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Third party funding: surveying the field

Over recent years, third party funding has established itself as an enabler and driver of litigation. It is, of course, on the “menu” of funding options that solicitors are under a duty to advise their clients to consider. It is also a factor that is expected to contribute to the healthy litigation environment referred to by the Lord Chief Justice, Lord Thomas of Cwmgiedd and (former) Lord Chancellor, Liz Truss, in their stated aim to “maintain… Britain’s reputation as the best place in the world for court-based dispute resolution.”

Whilst third party funding is becoming increasingly mainstream as a method of litigation funding, that is not to say that the application of the rules governing third party funding are settled or, more importantly, that the practical consequences for funded disputes are universal (or universally understood).

Last year we saw several cases which considered third party involvement, providing colour to a somewhat blank canvas:

  • In Excalibur Ventures LLC v Texas Keystone Inc and others, the Court of Appeal gave a clear signal of approval to third party funding, stating that it was in the public interest. The court confirmed that where a responsible funder performed “rigorous analysis of law, facts and witnesses, consideration of proportionality and review at appropriate intervals”, such actions could not be champertous. In managing the risk of allegations of champerty, advisers need to be diligent in reviewing the terms of a litigation funding agreement. Particular attention should be paid to a funder’s ability to influence strategic case decisions, withdraw funding, or obtain disproportionate awards; such elements may breach ethical constraints and cause a funding agreement to be champertous.
  • Looking to arbitration, in Essar Oilfields Services Ltd v Norscot Rig Management PVT Ltd, the court confirmed obiter that a funder’s fee may be recoverable from defendants as “other costs”. Prior to this decision, it was common practice that such fees would not be recoverable (as still remains the way in litigation). Arbitration has therefore carved out a particular distinction from the funding rules applicable to ordinary litigation.
  • Prior to the recent settlement of the litigation between Stuart Wall and Royal Bank of Scotland (RBS), and following an interim application brought by RBS, the court held that for an order of security for costs against a third party funder to be effective, it had power to require the claimant to identify that third party (see Wall v Royal Bank of Scotland Plc).
  • Looking at an alternative perspective on security for costs, in Premier Motorauctions Ltd (in liquidation) and another v Pricewaterhousecoopers LLP and another (PMA), the court held that, in certain instances, a claimant’s after the event (ATE) insurance can provide adequate security for a defendant’s costs, without the need to make an order. This decision is due to be considered by the Court of Appeal on 7 November 2017 and is likely to give additional welcome clarity as to when ATE insurance may provide appropriate security. This has been a hotly contentious issue and one that currently underpins much third party funding modelling on assessment of the economic viability of a case. Irrespective of the appeal outcome, the decision will be relevant to both claimants and defendants when considering security for costs applications (the most common and earliest procedural tool utilised in disputes using third party funding).

The overwhelming proportion of claims settle before trial (typically 96-97%) and the battleground of the vast majority of disputes are “won or lost” within the to and fro of litigation procedure. Adopting an appropriate strategic approach to cases where there is (or could be) third party funding is just another element of being a disputes lawyer and acting in the client’s best interests.

When advising clients and assessing strategy on third party funding factors that, in our experience, should be considered include:

  • Whether the funding agreement is in accordance with the code of conduct (published by the Association of Litigation Funders (AfL)). The code requires AfL members to follow certain protectionary procedures (for example, the requirement to hold a minimum of £2 million of capital). It is worth noting that there has been an increase in the number of entry-level funders in the UK market who may not satisfy the capital adequacy requirement.
  • The importance of quantum. In deciding whether a claim is economically viable, third party funders may look for a minimum damages-to-litigation costs ratio. This can range from anywhere between 4:1 and 10:1. As a result, the “cart” of quantum often overtakes the “horse” of liability (and becomes a determining factor).
  • The level of the return sought by the funders. The third party funder’s fee varies widely; the calculation can be relatively sophisticated and is dependent on the specific funder and the details of the case. It will often come down to commercial negotiation. In exchange for taking on responsibility for all the legal costs, funders will look for their return to be anywhere between 5%-35% of the damages recovered. Given that funding is often advanced in tranches, the investment return usually applies to the sums drawn down; therefore, the timing of settlement opportunities becomes materially important (on both sides of the litigation).
  • The requirement for and adequacy of ATE. A third party funder will likely insist on ATE insurance and have its own arrangement with several ATE insurers.
  • The requirement for due diligence. Third party funders will perform robust due diligence prior to agreeing to fund a claim. It can easily take between one to three months from initial submission to finalising a funding agreement. Whilst third party funders are beginning to advance costs to claimant lawyers during this period and can be flexible on the speed of due diligence where there are time pressures, this delay could still be a factor if there are limitation issues.

The growth of third party funding is a global phenomenon although attitudes to this development are not universal. In a significant development facilitating third party funding, Singapore and Hong Kong have legislated on its use in international arbitration claims with a seat in either jurisdiction. However, contrary to the global trend, the Supreme Court of Ireland recently held that, as a general rule, third party funding should remain unlawful because of champerty (see Persona Digital Telephony Limited & Sigma Wireless Networks Limited v The Minister for Public Enterprise, Ireland).

As third party funding continues to evolve, we are likely to see consolidation of funders’ requirements and increasingly competitive products and perhaps even greater clarity.

CMS Cameron McKenna Nabarro Olswang LLP James Gliddon Sophie Balme

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