The scale of economic disruption and contractual performance issues we’ve seen in the last year would ordinarily be accompanied by an increase in claims volumes as companies look to protect shareholder value. Whilst we have not yet seen the surge in claims that many predicted at the start of the pandemic, EY’s recent survey “How COVID-19 has impacted the UK’s claims and disputes landscape” suggests that this may be about to change.
The survey tells us that many businesses with claims to bring have spent the last 12 months focussed on navigating the operational impact of COVID-19 and simply haven’t had the time or resources to deal with these claims. However, as Government support packages for these businesses start to be withdrawn and financial pressures intensify, the need to recover losses will further increase and claim volumes can be expected to follow.
Yet businesses focused on liquidity and prioritising core activities may be reluctant, or unable, to tie up funds in what can often be lengthy and/or costly litigation or arbitration proceedings. This is supported by our survey which found that, since the start of the pandemic, 32% of corporates had deferred or stopped the investigation of potential legal claims they would ordinarily have pursued, with 30% of corporates citing lack of funds as the reason for such deferrals. It follows that demand for third-party funding (where a third-party agrees to finance a claimant’s legal fees in exchange for a share of the claim proceeds) is likely to increase as these businesses look to external funders to help them bring these claims.
Our survey predicts that this increase in demand will be significant, with the appetite amongst businesses to use third-party funding more than doubling from pre-pandemic levels (26% of survey respondents stated that they would have been willing to use third-party funding prior to the pandemic, whereas 55% of respondents indicated that they would be willing to use third-party funding now or in the future).
Whilst the unique circumstances of the pandemic may have created a favourable market for third-party funders, our survey indicates that 37% of corporates still do not fully understand their options for third-party funding of claims. Our survey respondents were all large UK-based companies (annual revenue of over $1bn and/or FTSE 350), so it seems that there is still more for funders to do if they are to maximise the opportunities currently available.
For the businesses seeking to use third-party funding to bring claims, there is a sense that things are about to get tougher. Prior to the pandemic, only 1 in 10 applications received by third-party funders typically ended up receiving funding. With demand for this funding set to increase, and funders having an increased number of funding applications to choose from, it seems that the challenges for businesses seeking to secure investment will only be amplified.
Businesses making an application for funding will therefore need to make sure that their claim stands up to scrutiny. In our experience, one of the key things that businesses can, and should, do to support an application is to present a robust case consideration which demonstrates to third-party funders that the opportunity is viable, will generate the required returns and, hence, is worthy of investment. This is likely to include a robust assessment of the merits of the case, an assessment of the financial position and solvency of the counterparty (to ensure there is a genuine likelihood of recoverability in the event the claim is successful) and a realistic assessment of the likely value of the claim.
The market volatility created by the COVID-19 pandemic makes performing these assessments more challenging, yet at the same time even more critical. Businesses should expect third-party funders to scrutinise these assessments very closely and will need to make sure that their assessments can stand up to this increased level of scrutiny if they are to secure the funding that they need.
My thanks to Simon Parrott, Forensic & Integrity Services Claims & Disputes Director, and Kate Pinder, Forensic & Integrity Services Claims & Disputes Senior Manager, for their input to this article.
