A handful of major companies are trying to defend high-stakes litigation with third-party funding, it has emerged, in a pioneering move that could potentially revolutionize commercial litigation in the U.K.
Specialist funding broker Calunius Capital is already placing one large U.K. corporation -- a defendant in a legal action -- with a funder to offset a proportion of the company's risk.
Legal Week has learned that a number of hedge funds are now willing to provide funding to defendants -- accepting a fee from a company in return for taking on a percentage of the risk.
If the defendant is successful the funder retains the fee but is liable for a "slice" of damages if the defense fails. The pioneering move has major implications for corporations facing large claims since the process, in theory, allows a company to put a "market price" on its liability and manage much of the litigation risk.
Mick Smith, one of Calunius' founders, said: "It is our firm belief that this market will develop for defendant corporates looking to hedge the outcome risks in general commercial litigation and will in time exceed the claimant litigation funding market.
"It is less about funding the costs, as defendants can usually afford them, and more about reducing the risks and protecting against the downside for internal risk management procedures."
Last month Legal Week revealed that eight out of 10 of London's top law firms were already using or assessing external funding for clients. However, the focus on external litigation funding has until now largely been on securing funding for claimants.
If successful, third-party funding for defendants would be likely to greatly boost the acceptance of the model and has also drawn interest from senior corporate lawyers.
Barlow Lyde & Gilbert commercial litigation partner Tim Strong said: "Funding defendants is a far more interesting feature of third-party funding as it is effectively bringing capital markets transactions into the litigation scene... sooner or later more people will be thinking about how they can offer funding solutions to the defendant side."
He added: "I can see the attraction of having a handful of these cases in a portfolio. The upside -- the fee for taking the risk away from the defendant -- is potentially much greater than that available on more traditional investments."