“It is now recognised that many claimants cannot afford to pursue valid claims without third party funding; that it is better for such claimants to forfeit a percentage of their damages than to recover nothing at all; and that third party funding has a part to play in promoting access to justice”. So summarised Lord Justice Jackson on 8 May 2009 in his interim report to his Review of Civil Litigation Costs (Pt 4, Ch 15). His comment will resonate with many barristers who have experienced the difficulty of advising claimants who have good claims which are foundering for lack of funds to finance them.
Until 1967 of course, it was a criminal offence and a tort for a third party to support another party’s litigation. Section 14(2) of the Criminal Law Act 1967 abolished that but declared that contracts tainted by “champerty or maintenance” were “to be treated as contrary to public policy or otherwise illegal”.
With the passage of time however, the courts have come to recognise the simple economic reality that a “cash rich” defendant can “starve out” a poor claimant regardless of the merits of the action and that third party funding (“TPF”) operates efficiently in Australia, the United States of America, Germany and elsewhere. It was perhaps only a matter of time before TPF would start to be employed in litigation in England and Wales.
The Arkin decision
Arkin v Borchard Lines Limited (Nos 2 and 3)  EWCA Civ 655 is the most celebrated authority to date in which TPF appears. There, the Court of Appeal dealt with the vexed question of a professional third party funder’s liability to the defendants for costs after the claim was unsuccessful.
The funder had agreed to pay for the claimant’s expert accountants’ fees (which ultimately amounted to £1.3m) in return for the recovery of that cost plus 25% of any damages recovered up to £5m and 23% of any excess.
In the event the claimant lost and the defendants looked to the funder for their costs which amounted to £6m (there being no after-the-event (“ATE”) insurance in place). When considering the making of a non-party costs order, the Court of Appeal weighed up a number of factors. It was “unjust that a funder who purchases a stake in an action for a commercial motive should be protected from all liability for the costs of the opposing party if the funded party” loses. On the other hand, “a just solution” needed to be found to compensate the successful party to some extent while not deterring the funder who had provided “help to those seeking access to justice which they could not otherwise afford”.
The Court of Appeal considered that the answer lay in holding the funder potentially liable for the successful party’s costs, but only to the extent of the funding provided—there, £1.3m. It was recognised that in order to balance such risks a funder might in future require a greater share of the damages in case of success, but that “the impecunious party can reasonably be expected to bear” this reduction on its recovery. Justice was better served that way than by barring the defendant from recovering any costs.
Which cases are suitable for funding?
As part of his on-going research into civil litigation costs, on 22 January 2009 Lord Justice Jackson met 25 representatives from entities involved in the process of TPF in order to investigate its significance and application. In his interim report, Lord Justice Jackson sets out the type of cases which are attractive to funders. They include:
- claims arising out of insolvencies;
- commercial claims;
- professional negligence and group actions.
Those less viable for funding include:
- personal injury (currently barred in any event by the Solicitors’ Code of Practice);
- small business disputes (where costs are disproportionate to the sums in issue);
- patent cases (legal and technical complexity);
- construction cases (complexity plus a mass of claims and counterclaims); and
- defamation (level of damages awards too low and unpredictability of outcome due to the crucial role of oral evidence at trial).
He noted that the minimum value of a claim is crucial in determining the viability of funding: some providers look for a claim value of at least £500,000; another only considered claims with a value of £25m (generally “collective redress” (class actions) against large, deep-pocketed corporations).
Only cases where the claimant is seeking damages are generally suitable for funding. The funder takes his share after the proceeds are physically recovered. “Paper” victories do not expose the claimant to any liability to the funder. This is a key benefit for a cash-poor claimant.
The nuts and bolts of funding
Usually the funder will suggest terms of investment after undertaking internal due diligence and if sufficiently persuaded by the merits of the claim and the recoverability of the proceeds. They will often simply want to see a synopsis of the case and its merits, key documents and a budget. There are rarely “proposal forms” or the like to complete. A claim with “a better than 50% chance” of success is unlikely to attract a funder. Of equal significance is the prospect of recovery from the defendant: pyrrhic victories are not attractive.
The funder’s share is a matter of commercial negotiation between them and the claimant. The funder may take a percentage of the amount recovered (generally between 10 and 40%) or a multiple of their agreed outlay/risk (which varies between 1.5 and 3 times). The over-arching concern is to ensure that the share does not emit the whiff of champerty, which may arise if it is too high.
A funder’s investment is varied. They may fund all or a part of the claimant’s own solicitor’s costs; disbursements (expert or counsel’s fees); provide security for costs by way of bank guarantee; or pay “upfront” ATE premiums (though such premiums are now often “deferred” or “self-insured”, payable only upon success of the claim).
The budget and the funder’s role
The funder will want a clear, fixed budget with the claimant incorporated into the funding agreement. The lawyers’ accurate assessment of the likely future costs of any given action is therefore vitally important. Only rarely will a funder consider revising the agreed budget (in other words increasing the amount of funding—though with a consequent increase in their share of the proceeds).
Most funders like to see themselves as “partial observers”. They will expect to be updated on developments in the case as they arise and will expect some form of costs control mechanism to be agreed with the solicitor, such as the provision by the solicitor, on a regular basis, of monthly budget updates and regular invoicing, as well as “status reports” and work-done schedules.
However, the funder does not take an active role in managing the claim. They cannot “run” the case or suggest that certain solicitors, barristers or experts are retained. Such behaviour would be seen as unduly influencing or controlling the case and could lead to the arrangement being found to be unenforceable.
The future for TPF appears to be bright.
Lord Justice Jackson has recognised the potential advantages in his interim report. He states (para 31): “it is the experience of funders that the existence of TPF sometimes in itself promotes settlement” by creating a level playing field between strong and weak parties and because the defendant notes that the funder qua independent party has looked at the claim objectively “and assessed that there are good prospects of success”.
One of the issues in which he invites consultation is whether s 14(2) of the Criminal Law Act 1967 should be repealed, a step which should not be taken “without analysing all the consequences”. Another is the question of regulation. At the moment third party funding is unregulated. Should though there be a code of conduct produced by an appropriate body, binding upon all funders? With the encouragement of the Civil Justice Council, a draft voluntary code has already been produced and is under discussion, though it has not yet been put into the public domain.
Lord Justice Jackson’s report will, it seems, increase awareness of the availability of TPF amongst the legal profession, some of whom regrettably still think that it is illegal. Although a professional duty lies only on solicitors to advise their clients about alternative means of funding, a solicitor is likely to be impressed with a barrister who demonstrates his own specialist knowledge of how to keep a meritorious piece of litigation alive via the mechanism of TPF. The Bar therefore has every reason to be aware of it.
Timothy Mayer is an in-house barrister at Allianz Litigation Funding UK