Counsel and litigation funding

Litigation has become a commodity worthy of investment. Investment is most commonly made in the form of litigation funding in group litigation, international arbitration, and large civil claims, but its reaches have extended to ancillary relief proceedings, consumer litigation, and even proceeds of crime proceedings. The focus of this short article is on traditional funding (where funding is offered to a client in return for a share of the fruits of that client’s litigation), but other forms exist, including B2B funding and portfolio funding.

While it is a colourless topic, counsel must know about funding and its effects. This is for two reasons. Firstly, in every funded case in which they are offered instructions, counsel must decide whether to accept those instructions, and if so, on what terms. And secondly, counsel must always protect the best interests of the lay client. Not every claim will benefit from the involvement of a funder and not all funding is lawful. Each case will turn on its own facts, but the following points may be made:

• Legality: While very much the realm of specialists, some funding arrangements are of dubitable legality. In particular, litigation funding provided directly to consumers by unregulated funders arguably amounts to the provision of unlawful consumer credit. Although such concerns have been known about for years, consumer funding seems to be tolerated (on the basis that non-recourse funding is thought not strictly to be the provision of ‘credit’); there is, however, no authority on this point, so it is possible that there is law yet to be discovered. Furthermore, many instances of so-called funding – especially in family cases – are, in reality, regulated recourse loans masquerading as funding.
• Avoidance of champerty: Of particular concern to counsel may be the degree of control that the funder exercises over the litigation. In practice, this is rarely a problem because most funders are all too aware of the fact that intermeddling in a claim may lead to a finding of champerty. Indeed, while it is only a voluntary code, the Code of Conduct for Litigation Funders 2018 provides that a funder will ‘not seek to influence the Funded Party’s … barrister to cede control or conduct of the dispute to the Funder’. Moreover, interference should not be confused with diligent scrutiny; while a funder is forbidden from having a degree of control which would be likely to undermine or corrupt the process of justice, this would not prevent a funder from taking an active interest in the claim. Indeed, Tomlinson LJ has commented that ‘rigorous analysis of law, facts and witnesses, consideration of proportionality and review at appropriate intervals’ is what is to be expected of a responsible funder (Excalibur Ventures LLC v Texas Keystone Inc and others [2016] EWCA Civ 1144 at [31]). That being said, counsel should be alert to the possibility of an overzealous funder overstepping the mark and should be equipped to give appropriate advice in this regard.
• Reasonableness: The best interests of the client demand that the funding is reasonable. There are two facets to this issue. The first is whether it is reasonable to use litigation funding, and the second is whether the funding is offered on reasonable terms. As to the first, it would not be appropriate for a client to use litigation funding if a better alternative existed (such as before the event insurance). The second facet will be a matter of surveying the market.

In the writer’s experience, where counsel has concerns about any of the above, there is often some resistance to making the funding documents available. This is understandable, as modern funding arrangements are complex, and will often comprise not just the funding agreement itself (known as a facilities agreement), but also commercially sensitive documents, such as securities. That may be so, but it would always be open to counsel to advise that the lay client must receive independent legal advice. In this regard it is worth nothing that (while voluntary), the Code of Conduct for Litigation Funders 2018 states that a funder will take reasonable steps to ensure that the litigant has received independent advice on the terms of the litigation funding agreement.

How is counsel to be paid?

So, for all these reasons, counsel should be aware of funding generally. What follows assumes that it is appropriate for the claim or matter to be funded by litigation funding.

The operative word here is ‘paid’. The harsh reality is that there is a distinction between those monies to which counsel may be entitled and those that they will actually be paid. This is because in most funded civil claims, there is a priorities waterfall (often in the form an elaborate deed) that determines how the litigation proceeds are to be distributed.

An example would be a case in which counsel is asked to enter into a discounted conditional fee agreement (dCFA) such that 50% of the base fees will be funded and paid unconditionally, with the remainder (plus a success fee) unfunded and paid only upon successful conclusion of the claim. The former is ‘safe’ as it will be paid out of the drawn down funding. The latter is ‘unsafe’ because it will paid out of the litigation proceeds. Those proceeds will compromise a limited pot of money, and it is a near certainty that the funder (and ATE insurer, if there is one) will have (or believe they have) a senior interest. At the end of the claim, counsel will probably be expected to accept a discount in respect of either the unpaid basic charges or, more commonly, the success fee.

In view of the above, if a civil claim is funded, clerks should ask if counsel will be expected to accept a discount if the claim is successful.

If (as is commonly the case) counsel is expected to accept a discount, then it would generally be in counsel’s best interests to seek to negotiate a higher ‘safe’ payment (such as an unconditional payment of 60 or 65%) rather than to seek to negotiate a higher success fee, as the reality is that the latter is ‘unsafe’ and may never be paid. Each case will turn on its own facts, however. In many cases, the benefit of being involved in high-value litigation with the guarantee of being paid at least discounted fees will be enough to satisfy even the most demanding of clerks.

Not all funded claims will have counsel acting under dCFAs, however. Indeed, in theory, any type of contract of retainer may be used in a funded claim. That said, as with any decision concerning contracts of retainer, there may be constraints.

• Unlawful contracts of retainer: The most important constraint in this regard is that neither CFAs nor damages-based agreements may be used in family cases. This is often a good thing from counsel’s perspective, as they do not need to worry about the effect of any priorities deed (as they will generally be paid out of the drawn down funding). Their fees will always be ‘safe’. Furthermore, damages-based agreement may not be used in opt-out collective proceedings.
• Funder’s preferences: This will often be determinative of the matter as the funder may insist on a particular type of contract of retainer. If the funder is to invest in a claim, they will generally want the reassurance that comes with knowing that the lawyers have skin in the game; as such, they will often specify that some form of conditional fee agreement is used. Even where this is the case, however, there is often a degree of flexibility; this is because many funders will specify that no less than a certain percentage of the lawyers’ fees (often 30-50%) must be at risk. Moreover, it may be that the constraint applies only to the solicitors, not counsel. A well-informed clerk would ask about such things and seek to maximise counsel’s ‘safe’ fees.
• Reasonableness: At all times, counsel must act in the lay client’s best interests. This is particularly so in the context of funded claims as the client will, in general, already be contractually obliged to pay a percentage of the damages to the funder. As such, not only must counsel ensure that their contract of retainer is reasonable on its own terms, but best practice would be to look at the entirety of the funding package. For example, if the client is paying 50% of the proceeds to the funder and a success fee to the solicitors, there may not be much left for the client if counsel claims a further success fee. One option would be for the lawyers to enter into a Harrington agreement (an agreement that, essentially, ringfences part of the damages); counsel should be aware of such arrangements and advise that specialist advice is taken where required. 

Further guidance: While it is now slightly out of date, more guidance on funding may be found in the Bar Council’s Guidance for Barristers and Clerks Relating to Privately Funded Civil Litigation.