By Stuart Hills, Founder of Riverfleet Limited

When the boilerplate becomes the deal…

Reviewing a Litigation Finance Agreement, like reviewing any other agreement, is often not the most pleasurable of experiences. Suffice to say, there are better ways to spend your sunny afternoons. You’ve waded through the Definitions, browsed those paragraphs on Interpretation, still not so sure why that needed to be a separate section and you finally reach the provisions on the investment, drawdown and conditions precedent and you genuinely feel like you are making progress… only to be immediately thrown into sections covering funder returns and indemnities, payments and tax followed by pages on representations and warranties, undertakings and termination events.

And that is ignoring all those other sneaky little clauses that advisors and counterparties like to refer to as “Boiler Plate” provisions – those clauses at the end of a contract that are in every contract – so they are standard, aren’t they? You don’t need to read them, right?

Unfortunately, wrong!

It has been clear for some time that a number of litigation funders are not finding things quite so easy. Markets are tough. Raising new money has not been easy and returns on existing deployed capital have not always come up to what was predicted. That nagging duration risk once again playing havoc with the IRR. Uncorrelated the returns may be, but the phrase “returns lower than expected” is easily translated into the language of any potential investor.

Conditions in the litigation finance market are generally described as being “tight”.  Alongside money-raising concerns, we see increasing concerns about greater regulatory scrutiny and in some quarters political disquiet towards the industry generally.

It is in this climate that we start to see the emergence of a new sort of investor – hedge funds and distressed investors hovering over the litigation finance battlefield on the look-out for wounded funds, looking for the purchase of litigation finance assets at deep discounts.

The reason for the sale could be simple – a funder may simply have run out of money.  The reason could be more complicated, but what is abundantly clear is that some funders are needing to sell on some of their assets and to sell them on quickly.

And it is here that we need to bring you back to your Litigation Finance Agreement review and those pesky boiler plate provisions. For one of those provisions stuck at the back end of the document will be entitled “Assignments and Transfers”, the ability of one of the parties to transfer the asset to someone else. Most LFAs treat funder assignment as either (a) freely permitted, (b) permitted on notice or (c) requiring litigant consent. 

Let’s go right back to the beginning…

You have a case, you need or want some funding. You work with your advisors to put a funding pack together, you short list a group of potential funders and then you market to those funders.  You negotiate the initial terms and you offer exclusivity to your precious chosen litigation funder – the one who is going to back you through thick and thin.  You sign an LFA and your funded case begins…And then one day you receive a notice telling you that your White Knight is planning to sell your asset to someone you have never heard of.  Really?  Can they do that?

Every funder will have their own bespoke wording but broadly the assignment and transfers clause will often say:

• That the Litigant can’t assign or transfer at all – not too surprising I guess
• That the Solicitor or Counsel will not be able to assign or transfer at all
• That the litigation funder can assign or transfer their rights and obligations to whoever they choose…

If it was getting late, if you forgot to drink that post-midnight coffee, if you never quite got to this clause in your review, it is quite possible that this is exactly what the clause will allow. Your funder may indeed have the right to transfer its rights and obligations to absolutely anyone.  

So, here’s the situation – you chose them carefully, you wanted to work with THAT funder, you wanted THEIR expertise not some other funder. You chose them because you trusted THEM.  What was the point of the beauty parade? Why don’t I get a say? If things get tough in the case will these new owners be standing next to me when I need them? 

These assignment and transfer clauses really do need negotiation for the litigant to get the right deal, to get a voice when this sort of situation arises. Whether that is consent rights to whom the rights and obligations can be transferred to, or some sort of Positive or Negative approved list, or the like. Agreements of this nature are complicated, they include a vast number of discretions and consent rights – who controls those is critical for both the litigant and their counsel.

But, not to worry, if something goes wrong you can have your day in court to dispute the LFA – or can you?  Look carefully at the Governing Law and Jurisdiction clause.  Do you get the right to take the counterparty to court or have you signed this away to an expert in some sort of arbitration process. Now, there’s nothing wrong per se with experts or arbitration, but all parties do need to recognise that it is a distinct disputes mechanism with its own appeal rights and enforcement routes.  Once again, advice needs to be taken to properly understand the distinction between a court process and an arbitration process.

Here’s a suggestion – before you sign off on the document, read the last clause first and then the second last, until you reach the front of the document. You may just spot something you don’t like or don’t understand….

Every single clause in an LFA is there for a reason. Every single clause needs to be read and understood, negotiated where necessary to suit your needs. The simplest-looking clauses can have dramatic consequences. When negotiating the engagement with your chosen law firm it may be an idea to get them to agree to any future potential LFA review on your behalf – and get that included in your fixed fee.