 per cent, if the case is lost or aborted, the law firm does not suffer the full financial consequences, such as writing off all work in progress.
Our third-party funding proposals for DBAs are likely to be packaged in two ways, either on a case-by-case basis or across a portfolio of cases. The case-by-case basis largely resembles the traditional way in which third-party funding is used, but with a key difference. Historically, a solicitor in a funded case would be required to undertake part of their work pursuant to a conditional fee agreement (CFA) and the funder would enter into an agreement with the litigant to pay the balance of the solicitor’s invoices and other costs associated with the litigation.
DBAs, for commercial cases permit solicitors to take up to 50 per cent of the award (potentially far greater uplifts that CFAs allow) and, therefore, conceptually at least, it is open to the funder to contract with either the solicitor or the litigant to provide funding and share in their respective recoveries. Should the solicitor contract with the funder the client need not even be made aware of the funder’s involvement. This would, no doubt, be a far more simple method of funding for solicitors to explain to their clients.
The DBA portfolio approach represents a substantial departure from the conventional third-party funding model. Rather than considering individual cases, the third-party funder would provide the litigation team (or certain fee earners within it) with an agreed amount of capital that the firm could use as working capital to underpin a collection of cases being run under DBAs.
Such an arrangement would arguably be better than the case-by-case model for all parties concerned. By way of example, the firm would have direct access to funds that it could allocate to the cases that most needed it at any given time, the funder’s risk is lower because returns could come from more than one source and, in turn, this benefits the client because the cost of funding would be reduced in line with the lower risk profile.
Another advantage of the DBA portfolio funding approach over the case-by-case model is that the funder might not need to undertake due diligence on each case and, in time, the firm might have full delegated authority.
It is unlikely that full delegated authority would be granted while the funder’s relationship with the firm is in its infancy, but, as matters progress and cases are won, the funder should achieve a level of trust and confidence in the litigation team that means it no longer needs to review every case.
Of course many factors need to be taken into account before delegated authority could become absolute or commonplace, but it is a logical progression for the third-party funding market. If delegated authority is to be achieved for DBA portfolios, the solicitors involved would need to demonstrate not only that they are capable litigators, but also that they understand the third party funder’s investment criteria.
I left private practice a little over a year ago and moved into third-party litigation funding. My role involves undertaking due diligence on cases that represent investment opportunities, and the change in mindset and attitude that was required to make commercial decisions and assess legal merit was significant. The skills required for assessing cases for investment purposes, rather than just for trial, are quite different.
Graham Huntley, London Solicitors Litigation Association executive committee member and partner in Signature Litigation
The future of litigation funding is generally bright. Portfolio funding is a more efficient means of aligning capital with the provision of litigation services. It also avoids the time consuming and often defeating task of individual negotiation of terms for complex commercial disputes in particular.
Additionally, funding arrangements can overcome some of the problems with DBAs, in particular as regards the scope for hybrid DBAs. The funder can provide the capital to replace the fees element that may not be possible alongside the DBA (until the regulations are amended).
But the arrangements must be seen by the client to work. To the extent that the portfolio approach imposes obligations on the law firm to use the funder’s model, and none other, there will be client resistance. And if the funder requires a slice of the DBA recovery, there will need to be individual negotiation (and disclosure of the role of the funder).
The arrangements work best when there is some parity of financial contribution between client, law firm and funder. Even with these arrangements, problems are likely to arise when large-percentage recoveries under DBAs produce very substantial windfalls for the funder, which may be out of all relationship to the capital invested.
Jamie Colman, senior associate, Plexus Law – defendant insurance litigation firm
Solicitors looking to maximise their revenue streams will struggle to do so using DBAs, which suffer from five significant drawbacks.
First, DBAs provide for the fee to be in proportion to the damages, not the work that has to be carried out.
They will put the client in conflict with his solicitor if the client wishes to accept a much smaller sum of damages than has been claimed.
DBAs cannot be used as part of an overall funding agreement. The solicitor could be over-rewarded when the damages are agreed very early in the dispute after minimal work, and under-rewarded where it is necessary to take the same sort of dispute all the way to trial.
A client that has other means of funding litigation cannot reasonably be advised to enter into a DBA by their lawyer. A lawyer presented with a very strong claim cannot reasonably advise their client to agree to a large percentage of the damages as the fee.
Finally, the portfolio proposal suggests the winners will pay for the losers over time but, unless the client is bringing a large number of disputes into the portfolio, each individual client retainer has to be separately advised on and agreed by each client, and so there is no ‘portfolio’.
Matthew Amey, director of independent litigation risk transfer broker, TheJudge
Portfolio funding will appeal to certain firms conceptually although, in practice, it could be some time before we see them working effectively.
There are significant risks for the funder, who will need the right data from the firm to ensure the facility is economically viable.
Some specialist litigation departments with regular instructions of relatively homogenous case types may have the statistical evidence on recoveries and longevity to support a business case for such a facility. Others will find it difficult or time-consuming to collate the necessary information.
If the firm has the right track record and is committed to the concept, then inevitably this sort of model will develop over time. However, it is the firm’s commitment to the model which is the most significant barrier.
The portfolio concept requires a degree of assumption over the billing arrangements that future clients will agree to. The firm will need to ensure any tied arrangements they make do not tether them to an uncompetitive arrangement in comparison to their peers.
They should seek out a portfolio by tendering to the market to ensure their arrangement is suitable and remains suitable for the anticipated lifespan of the scheme.
We’ve seen very different approaches, and resultant costs, by all the funders we are working with on portfolio funding models.
Firms not prepared to close their options down to one model involving a binding commitment so soon after LASPO have other options. Mini-panel arrangements are proving popular with mid-tier and regional firms.
These provide access to several of the important funding markets under tight service-level agreements and agreed procedures, providing certainty for dispute resolution teams, without making long-term commitments at this juncture.