For years now, it has been widely recognised that the cost of litigation is a bar for some and impedes access to justice. For the claimant who has a good case but an inability to fund it, third-party funding may well be perceived as the perfect solution. The funder meets the litigation cost and the risk of an adverse costs order in return for a share of the damages. From the claimant’s perspective, the need for financial outlay is eliminated, the risk of costs liability disappears and that can justify handing over a share of the damages — a lower percentage of something is better than 100% of nothing.
Historically, arrangements like this were considered contrary to public policy and unlawful — the laws of champerty and maintenance were invoked to declare them criminal, tortious, void and unenforceable. The fear was of the third party meddling in the litigation. As Lord Denning said during the case of Re Trepca Mines [1963]: “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…”
But with the demise of legal aid and the increasing costs of litigation, there has been growing recognition of the need for flexibility. The landscape began to change in 1967 when the Criminal Law Act abolished maintenance and champerty as crimes and torts. However, under section 14(2) of the Act, the arrangements were still regarded as contrary to public policy — void and unenforceable.
Fast forward to the 1990s, when the first real strides were made, albeit in the narrow context of solicitor’s CFAs. These, like third-party funding, had been regarded as unacceptable on account of champerty/maintenance. But by the end of the decade, section 58 of the Courts and Legal Services Act (as amended) was operating to permit solicitor’s CFAs subject to strict regulation. Now, a solicitor can defer all or a percentage of his costs pending a successful outcome, at which point he charges his unpaid standard rate plus a success fee, all of which is recoverable from the opponent. In the event of failure, no costs/further costs can be charged.
Changes to the approach to third-party funding were quick to follow. Recognising that the only real objection to third-party funding arrangements was the public policy objection — the fear of interference with justice — the courts began to uphold the validity of arrangements where it was clear that that risk did not exist. Thus in the 1993 case of Giles v Thompson, an arrangement whereby car hire companies would hire replacement vehicles to claimants involved in traffic accidents and then fund proceedings to recover the charge, was held valid as there was no risk of interference with justice. And in Factortame & Others, R (on the application of) v Secretary of State for Transport, the court upheld as valid an arrangement under which a firm of accountants supported the claims of Spanish fishermen excluded from British waters in return for 8% of their damages, for the same reason.
And so, the change in focus. From being prima facie unenforceable, third-party funding arrangements will now be enforceable unless there is something about the arrangement under scrutiny that is particularly objectionable. This might be clear evidence of excessive control or influence by the funder, or some other factor that heightens the risk of that.
Indeed, there is clear evidence of growing judicial and political support for this type of arrangement. Master of the Rolls, Sir Anthony Clarke, has recently been quoted as saying that litigation funding should be encouraged so long as it is controlled, the Civil Justice Council Report of 2007 concluded that it should be encouraged subject to regulation and the Office of Fair Trading referred to it as an “important potential source of funding”.
So where does this leave us? Certainly not every funding arrangement will satisfy the scrutinising eye of the courts. However, many will; properly formulated third-party funding has become a viable and accessible option for claimants. But only, it has to be said, claimants with a strong case. Like any investor, the third-party funder is looking to make money and will only ever fund those cases with a good chance of success against an opponent with the means to pay and where the figures stack up. A 70% prospect of success is widely recognised to be the applicable benchmark. And for the figures to stack up, the value of the claim will have to be substantial relative to costs — funders will be looking to recover on average three to four times their financial outlay, which means that for the claimant to benefit from bringing his case, its value must exceed five times the forecasted legal costs. Indeed, most funders will not even look at a case worth less than £250,000 and there are some who will only support cases worth several million.
There will inevitably be many claimants resistant to the idea of parting with a significant proportion of their damages. Any consideration of third-party funding is therefore incomplete without consideration of the alternative potential funding arrangement that can be created via a combination of after the event (ATE) insurance and a solicitor’s CFA. This leads to a wider sharing of risk and could be a less expensive option. When set up properly, an arrangement like this can provide the claimant with an entirely cost- and risk-free litigation experience — for the agreement to pay an ATE premium (which can be deferred and made conditional on the outcome) and a CFA success fee in the event of a ‘win’. The claimant can pursue his case safe in the knowledge that he will, in practical terms, have no costs liability and yet retain all his recovered damages. All excesses payable for the privilege of the arrangement (subject to the usual challenges on assessment) are recoverable from the opponent in the case of a win. A defendant pitched against such a claimant is in a very difficult position.
Inevitably, it will not just be the impecunious claimant who taps into these new opportunities. When we talk to clients, the overwhelming theme is that the single largest barrier to litigation for even the most cash-rich corporates is cost risk and uncertainty. Increasingly, in-house counsel charged with the management of restrictive legal spend budgets are telling us that they are looking for costs solutions that are certain, transparent and under which risk is shared.
Project management of cases has overtaken more traditional methods of dispute conduct and client confidence appears to be growing — confidence to demand from lawyers a robust and definitive assessment of the case: merits, value and risk. And clients are looking not only for a meaningful assessment of their case but for lawyers to suggest innovative ways to hedge risk and to demonstrate their own confidence and commitment by sharing the risk through a CFA. Whether these corporates will be prepared to hand over a large proportion of their damages to a third-party funder in return for reduced risk remains to be seen, but for those that are not, solicitor’s CFAs with ATE would seem to be the viable alternative.
Despite what some commentators are saying, there is nothing unique about funding arrangements based on a sharing of risk; however, the landscape is changing. How quickly it will continue to change will depend on two things: firstly, whether lawyers will become more commercially in tune with client needs, properly assessing and project managing cases and creating for their clients innovative funding solutions on a bespoke basis; and secondly, whether it turns out from the small print that the current offerings are more about hype than substance and attractive only to a small and unique demographic of litigants.
Michael Clavell-Bate is a partner and Kath Livingston is a senior associate in the litigation and dispute management practice group at Eversheds.
LitigationJuly2008
