Past and present has shown us that the law is dynamic and subject to constant change. These changes can be attributed to a number of factors, which may include public policy, politics, social changes and advances in technology, such as the development of artificial intelligence and powerful processing and legal research platforms. However, the greatest factor to changes in the law remains the economy.
Economic changes have necessitated law firms to be operated like businesses, and to depart from the traditional law firm business model. These changes have been fuelled on by customer expectation and the so-called "more for less" principle. Law firms are continuously put under pressure to balance overheads, cash flow and the bottom line with service delivery to their clients.
Increased competition in the legal field, from both lawyers and non-lawyers further exacerbate this change. In South Africa, many "other" businesses have started providing the services traditionally reserved for law firms. Examples include the provision of administrative services relating to insurance and debt collection. However, litigation in courts and other tribunals remain within the exclusive scope of attorneys and advocates in South Africa, as has traditionally been the case.
A litigation focussed law practice presents its own unique problems. One of the most important of which is the firm's ability to finance the litigation and "carry" the claim. The nature of defended litigation results in long time periods between the time that a summons is issued to the eventual finalisation of the matter. This often takes years, and firms are necessitated to carry the costs associated with litigation during this time.
A prime example of the above is any litigation which involves the presentation of expert testimony. The attorney is responsible for obtaining the necessary reports and arranging for the expert witnesses to be in court. People who act as expert witnesses are obviously experts in their respective fields, and experts with the requisite knowledge and experience can command high tariffs for their services.
Generally speaking, the costs associated with litigation are recovered from the unsuccessful party in the way of cost orders. However, this only occurs at the finalisation of the matter. In the ordinary course there are no payments before the finalisation of the matter. Traditionally, litigation is financed by the law firm through deposits from their client and the firm's own reserves.
However, a number of firms have started providing niche bridging finance services to law firms in order to fund litigation. The world leader in this regard is the United States of America, where there has been a surge of specialist finance houses who fund litigation. The economics of these arrangements are well suited to US jurisprudence, which is characterised by its litigious nature and high jury awards. However, in our view the main factors giving rise to the success of these finance houses are the rules pertaining to US contingency agreements and the concept of punitive damages, which makes litigation very lucrative for American law firms.
American finance houses have seized this opportunity and are offering tailor made finance products to law firms to fund their litigation. One example of such a business which has been in the media recently, is Legalist, a start-up firm established by Eva Shang, a 23 year old Harvard dropout, who established the firm with a college classmate. It is reported that Legalist has obtained capital in the amount of $100 million to fund litigation.
Law firms in the United States require funds to prosecute their claims, specifically to carry the costs of protracted litigation and to obtain the services of experts as explained above. Businesses like Legalist will assess a law firm's case and determine whether it will be successful or not. The capital which is advanced to fund the litigation is repaid from the award at the finalisation of the matter. These finance houses require the necessary expertise to identify successful claims and to make an accurate assessment of the possible risks involved in order to "bet on the right horse". These finance houses will borrow money from outside sources, advance it to the law firms to fund their litigation, and then recover the loan plus interest at the finalisation of the matter.
Modern technology has equipped these finance houses with algorithms to assist with due diligence and the assessment of potential claims and to predict successful claims. These algorithms are "fed" with data in the form of court records and reports, which enable them to determine the probability that a particular matter would be successful in a certain court. These algorithms are very powerful and complex and consider previous patterns and the attitudes of judges and juries.
It is our view that these businesses may support the poor man who cannot afford to litigate against large entities, often referred to as "David and Goliath" cases, where the plaintiff is an individual or small company whose financial resources are dwarfed by those of the much larger defendants. In the past, financial disparities between litigants have often led to "incomplete" litigation and must therefore be regarded as an impediment to justice. With the necessary financial assistance, a plaintiff with good cause can now afford to prosecute his claim against a large corporation. Eventually, with all the litigation abounding, the costs of services will increase as the cost of insurance and other factors increase. It is reported that Legalist has funded 38 cases of which half have been resolved with an 80% success rate.
In conclusion, the concept of litigation funding has become more widely accepted, and we may see a surge of similar litigation finance service being promoted in South Africa.