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Backing both David and Goliath: how litigation funding is changing

"There are no trees in Kazakhstan."
Tomas Mateos Werner is not strictly correct, but central Asias largest economy is rather short on forests. That is why, at first glance, the prospect of taking over the company responsible for a large chunk of the countrys paper recycling and cardboard production seemed so tempting.
The company, Kazakhstan Kagazy, was not all it seemed, however. In 2009 when Werner became the majority shareholder, it became clear that it was in serious difficulty.
The Spanish-German former HSBC director describes its state back then as hollowed out by frauds. According to Werner it owed $110m (?80m) to major creditors. Kazakhstan newspapers have vilified Werner for his legal pursuit of the paper firms former chief executive. The UK case has been drawn out, complex and unpleasant for those involved.
The case entailed what the presiding judge, Mr Justice Picken, described as costly and, perhaps, not wholly necessary skirmishing in his conclusions from the Dec 22 ruling. Language, let alone highly complex corporate structures, proved a challenge with many witnesses giving evidence in Russian and in several cases, by video link from Astana, Moscow and Vancouver.
The human drama of this long running court case was made possible due to a growing asset class: litigation funding. Increasingly, firms are buying an interest in the outcome of a case, raising capital to pursue claims.
In Werners case, a rapid restructuring and an approach to Harbour Litigation Funding, one of a growing number of litigation funders, was the only option. The final figure of the payout is yet to be determined but it is likely to be close to $260m.
Kazakhstan Kagazy holds assets of $40m, according to Werner. Without litigation funding, Werner claims he would simply have been outspent by the other party. This is what leads many litigation funders to describe themselves as levelling the playing field in a David and Goliath scenario. Burford Capital, the Aim-listed litigation funder, is an example of just how deep the pockets of these firms can be. It tripled the amount invested in legal claims last year to $1.3bn, it revealed last week. The firms full-year results are due out in March.
Backing both David and Goliath: how litigation funding is changing

Tomas Mateos Werner, chief executive of Kazakhstan Kagazy, outside the Royal Courts of Justice
Litigation finance investors raised ?10bn worldwide, in an industry that Burfords CEO Christopher Bogart, former in-house counsel for Time Warner, describes as unexceptional; its just another kind of asset class, another industry insider claims.
Litigation funding firms are increasingly opening up the option to offer corporate clients the sort of no win no fee arrangement seen in consumer-based claims. Bogart calls this a modernisation of the legal industry, pulling it from cash towards other forms of financing. Were leading the economic transformation of the legal industry, he says, rejecting comparisons with other forms of no win no fee that the public might be more familiar with.
The vernacular of ambulance chasing is quite literally ambulance chasing. Its about lawyers who deal in the world of small claims. That is not the business that were in at all, Bogart says.
Companies have long operated in challenging countries where corruption might be rife, and fraud hard to prove. They have relied on international law, usually involving arbitration treaties. This was the case with one of Burfords investments. The World Banks centre for settling investment disputes ruled in favour of the claim, made by airline owner and Spanish investment group Teinver SA, that Argentina had allegedly illegally expropriated the groups airlines.
The tribunal ordered the country to pay Teinver and other parties $324m plus interest, but disputes over the final awards are still ongoing.
Claims that the industry is making justice more accessible are universally agreed with. The cases are funded based on their likelihood to generate a return, rather than on principle, complicating the claimant vs defendant model of justice, but adding the interest of a third party to proceedings.
Self-regulation of the industry, by means of the Association of Litigation Funders, has been called into question by experts who believe an independent regulator would make the industrys practices more visible. Some legal experts believe that it can have a distortive effect on the legal system when such large third-party financial organisations are involved. Former justice minister and Tory peer Lord Faulks QC, argues that litigation funding is parasitic.
He told The Daily Telegraph: The trouble is theres a risk that the whole thing becomes about a commercial transaction rather than a dispute it could become the corporate equivalent of [ambulance chasing].
Lord Faulks does not believe that the activities of these firms ought to be banned, rather that the interests of all parties involved in a case ought to be clear, and that the Government must assess the potential risks arising from self-regulation.
One of the cases were funding at the moment is a class action of seaweed fishermen in IndonesiaMartin Tonnby, Harbour Capital
Martin Tonnby, head of Harbour Capital, says that such criticisms have not been widespread among the legal community. If anything we feel we have very good support [from the judiciary].
For Leslie Perrin, chairman of the Association of Litigation Funders (also chairman of Calunius Capital), and Tonnby, criticisms of the industry simply miss the point: you cannot win cases with money, only contest them. The merits of the case are what will lead to a favourable judgment.
Perrin points to a remark from former Lord Justice, Sir StephenTomlinson on the issue that litigation funding is an accepted and judicially sanctioned activity perceived to be in the public interest.
Tonnby, whose firm now has $1bn of assets under management and has doubled the money committed to cases in the past year, believes that the industry is evolving. No longer just a means for David to take on Goliath, litigation funding is increasingly serving both ends of the scale, targeting well-resourced corporates who would be keen to take litigation costs off their balance sheets.
According to Burford, it funded a top 20 FTSE-100 company, which legal trade press understand to be telecoms giant BT, to pursue current and future claims. The firm was seeking to boost profitability and shift costs from its balance sheet.
Burford
There is still an interest in helping small organisations pursue legal action. The funders are keen to note that minnows are still being given the money they need to take on giants.
One of the cases were funding at the moment is a class action of seaweed fishermen in Indonesia claiming compensation for alleged damages caused by an oil spill by PTTEP Australasia Ashmore Cartier PTY Ltd, Tonnby says.
New areas for litigation funding have opened up over the last few years. Most recently Hong Kong and Singapore ruled to allow arbitration finance in their legal systems. Bogart says efforts need to be made to champion British legal expertise and its judiciary more fiercely.
Thinking about litigation is a bit like thinking about going to the dentist. You inherently have a degree of lack of attention and undervalue the process. You dont see the UK Government out talking up the value of the UK judicial system, he says.
Bogart adds: Where there is increased business uncertainty, legal services tend to flourish and more litigation results; in the long run, we expect Britain to remain a major world centre for law and justice.
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