REUTERS | Ina Fassbender

Third party funding: not such a bright idea?

When returns on investment in traditional markets are at an all time low, capital (especially private capital) seeks better returns elsewhere. Pensioners cash in their pensions and dive into the buy-to-let market (their children need to worry about their inheritances if/when that bubble bursts), while more adventurous investors see litigation as a money spinner.

Some private capital funds have been funding substantial commercial litigation, not always successfully. The sting in the tail when the litigation goes wrong is the loss of the investment and the liability for the winner’s costs.

One such misadventure was Excaliber Ventures v Texas Keystone Inc, a decision of Lord Justice Christopher Clarke in October 2014. This was a case in which the winning defendants were awarded indemnity costs against the losing funded claimant. The defendants sought a non-party costs order against nine professional funders, who all stood to gain financially in the event that the claimant won the litigation. Two of the funders conceded the principle that they should pay costs, but disputed that this should be on the indemnity basis.

It was argued on behalf of the funders that, as they had no liability for the way in which the case had been pursued (having been careful to keep out of this in order to avoid being accused of controlling the litigation and the agreement being considered champertous and so void), it was unjust for them to have to pay indemnity costs. The court disagreed and held that the funder’s ignorance of the factors in the case that led to the award of such costs was not a reason to avoid paying them. As the judge stated, “The pursuit of objectively hopeless claims which required much time, labour and expense to refute is itself a ground for indemnity costs both against the litigant and his funder”.

What is interesting about this case are the criticisms that the judge made of the funders’ failure to take “rigorous steps short of champerty” to inform themselves of the merits of the litigation, of the way in which the litigation was being pursued and of proportionality at appropriate intervals.

What, then, is a funder who informs itself of the way in which the litigation is being conducted and has concerns that it will be exposed to an indemnity costs order to do? Giving instructions as to how to conduct the litigation is not an option, as this would surely cross the line into champerty. This leaves only the nuclear option of withdrawing funding, which is, of course, unattractive if the funder takes the view that there is merit in the claim (despite the concerns about the way it is being conducted). Pulling funding will very often mean the claim has to be discontinued, with the obvious costs consequences.

Just that happened in a case involving Nigerian oil deals. The funders were Buttonwood Legal Capital and they pulled funding halfway through the case. That prompted the claimants to bring separate proceedings to enforce the funding agreement. The claimants used the same solicitors as they used in the underlying litigation, who acted on a CFA.

The claim against Buttonwood was dismissed and, with good reason, Buttonwood was doubtful of its chances of getting its costs from the claimants, so it sought a third party costs order against the solicitors. That claim failed too and the solicitors were awarded their costs.

These were both very expensive outings for the funders. The lesson must be that funders need to be much more diligent in weeding out poor cases, rely on the claimants’ own legal advisers less and ensure independent scrutiny of the claim, both at the outset and as the case progresses.

Whilst on the topic of third party costs orders, an odd situation arose in Davies v Forrett and others. This is certainly the first case that we have come across in which the court has taken the somewhat unusual step of making a non-party costs order in a part 20 claim against a party in the underlying claim.

The substantive dispute arose out of a road traffic accident. The claimant sued both the driver of the car in which he was a passenger (driver A), another car involved in the collision (driver B) and driver A’s insurer.

There then arose a dispute as to whether or not driver B’s insurer would provide cover in respect of the accident. This led the insurer to issue part 20 proceedings for a declaration that it had no liability to driver A. Driver B had an interest in the part 20 claim because the insurer’s case that it was not liable to driver A rested on asserting that driver B had at least some liability for the accident (thus the insurer was not liable as an article 75 insurer).

This claim was disputed by driver A and ultimately led to the insurer joining the claimant, but not driver B, as a party to those part 20 proceedings. The insurer was successful in obtaining the declaration sought.

Eventually, and after much unreasonable conduct by both driver B and his solicitors (as found by the judge), driver B admitted liability for the accident. Thus the question of where the costs should lie in both the claim and the part 20 claim had to be determined. The judgment in relation to the costs of the claim need not detain us, what is more interesting is what happened with respect to the costs of the part 20 claim.

It is clear from the judgment that the court was of the view that it was the conduct of driver B which had led to the need for the part 20 proceedings to be issued at all. The difficulty was, of course, that while driver B was a defendant in the underlying claim, he was not a defendant in the additional claim.

It was argued that CPR 44 gave the court the power to make an order for costs against driver B in these circumstances, as he was a party to the proceedings “more generally defined”. The court rejected this submission, relying on CPR 20.3(1) which, in my view, is undoubtedly right. The court also had in mind that there was at one point during the course of the proceedings an application to join driver B to the part 20 claim, but that application was never pursued. The court was not, therefore, prepared to simply treat driver B as if he had been so joined.

The court was, however, persuaded to make a third party costs application pursuant to section 51 of the Senior Courts Act 1981. Mr Justice Eadis held that driver B was a funder within the additional claim because:

  • Somewhat surprisingly, driver B’s solicitors had drafted driver A’s defence to the part 20 claim before it was amended. Driver A subsequently abandoned this defence when the claim was re-pleaded.
  • Driver B had inspired the part 20 action for his own benefit and not to facilitate driver A’s access to justice. He contributed to that access only to a limited degree.

It must be implied into the court’s judgment that it found that driver B was the real party to the litigation.

While the facts of this case are undoubtedly unusual, with the rise of litigants in person in all areas of litigation (what with the funding changes making CFA’s less of an attractive prospect to solicitors, and changes in public funding taking many previously funded claims out of scope) it may be that examples of represented parties assisting a litigant in person for their own ends could increase.

39 Essex Chambers Katharine Scott Simon Edwards

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