How funding drives innovation and technology in litigation
In this month’s blog we interview Susan Dunn, Co-Founder of Harbour, one of the world’s largest litigation funders. Susan in many ways needs no introduction, as the doyenne of funding, she is one of the most well-known and respected people in her field. In this interview we delve deeper into what inspired her to get into litigation funding and the role funders have in driving technology and innovation in the sector.
Q) You once described your entry into litigation funding as a ‘sliding doors moment’ – can you tell us more about it?
Getting into litigation funding, really wasn’t a cunning plan. It was a coincidence of fate. I was working for the Cabinet Office running an IT project at the time (early 2002). Like the film ‘Sliding Doors,’ I was on the tube at St James’ one day and bumped into David Locke QC.
David is a barrister I had regularly instructed as a young solicitor. David had just lost his Labour seat in the 2002 election. I asked what he was going to do next, and he mentioned he was going to try “litigation funding.” Something I had never heard of. The next day (after, it turns out, a conversation with the woman who trained me and remains a good friend to this day) he called me up and asked if I wanted to set up the business with him. I knew little about it, but it sounded intriguing, so I thought, “why not”?
We started with £1m, operating first out of his house in Bewdley and then a converted factory in Kidderminster. It was a very hard first five years. Litigation Funding was completely unknown and with that came a lot of uncertainty. So, a lot of time was simply convincing people that it was possible. Lawyers can be a hard crowd to win over!
We set up Harbour in late 2007. We are 15 this year and Harbour now has £1.5bn across five funds.
Q) What have you learnt over the years you have been doing this?
After all these years, one of the greatest challenges is budgets for claims. Whilst they are getting better, and the introduction of costs budgeting has introduced some planning and discipline, they are still not good. It seems for funders and clients alike; it is very hard for lawyers to provide certainty. Part of that is that unlike funders, law firms don’t analyse their past data as much as we do to see how their budgets to actuals turned out, from which one can learn an awful lot. We believe all clients would pay a bonus for certainty, as it makes financial planning so much easier. Unpleasant surprises about costs over-runs are very difficult to manage.
We are obsessed with data and by analysing our experiences on cases, we can see trends and where the budgeting most goes awry.
The reality is that a win at trial will be undermined if the budget is over-run, thereby decreasing the value of the win.
Q) Are there any cases that stick out for you?
Definitely. Stone & Rolls Ltd v Moore Stephens, which found that where the company was essentially run by one person as the alter ego of the company, the fraud of that person would be attributable to the company, and the ‘company’ (or the creditors standing in its insolvent shoes) could not rely on the individual’s fraud when bringing a claim for negligence against any auditors on behalf of the company. This case decided, contrary to received wisdom, that the company and the individual were not separate legal personalities.
It was the last case to be argued before the House of Lords. And we lost it 3 – 2. Though I still have people telling me today that the decision was wrong. Which is lovely to hear –it doesn’t really help as it was still a loss!
However, despite the outcome, it was a case I would still fund today given the extraordinary fact pattern of the case.
What I really love about the role of funder is the most amazing range of enquiries daily and it’s what makes the job continually interesting and varied. Sadly, most of which I can’t repeat, for confidentiality reasons. We really are privileged to have the most amazing window on the world
Q) What are your thoughts on the recent paper published by professional services firm RPC which found that the UK litigation funder ‘war chests’ has hit record high of £1.9bn – up 46% in a year?
Of course, the amount of funds has grown. However, I would just sound a note of caution that lawyers don’t make assumptions about the source of funds when talking to a funder (especially one who isn’t a member of the Association of Litigation Funders
It’s critical that lawyers query the permanence of the funding that is available.
Remember Affiniti Finance (a funder that went into administration last year). They appeared to have £250 million shortly before they went bust, but because the funding was not permanent, it was funding that could be recalled at short notice. It is the responsibility of the lawyers running claims and benefitting from funding, to verify the basis of the funding, so they know it is both ring-fenced and not being used on other cases or able to be withdrawn by the provider of funds at short notice. Lawyers must question what the leverage is on the financing providing. If it is debt finance, what are the terms of the debt? When will it be called in? These questions will help to protect those who are seeking funding in this growing market. And stop cases running out of funds halfway through the claim.
Q) What are your thoughts on funding class actions?
From our perspective, to some extent they are the same as any other type of case when it comes to assessing them in that they still need to meet our criteria, for funding, namely, be against a defendant who can pay, be of a recognisable minimum claim value, have a realistic budget and have good legal merits.
Where they differ is primarily two-fold, the need to book build (in this jurisdiction unless in the CAT) and the need to efficiently manage the large group of claimants.
For law firms that are seeking funding, we are wary about the inefficiencies of administration in class actions. It’s just not acceptable to receive proposals from a law firm stating, “we will have 58 paralegals sitting in a room processing thousands of applications.” Technology has such an important role to play in the efficient management of the claimant group and book building. The lawyers are best focussing on the legal merits of the case and leaving the data management to those with the greater expertise, as this makes claims that more cost effective.
Q) Does this go back to your point on budgeting: that lawyers still seem to struggle with this?
Absolutely. I think funders have been good drivers to getting lawyers used to using technology – like FinLegal – to bring in efficiencies. Lawyers recognise that we fund a lot of cases and therefore are exposed to more of these solutions which we are then able to recommend, as we have been experienced at learning what does and doesn’t work.
Lawyers can get wooed by someone with good design skills and focus on the front end. But they may not understand how the back end works and the importance of the system being able to extract and manage data and how easily date received in one format can interact with law firm systems and produce readily understandable schedules and information for court, which can also be managed if facts in the case change.
I recommend that they ask really basic questions. Test, but if you don’t know something ask, especially with technology.
I would also recommend that when using new technology, a lawyer sits down with the provider for a proper scoping session so that they know what to look for.
At the same time technology providers need to provide the lawyers with practical examples of what can be done, it is absolutely critical that each party knows what they are buying/selling. The reason many IT engagements flounder is because the purchaser wasn’t entirely clear what they were getting, and the seller perhaps assumed a higher level of understanding than existed because the buyer didn’t know what to ask for.
Q) What are your thoughts on regulating litigation funding?
Whenever anyone says they think they need regulation for anything, I believe the most important thing to first establish is what the concerns are, as regulation can be quite a vague term. The two things all lawyers should be asking regardless of regulation are 1) the role the funder has in a claim, their termination rights, mediation provisions etc and 2) whether the funder has adequate capital for the entire life of the case, which is ring fenced.
Litigation Funding is a unique financial transaction because, unlike most other forms of finance, there are a number of protections for the funded party. First, they are represented by a regulated professional who owes them a duty of care and second there is a judge who oversees the way in which the financed transaction is run and is there to adjudicate and disagreements. Finally, there is also the defendant who will be keen to ensure the funding arrangements protect them in relation to adverse costs which in turn protects the funded claimant.
The Association of Litigation Funders was set up in 2011 to oversee the Code of Conduct which was produced as a result of the Jackson report and following a working party to develop it. This contains a complaints procedure which is run by a third-party law firm. I would urge anyone using funding to only work with those who are members of the Association unless there is a very good reason not to do so.
Beyond that, I query what further regulation is needed.
Q) Looking to the future, what do you think will happen in funding in the next year and the next five years.
I think there will be a continued emphasis on costs. We’ve already seen this with judges trying to expand fixed fees across different areas of disputes and the Civil Justice Council review of costs is asking questions about what is and is not working – we simply have to find a way to make costs of litigation more predictable than they are currently.
The use of technology in all areas will only increase. It is incumbent on lawyers to get more savvy about it – and to not be intimidated. Their clients are very comfortable using technology, so they need to be the same. We’ve seen large precedent-setting claims being asserted in response to the way our lives have changed. Big tech has questions to answer about the use of our data, how it favours its own services, and how it limits the ability of others to genuinely join the market. The Guardian’s recent expose about Uber is an example of that. These claims are long duration and have enormous budgets. One has to have a lot of capital and a lot of staying power as a funder to fund these types of claims – they are not for the faint hearted even though they are likely to succeed ultimately.
We see funders and law firms alike moving into the class action space. While they require the same skills to assess the legal merits of the cases, there are a lot of other skills which are required to cost effectively manage large groups of claimants. Most law firms don’t yet possess such skills.
And looking further ahead, I think we will see a greater cooperation between the public and private sector on recovery of assets. In a world of limited government legal budgets, it is beyond me why they don’t use funding to bring actions. The wrongdoers know government departments have tiny budgets, so it encourages bad behaviour. But it requires genuine innovation at the top of the leadership in the civil service to do this. There are billions of pounds of possible recoveries, and funders can really assist greatly in securing assets which is just not possible in the current situation of government finances as we saw with recent reports of writing of over £4bn of furlough loans.
What a story, and one that will hopefully encourage those who want to innovate in the sector not to be afraid to try new things. Here are some key take aways for us all in the litigation and class action space:
Keep on top of budgets and be realistic – look back to how your past budgeting v actual costs ended up
Using technology will drive efficiencies of administration of class actions – it is not acceptable any longer not to make use of technology to keep costs down
Don’t be afraid to ask what you think might seem like ‘stupid’ questions – more likely than not many others in the room will be glad you did so. Constant verification is critical