When it comes to pushing the envelope on the application of litigation funding, lawyers are sometimes known to try and persuade a funder to provide so-called “seed funding”. This is a relatively small commitment of funds to pay for disbursements or fees that are needed before it is possible to establish whether or not there is a viable cause of action worth pursuing.
The seed costs can be for anything from a counsel’s opinion; an asset scoping report; an expert report, or even a court issue fee to keep a potentially viable claim from being time-barred.
The challenge with seed funding is that it is inherently speculative and therefore not how most mainstream professional litigation funders want to deploy their capital. Some funders will rule out any form of seed funding while others may entertain a relatively small amount (dependent, of course upon the potential value of the overall claim).
It is not easy to estimate how much seed funding is disbursed by funders each year, but I think it would be fair to say that it is probably a very small percentage of the overall legal spend financed by professional third party funds. Indeed, it is talked about much (much) more than it is delivered.
A lawyer who spends significant time attempting to secure seed funding that does not ultimately materialise will experience one of the most frustrating, but common, interactions that can arise when attempting to arrange funding for a matter. I suspect this is because seed funding is usually sought by fee earners who are trying to entice a new client instruction, rather than fund an existing engagement. The promise of new business dashed can leave a bad taste in the mouth, especially when the lawyers are focused on the income that could have been achieved had the seed funding established a lucrative claim.
Some matters would do better without seed funding. Many lawyers bring cases to the funding market at a very early stage because they believe their client is apathetic towards bringing the claim. The assumption is that an apathetic client will tolerate a funder taking a greater than normal share of the recovery as long as they’re not expected to pay any fees up-front (despite having the ability to do so). It is an understandable strategy, but it can backfire down the line. Such a scenario can lead to acceptance of an uncompetitive funding arrangement, only for the client to later become dissatisfied when it becomes clear that there will be a valuable recovery, the lion’s share of which will be due to the funder because they accepted a relatively small amount of seed funding which the client should have just funded themselves.
Clients with the ability to pay for legal fees should always be advised on the difference seed funding can make when it comes to the pricing and structure of a litigation funding agreement. I would not be surprised if a comparison of price sparked an interest in them taking more risk at the start to substantiate the opportunity.
Of course, some cases need and benefit from seed funding. Cases that will never get off the blocks without funding, because the claim holder has no funds or perhaps there are no clients yet (for example, collective actions often need seed funding), need not only a brave funder to take the risk on investigation costs but also a group of stakeholders willing to share the early-stage risk. That means, law firms willing to put their fees at risk, alongside a funder paying “hard costs” such as expert reports and other disbursements. It often also means counsel agreeing to a substantial discount on their normal fees to provide holistic opinions, and asset scoping firms being willing to take their fees from an eventual recovery in return for an uplifted fee.
It is pointless asking a funder to provide seed funding unless there is a potentially great claim to fund going forward. That much is obvious. However, I would submit it is also pointless to ask for seed funding unless all the other stakeholders are sharing in the risk to prove there’s a great claim to fund.
Even in cases where there is a willingness by all stakeholders to share risk, cases can end up aborted because the quality of the work is just not good enough. The outcome can often be disappointing if those making a speculative investment in a matter restrict the level of investment to the bare minimum. So often, half-hearted attempts to get a case off the ground end up instead being the very thing that sinks it. Funders often see desk-top asset reports or counsel’s opinion from a barrister that does not have the required specialism to truly provide the confidence needed to launch the claim – or worse – one so heavily caveated it provides little information on the merits.
Conversely, when multiple stakeholders properly commit themselves to the process of early-stage case investigation they give themselves the best chance of being part of a successfully funded claim, which is more likely to lead to excellent billings for all those involved. Only good quality work in the investigation stage is likely to be convincing enough to see a case through to a funding deal. It is also the way in which some of these investigation expenses incurred by lawyers, enforcement experts and so on, can maximise the chance of receiving a retrospective payment once the funder’s threshold test for full funding have been met.
Seed funding should be used sparingly and with caution, particularly when a client may have the capacity and liquidity to self-fund the claim to a reasonable early-stage assessment of the merits. Like most things in life, without risk there is no reward, and ultimately law firms, counsel, experts, and clients that work with funders to get a strong speculative claim off the ground will find they reap much more of the benefits once a funding deal is in place.
This article featured on the Practical Law Dispute Resolution Blog