THE BLOG
05/02/2016 08:32 GMT | Updated 04/02/2017 05:12 GMT

Paupers and Princes Alike: The Changing Face of Litigation Funding

Litigation funding has been around for a long time, and the face of it is changing. Where it was once seen as a distress purchase, for businesses without the necessary capital to fund costly litigation procedures, it is now being utilised by financially healthy organisations, who would rather avoid risk, choosing instead to use their capital elsewhere.

Third party litigation funding is essentially where a financier or private equity company will put up money for a legal dispute - covering all court costs and fees - in return for a proportion of the winnings if the case is successful. If the case is unsuccessful, the third party absorbs the financial damage.

While the percentage taken by financiers in a successful case is often high, litigation funding has historically provided a way of unlocking access to litigation for those that would otherwise not have the means to do so, and would, consequently, receive nothing.

A perfect example of this David v Goliath type of litigation funding is the Roadchef case - one that I've been involved with for a large part of my career.

The service station restaurant chain had adopted an Employee Share Ownership Plan (ESOP), in which every employee would have shares in the company. The thinking was that long-term employees, regardless of rank, could be rewarded for their loyalty with shares of ever increasing value.

However, things didn't quite go to plan as, when the founder of the scheme passed away, Timothy Ingram-Hill became CEO, promptly selling the company's £22 million worth of shares - many of which legally belonged to Roadchef employees. His actions left more than 600 employees without the considerable sums of money - in some cases five figures - that were owed to them.

Ironically, despite having a valid claim, the company employees were unable to pursue their boss legally, as they'd been left without the very funds with which they could have paid the legal fees.

In 2005, Roadchef's new board focused their efforts on reclaiming the funds in order to redistribute them to staff, and instructed Capital Law - my own firm - to help. However, it wasn't until 2010, when a change in the law enabled us to access third party litigation funding, that we were able to successfully tackle the problem in court, with the High Court awarding the employees large sums in compensation.

Several years on, where it was previously once thought of only in insolvency situations, litigation funding has become more widespread.

Rather than a distress call by an insolvent business, litigation funding is becoming recognised as a way of uncovering previously hidden, and dormant, financial assets, as businesses can bring previously written off claims and profit from any damages that they're subsequently awarded.

What's more, healthy businesses are also starting to use litigation funders as a way to stave off financial risk and use their working capital for other business areas. Telecoms giant BT, for example, recently obtained £45m funding in order to pursue a portfolio of claims - choosing to turn to litigation funding, rather than use their (undoubtedly substantial) capital to fund the litigation themselves.

It's important to note that this emerging practice is ever-evolving, and that we can expect to see huge shifts in the current model in the years to come. Third party litigation funding is a phenomenon that is set to grow exponentially - providing both financial access to justice for those who lacking funds to bring claims and an opportunity for healthy business to capitalise on hidden potential assets, without denting their pocket in the meantime.

Andrew Brown is a Partner and a specialist in commercial disputes at Cardiff and London based law firm Capital Law www.capital-law.co.uk. For more information on Capital Law's litigation fund: www.capital-law.co.uk/services/litigation-fund/