What has prompted the City’s top litigation team’s review of something that has been a part of the litigation landscape for a number of years? It may have been the Civil Justice Council’s (CJC’s) recent recommendation in its ‘Improved Access to Justice’ report that third-party funding should be encouraged. Is third-party funding set to become an influential factor in the litigation arena?
It is difficult to see financially-stable organisations being impressed by a suggestion that they should pay a substantial percentage of damages awarded to them to a third party, as the quid pro quo for the latter’s funding of a case, when they are able to fund the case themselves. When a company is advised to take a claim to trial, it generally expects to win. A weak claim is likely to be as unattractive to a third-party funder as it would be to a prospective claimant.
Business is more likely to be concerned that any increase in the availability of third-party funding will generate more claims against it, including large class actions, which would not otherwise merit consideration. The insurers defending the $140m (£69m) professional negligence claim against Moore Stephens, funded by IM Litigation Funding, have even more reason to be disheartened by any suggestion that new third-party funders are entering the market.
The courts’ attitude to third-party funding is now reasonably well established. In Arkin v Borchard Lines & others [2005], the Court of Appeal ruled that where the third-party funder exercises control over proceedings and stands to gain from their success, the funder’s liability to pay costs to its successful opponent should be limited to the amount of funding provided. It stands to reason that any funder in this market will want to influence how its investment is progressing. It is hoped that the courts will be prepared to go further than Arkin and increase the funder’s level of liability to adverse costs orders, if it effectively takes over the conduct of litigation or stands to receive the lion’s share of the damages in return for funding. The CJC’s report not only took note of the Arkin constraints in making its recommendations but also wanted to see the activities of commercial third-party funders regulated.
Recent developments in the sub-prime mortgage market may make more speculative hedge funds treat investment opportunities with greater circumspection, but the prospect that more aggressive funds will enter this market remains a cause for concern for many potential defendants. There is little to stop a ‘get-rich-quick’ funder backing a substantial but weak claim, running it hard in the knowledge that it will probably extract a settlement, not least since the unfortunate defendant will never be sure of recovering its defence costs.
That said, third-party funding may just have become the latest flavour of the month given the amount of investment funds available in a buoyant economy. Even if the current level of interest in litigation continues, the deterrent of having to pay the winner’s costs will always be a major factor. So too is the fact that the outcome of complex, high-value litigation is difficult to predict at the outset, when the funder must decide whether it is prepared to get behind a claim for the long haul. The funders have to back more winners than losers. The next generation of funders may require the claimant and its advisers to share the risk of the outcome. New complex fee arrangements beckon.
Herbert Smith must be right to assess the impact on its business of the prospect of third-party funding gaining a stronger foothold, but the suspicion is that this will not cause a material upturn in a fairly flat litigation market, any more than has been the case with the increased accessibility to CFAs or the threatened upsurge in class actions, both of which have been responsible for a huge number of column inches recently.
David Gray is head of the