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Covid-19 and Defendant Collectability Risk

April 15, 2020

Covid-19 and Defendant Collectability Risk

The following article is part of an ongoing column titled ‘Investor Insights.’  Brought to you by Ed Truant, founder and content manager of Slingshot Capital, ‘Investor Insights’ will provide thoughtful and engaging perspectives on all aspects of investing in litigation finance.  EXECUTIVE SUMARY
  • Covid-19 will likely lead to the biggest financial crisis since the Great Depression
  • The crisis has affected the solvency and viability of corporations and sovereigns
  • Litigation managers need to re-assess collectability risk, immediately and regularly, of each defendant in their portfolio
INVESTOR INSIGHTS
  • Diligencing litigation managers should involve a deep understanding of how they assess defendant collectability risk
  • Defendant collectability risk is an ongoing risk that changes over time, therefore managers need a continuous risk assessment methodology
  • Investors looking to invest in litigation finance secondaries to take advantage of the current dislocation should avoid single case risk and look to portfolio acquisitions, but must assess collectability risk across the portfolio being acquired
As Covid-19 has taken the planet and the legal community by surprise, I think there are some lessons learned from private equity that can be applied to litigation finance.  In short, focus on cash – its collection, generation, distribution and availability. So, how does this relate to Litigation Finance? This novel Coronavirus-driven healthcare crisis which has spiralled into a broad-based economic crisis, the likes of which the modern global economy hasn’t seen since the Great Depression, has had the effect of taking otherwise viable, profitable and cashflow positive businesses and stopping them in their tracks.  Overnight, certain businesses and industries have performed a complete one-eighty, whereby they went from solvent to being on the precipice of insolvency.  For many litigation finance firms, their immediate reaction has and should be to undertake an immediate and urgent review of the defendants involved in each and every case in which their portfolios have an investment, in order to re-assess collectability risk, one of the key areas of litigation finance underwriting. When an economy, especially a consumer driven economy like the US, effectively shuts down overnight, there are few industries and companies that will be spared from a diminution in their value and blockage from access to capital.  Former “recession-resistant” and “necessity” businesses have just experienced a new reality, which is that necessity is determined by context.  The current context states that the only necessity is feeding, hand washing, shelter and healthcare, and this has had a massive impact on the economy. While this too shall pass, the economic impacts will likely linger for a number of months and years.  The hope for a “V” shaped recovery has been dashed, as the crisis has extended beyond initial duration estimates.  My personal opinion is that it will at best look like a “U” shaped recovery with the possibility of a double “W”, meaning there will likely be some ups and downs along the way, should the dreaded “C-19” rear its ugly head again going into the next flu season, or should it fail to be contained due to premature ‘return to daily activity’ policy.  My hope is that the massive amounts of stimulus that are being pumped into the global economy actually make their way to the most hard-hit regions of the economy, namely ‘Mainstreet’, and thereby mitigate the damage that would otherwise be experienced for many small and medium-sized businesses on which most economies rely. While we tend to focus on home first, litigation funders should also be mindful that the economy is global.  As bad as developed countries think they may have it, fund managers who participate in the international arbitration market, which by definition, involve developing countries and corporations therein, need to be mindful that those defendants in developing countries will likely be even more greatly affected. Yes, even sovereigns. Those managers that are focused on patent litigation involving start-up technology companies should also ensure the plaintiff is solvent through the end of the litigation, not to mention the collectability risk of the defendant, which may have been negatively impacted. All of this is to say, that it is in the best interests of litigation finance managers to undertake a re-assessment of collectability risk of each and every defendant in their portfolio, and to do so on a regular basis for the foreseeable future.  Managers will need to assess (i) the degree to which the defendant’s industry has been impacted, (ii) the strength of each defendant’s business and balance sheet, (iii) the ability for the defendant (business or sovereign) to access sufficient capital to maintain solvency, (iv) the degree to which the value of such business has declined, (v) a study of the defendants’ behaviour during the last economic crisis, as it relates to litigation ongoing at that time, if any, (vi) determine the extent to which other parties have security and seniority ahead of the plaintiff’s claims and (vii) assess the defendants’ ability to raise capital outside of financing (i.e. asset sales, equity raises, etc.). Once a determination has been made as to the relative collectability risk, managers will then need to determine next steps with respect to protecting themselves from those cases where the defendant collectability risk has materially changed.  This may involve the withdrawal of any further financing provisions (to the extent the financing was milestone-based), partnering with other parties to share the increased risk of the case, or selling all or a portion of a case or a portfolio (although the manager would be selling into a weak secondary market with relatively few participants, which will be reflected in the valuation, if they can secure bids).  While the options may not be great, they may be better than investing ‘good money after bad’. Investor Insights For investors that are invested in the sector or considering making an investment in the litigation finance market, now is a good time to diligence how and the extent to which managers were on top of their portfolio in assessing collectability risk.  For those investors interested in secondary market opportunities, caveat emptor.  The risk profile for a single case secondary is much higher given the high level of uncertainty in today’s market so a portfolio of secondaries may be a better risk-adjusted avenue to pursue but the portfolio’s diversification benefits would not negate the need to reassess the collectability risk of each defendant in the portfolio.  Edward Truant is the founder of Slingshot Capital Inc., and an investor in the consumer and commercial litigation finance industry.

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Survey Finds Legal Clients Accept AI for Simple Queries but Not Sensitive Matters

Consumers are increasingly willing to interact with artificial intelligence when contacting a law firm, but that comfort drops sharply once the conversation turns complex or personal, according to new survey data.

According to figures published by Bristol Law Society, the research was commissioned by customer conversation company Moneypenny and conducted by Censuswide among 2,000 UK consumers between June 8 and June 10, 2026. It examined how receptive people are to AI when dealing with different types of businesses, including legal providers.

Where law firms are concerned, willingness tracks closely with the simplicity of the task. Some 29% of respondents said they would be happy using AI for an initial enquiry and 28% for completing a questionnaire. That figure falls to 22% for receiving a case update and 17% for settling a bill. A substantial 38% said they would not be happy using AI for any legal-related communications at all.

The survey also found pronounced generational and gender divides. Among Baby Boomers, 51% rejected AI for any legal communications, as did 44% of Gen X, compared with 28% of Millennials and 26% of Gen Z. More women than men expressed reluctance, at 43% versus 33%.

Bernadette Bennett, Head of Legal at Moneypenny, said the results point away from a uniform approach. "The best customer experiences will be achieved by blending both tech and human communications seamlessly, with AI handling simple queries quickly and efficiently, but deferring consumers to a real person for sensitive issues," she said.

Commercial

Commercial Court Rules Funder Due-Diligence Communications Fall Outside Litigation Privilege

The Commercial Court has ruled that communications created to help a litigation funder decide whether to back a claim do not ordinarily attract litigation privilege, ordering disclosure of exchanges between a law firm and its funder in a long-running dispute against Uber.

As reported by Dorsey & Whitney, the decision in Uber London Ltd & Ors v Garry White & Ors; Mishcon de Reya LLP [2026] EWHC 1610 (Comm) arose from black-cab drivers' claim that Uber engaged in an unlawful conspiracy. Mishcon de Reya assessed the merits of the claim for funder Harbour in late 2017, before beginning to represent the drivers in October 2018. Uber sought disclosure of those pre-engagement communications.

The court held that the dominant purpose of the firm's exchanges with Harbour was to evaluate the claim as an investment, not to conduct litigation, and that such funder-facing material therefore falls outside litigation privilege. It distinguished a funder's investment decision from a litigant's own funding decisions, which the court treated as inseparable from the litigation itself.

The ruling carries practical weight for how funders and their counsel handle diligence. Documents prepared to win financial backing may be disclosable, and a confidentiality arrangement cannot retroactively strip a client of the right to relevant information a firm has already obtained. The decision adds to a growing body of UK authority testing when funding-related communications must be produced, reinforcing that privilege turns on the dominant purpose of each document rather than the mere involvement of a funder.

Commercial

UK Government Proposes Overhaul of Opt-Out Collective Actions and Funding Rules

The UK government has proposed a wide-ranging overhaul of the opt-out collective actions regime, including lifting the ban on damages-based agreements as a way to fund claims before the Competition Appeal Tribunal.

As reported by Legal Futures, the Department for Business and Trade's consultation would permit DBAs to fund opt-out proceedings, pointing to the Australian state of Victoria, where the government said funding rates have decreased and claimants have received superior returns since a similar change in 2020. The package is intended to broaden the funding options available to class representatives while addressing long-standing criticism that the regime favors funders over consumers.

Several proposals would reshape how cases proceed. The CAT would weigh the "absolute suitability" of a claim for collective treatment, with greater emphasis on proportionality and the balance between costs and potential benefits. The tribunal would also indicate at certification whether a funder's expected return is reasonable, and funders would be paid once damages are awarded or a settlement is approved rather than waiting for distribution to conclude.

The consultation further seeks views on empowering the CAT to require mediation, with cost consequences for parties that refuse to engage, and on introducing application fees linked to claim values. The government is also reconsidering whether undistributed settlement sums should continue to flow to the Access to Justice Foundation. The proposals follow findings that viable claims below £500 million struggle to attract backing, and that only one case has reached judgment under the regime to date.