6 May 2016
This article provides an introduction to the law applying where a third party funds or seeks to fund civil proceedings.
What is third party litigation funding? Third party funding involves a third party, who has no connection to the litigation (or arbitration reference), agreeing to pay the legal fees and/or associated expenses of one the parties to the action. The normal third party funding arrangement involves funds being provided in exchange for a pre-agreed fee, which is payable only upon a predefined successful outcome. The fee payable to the funder is usually taken from the sums recovered from the losing party (or paying party if the claim is compromised); this is why, in the vast majority of cases, the funded party to an action is normally the claimant.
The basis of the fee payable varies between funders, but it is commonly based on a multiple of the investment made or a percentage of the proceeds of the action. As touched on briefly above, conventional litigation finance is provided on a non-recourse basis; this means the funds provided and agreed success fee are only (re)payable if the claim is successful. Traditionally, litigation funding was only available for commercial cases with a minimum quantum of around £3-5m due the returns required by many funders. However, that has changed and funding is now available for commercial claims of any size. Please note, there are also funders that provide finance for claims that are not commercial in nature, such as family and clinical negligence claims; however, such claims and funding arrangements fall outside the scope of this article, which focuses on commercial litigation funding only.
(i) Legal constraints on third party funding: Champerty and Maintenance:Historically, third party litigation funding was deemed unlawful due to the laws prohibiting maintenance and champerty. Maintenance occurs where there is “wanton and officious intermeddling with the disputes of others in which the [maintainer] has no interest whatever, and where the assistance he renders to the one or the other party is without justification or excuse” (Fletcher Moulton L.J. in British Cash & Parcel Conveyors Ltd v Lamson Store Service Co Ltd  1 K.B. 1006 at 1014). Champerty is a “species of maintenance: but is a particularly obnoxious form of it. It exists where the maintainer seeks to make a profit out of another man’s action – by taking the proceeds, or part of them, for himself” (Per Lord Denning MR in Trendtex Trading Corp v Credit Suisse  Q.B. 629 at 654). The public policy grounds behind the doctrines were summarised by Lord Denning MR in Trepca Mines Ltd (No.2), Re  Ch. 199 : “The common law fears that the champertous maintainer might be tempted, for his own personal gain, to inflame the damages, to suppress evidence, or even to suborn witnesses. These fears may be exaggerated; but, be that so or not, the law for centuries has declared champerty unlawful” (Ibid., at 219-220) .
Both maintenance and champerty were crimes and torts until they were abolished by ss.13 and 14 of the Criminal Law Act 1967 (CLA 1967). However, s.14(2) of the CLA 1967 provides that “the abolition of criminal and civil liability… for maintenance and champerty shall not affect any rule of that law as to the cases in which a contract is to be treated as contrary to public policy or otherwise illegal”. This has the effect that if a contract breaches the rules against maintenance and champerty and is therefore contrary to public policy, it could be deemed to be unenforceable. As such, the common law position in respect of Conditional Fee Agreements (CFAs) is that they are deemed void and unenforceable at common law (Chitty on Contracts (Sweet & Maxwell, 32nd ed., 2015), at 16-064). However, the common law has been modified by statute so that CFAs and Damages Based Agreements (DBAs) that are compliant with the relevant statutes are permitted (see s.58 of the Courts and Legal Services Act 1990 (CLSA 1990) (as amended) in respect of CFAs and s.58AA of the CLSA 1990 (as amended) and the Damages-Based Agreements Regulations 2013/609 in respect of DBAs).
Beyond these statutory modifications, the common law remains. However, since the CLA 1967, public policy has developed and the law against champerty and maintenance has softened; this is thanks to a change of approach by the courts in recognition that third party funding can provide access to justice for claimants who could not otherwise afford to pursue a meritorious claim.
A useful summary of the current state of the law was set out in London and Regional (St George’s Court) Ltd v Ministry of Defence  EWHC 526 (TCC); (2008) 152(14) S.J.L.B. 28, in which Coulson J. used the authorities summarised by Underhill J. in Mansell v Robinson  EWHC 101 (QB) as follows:
“a) the mere fact that litigation services have been provided in return for a promise in the share of the proceeds is not by itself sufficient to justify that promise being held to be unenforceable: see R (Factortame) Ltd v Secretary of State for Transport (No.8)  QB 381;
b) in considering whether an agreement is unlawful on grounds of maintenance or champerty, the question is whether the agreement has a tendency to corrupt public justice and that such a question requires the closest attention to the nature and surrounding circumstance of a particular agreement: see Giles v Thompson  1 A.C. 142;
c) the modern authorities demonstrated a flexible approach where courts have generally declined to hold that an agreement under which a party provided assistance with litigation in return for a share of the proceeds was unenforceable: see, for example, Papera Traders Co Ltd v Hyundai Merchant Marine Co Ltd (The Eurasian Dream) (No.2)  EWHC 2130 (Comm);  2 All E.R. (Comm) 1083; d) the rules against champerty, so far as they have survived, are primarily concerned with the protection of the integrity of the litigation process in this jurisdiction: see Papera. (Ibid., at 103).”
(ii) Liability of funders: A non-party to a piece of litigation can be ordered to pay costs associated with that action. (See s.51(1) and (3) Senior Courts Act 1981, r.46(1) and (3) Supreme Court Rules 2009/1603, s.15 Judicial Committee Act 1833 and s.12 Judicial Committee Act 1843 for the various basis of the courts’ jurisdiction to make such an order.) The scope of a funder’s liability in this regard was addressed by the Court of Appeal in its seminal decision in Arkin v Borchard Lines Ltd (Costs Order)  EWCA Civ 655;  1 W.L.R. 3055. The third party funders supported what Lord Phillips described as a “disastrous piece of litigation” (Ibid., at 1). The claimant was impecunious and he was only able to pursue his claim because of the support of the third party funder. In reaching its decision, the Court of Appeal found that “causation is…often a vital factor in leading a court to make a costs order against a non-party. If the non-party is wholly or partly responsible for the fact that litigation has taken place, justice may demand that he indemnify the successful party for the costs he has incurred” (Ibid., at 24).
However, Lord Phillips recognised that if a professional funder is not financing all of the party’s fees, it should not be responsible for the entirety of the defendant’s costs should the claim be unsuccessful, as this would deter funders from providing funding (Ibid., at 39). In light of this, it was held that a “professional funder, who finances part of a claimant’s costs of litigation, should be potentially liable for the costs of the opposing party to the extent of the funding provided” (Ibid., at 41). However, if a funding agreement is rendered champertous, the funder is likely to be found to be liable for the other side’s costs without limit should the claim fail (Ibid., at 40).
(iii) Solicitors’ regulatory obligations in respect of advising on availability of third party litigation funding: The outcomes-based Solicitors Regulation Authority (SRA) Code of Conduct 2011 (“the Code”) is based on the 10 mandatory SRA Principles (“the Principles”). The Principles that are most relevant to fees and funding are 4,5 and 6 which provide:
“You [the Solicitor] must:4. act in the best interests of each client;5. provide a proper standard of service to your clients;6. behave in a way that maintains the trust the public places in you and in the provision of legal services.”
The Code has 16 mandatory “Outcomes” which, if achieved, “will help ensure compliance with the principles”. (SRA Handbook 2011, Introduction to the Handbook). The most relevant Outcomes are O(1.12) and O(1.13) which provide that solicitors must ensure that:
“O(1.12) clients are in a position to make informed decisions about the services they need, how their matter will be handled and the options available to them; O(1.13) clients receive the best possible information, both at the time of engagement and when appropriate as their matter progresses, about the likely overall cost of their matter…”The outcomes are supplemented by indicative behaviours which can evidence that the solicitor has “achieved these outcomes and therefore complied with the Principles” (SRA Code of Conduct 2011, 1st Section: You and your client, Chapter 1: Client Care). The indicative behaviours of most relevance to showing that the above outcomes have been achieved are IB(1.13) and IB(1.16):
“IB(1.13) discussing whether the potential outcomes of the client’s matter are likely to justify the expense or risk involved, including any risk of having to pay someone else’s legal fees;…IB(1.16) discussing how the client will pay, including whether public funding may be available, whether the client has insurance that might cover the fees, and whether the fees may be paid by someone else such as a trade union…”
From the above, there is a clear professional obligation on solicitors to advise clients on the availability of third party funding; failure to do so would be a professional conduct issue (N. Rowles Davies, Third Party Litigation Funding (1st Ed., 2014), at 196). Furthermore, failure to advise on the availability of funding may amount to negligence in certain instances (See S. Dobson, Litigation Futures, 31 July 2015 Are you letting down your clients over funding?).
(iv) Third party funding: privilege: When reviewing a case, a litigation funder will undoubtedly want to see a number of potentially privileged documents (for example, legal advice provided by the solicitor to his client, advice provided by counsel, factual and expert witness evidence etc.) in order to assess the merits and feasibility of the case. The issue that therefore arises is whether the passing of these documents from lawyer to funder results in a waiver or partial waiver of privilege, with the consequence of those documents becoming disclosable.
Documents created by a lawyer during the course of his retainer will generally be protected by legal professional privilege, be it legal advice privilege and/or litigation privilege. Legal advice privilege applies to confidential communications between lawyer and client which form part of the continuum of giving and receiving legal advice (Phipson on Evidence, 18th Ed., 23-18). Litigation privilege applies to a confidential communication made for the dominant purpose of litigation or arbitration which is reasonably contemplated, between any of the following: a lawyer, his client, and a third party. (See M. Alrashid, J. Wessel and J.Laird “Impact of Third Party Funding on Privilege in Litigation and International Arbitration”, Dispute Resolution International, Vol.6 No 2 (2012) at 106 and Phipson on Evidence, Ibid).
Uncertainty arises when documents protected by legal advice and/or litigation privilege are passed to the funder, as it may be argued that the privilege is thereby waived. This is because the requisite confidence for legal professional privilege to apply may be lost. In this situation, privilege can be protected by disclosing the documents on the express basis that there is no intention to waive privilege, and by obtaining an undertaking from the funder that they will keep the documents confidential (Ibid., “Impact of Third Party Funding on Privilege in Litigation and International Arbitration” at 107).
The waiver argument is likely to fail if common interest privilege applies to the documents so as to protect privilege in documents passed from a lawyer to a third party funder. In summary, common interest privilege arises when one party voluntarily discloses a privileged document to a third party who has a common interest in the subject matter of the document or in the litigation in respect of which the document came into being (B. Thaki QC The Law of Privilege (2nd Ed. 2011), at 300). Where common interest privilege applies, the receiving third party can assert privilege in the document “so that he can neither be required to produce it on a witness summons in the litigation to which the sender of the document is a party, nor in subsequent litigation in which he himself may be involved as a party”. (Phipson on Evidence, op. cit., at 24-06).
There is plainly a strong argument that a third party funder has a common interest in the litigation concerned, and given the courts’ recognition of the role which third party funding plays in affording access to justice, it would appear likely that common interest will be found to apply to documents disclosed by a funding applicant or its lawyers to a funder.