I. Introduction
The governance of Third Party FundingFootnote 1 in England and WalesFootnote 2 has been unique and unparalleled among common law jurisdictions. Apart from the ad hoc judicial supervision of individual litigation funding agreements (LFAs) entered into between Funder and the funded party (hereafter, “the Litigant”), the regulation of Third Party Funding is undertaken principally via two measures: first, by a Code of Conduct for Litigation Funders and, secondly, by the establishment of the Association of Litigation Funders (ALF) by which to regulate those Funders who join the ALF and are thereby deemed to have adopted that Code. Hence, it is a system of self-regulation and, furthermore, only those Funders who join the ALF are bound by the Code.
Originally published in November 2011, with the assistance of the Civil Justice Council (CJC),Footnote 3 and with a mandate by Sir Rupert Jackson as the architect of the ground-breaking costs and funding study which was undertaken in 2009,Footnote 4 the operation of the Code has since been supervised by the ALF.Footnote 5 In 2013, and in furtherance of the objective of, inter alia, “promot[ing] best practice in litigation funding”,Footnote 6 the ALF voluntarily undertook the drafting of key changes to the 2011 Code and to other constitution documents. A revised Code of Conduct for Litigation Funders (hereafter, “the 2014 Code”), revised Rules of Association for the ALFFootnote 7 and a newly developed Complaints ProcedureFootnote 8 were published in January 2014.
In light of that recent review, this article examines four legal conundrums that arise in respect of the governance of Third Party Funding in England:Footnote 9
(1) the treatment of the capital adequacy of Funders is a contentious and divisive issue, and is inextricably linked with the question as to whether “full regulation” of Funders should be preferred to the “soft regulation” which the Code represents. This issue is dealt with in Section II;
(2) the avoidance of any champertous behaviour on a Funder's part is essential, and some (but not all) of the key champerty factors stipulated in English case law are contained in the 2014 Code. One such factor – the willingness and ability of a Funder to cover adverse costs, should they arise – is dealt with (again) uniquely, and controversially, in English law. These topics are discussed in Section III;
(3) another difficult issue surrounding a Funder's conduct concerns the grounds upon which a Funder may terminate an LFA and thereby legitimately withdraw funding from a Litigant. Recent developments in that regard are critiqued in Section IV;
(4) the somewhat controversial impact upon Third Party Funding of the recent legislative authorisation of damages-based agreements (DBAs) is analysed in Section V. The aim of this section is to refute categorically any assertion that a Funder's LFA could constitute a DBA, as a matter of statutory construction. That possibility, ventured in some quarters since the implementation of the DBA Regulations 2013, is not tenable, when the governing legislative framework is closely analysed.
(5) Section VI concludes.
It should be noted, at the outset, that the concept of Third Party Funding has received strong appellate judicial approval in EnglandFootnote 10 as promoting a Litigant's access to justice where, otherwise, there might be none. Even if the Litigant must necessarily forego a percentage of its damages in the event of success, the Court of Appeal observed, in Gulf Azov Shipping Co. Ltd. v Idisi, that “[p]ublic policy now recognises that it is desirable, in order to facilitate access to justice, that third parties should provide assistance designed to ensure that those who are involved in litigation have the benefit of legal representation”.Footnote 11 Extra-judicial commentary,Footnote 12 and England's civil advisory body,Footnote 13 have also supported the concept as a viable and respected source of funding (albeit that it has, to date, been far more readily available for higher-value claimsFootnote 14). This endorsement has been reflected, too, in other jurisdictions such as in Jersey,Footnote 15 Canada,Footnote 16 New Zealand,Footnote 17 Australia,Footnote 18 Bermuda,Footnote 19 and South Africa,Footnote 20 and also in a few European Member StatesFootnote 21 (but not in IrelandFootnote 22). The development of a Code of Conduct has not, however, been replicated in any of those other jurisdictions.
Third Party Funding is likely to assume greater importance in England in the future, given two developments, namely the way in which the Jackson cost reforms of April 2013 have variously affected the availability of other litigation fundingFootnote 23 and the foreshadowed implementation of collective actions reform in the UK later in 2014.Footnote 24 Funders (and those who engage, use, and regulate their services) will continue to face challenging legal issues, and it is the purpose of this article to examine these, in light of recent important developments.
II. The Capital Adequacy of Funders
A. Bolstering the Threshold Requirements
Neither the 2014 Code nor any other source compels the establishment of an indemnity fund by which to cover any unmet funding obligations on the part of a Funder. Nor does the State, in the guise of the Prudential Regulation AuthorityFootnote 25 or the Financial Conduct Authority (FCA),Footnote 26 regulate or supervise the conduct of Funders. Moreover, the State-funded Financial Services Compensation Scheme will not compensate a Litigant if a Funder is unable to pay liabilities which are incurred under an LFA.Footnote 27 The author also understands that professional indemnity insurance would not customarily be held by Funders, given that they do not engage in the provision of advice.Footnote 28 Although some Funder Members of the ALF are regulated by the FCA,Footnote 29 that status depends upon whether the Funder provides (via an arm of the corporate structure) an investment advice-type service – in which case the aforementioned Scheme would not attach to its funding services in any event. Hence, verifying the level of a Funder's capital adequacy which the 2014 Code stipulates, and a close supervisory role in relation to the financing of Funders generally, falls within the remit of the ALF's responsibility.Footnote 30
Against this background, the bolstered capital adequacy requirements in the 2014 Code are of the utmost importance. A Funder was already under an obligation, under the 2011 Code, “to maintain the capacity to pay all debts when they became due and payable” and “to cover aggregate financial liabilities under all of its LFAs for a minimum period of 36 months”.Footnote 31 Those obligations continue.
However, the 2014 Code imposes four additional obligations. A Funder must: (1) ensure that it “maintains access to a minimum of £2 million of capital or such other amount as stipulated by the ALF”;Footnote 32 (2) “accept a continuous disclosure obligation in respect of its capital adequacy”, and must notify the ALF and the Litigant if that Funder “reasonably believes that its representations in respect of capital adequacy are no longer valid because of changed circumstances”;Footnote 33 (3) arrange annual auditing, and provide the ALF with an audit opinion about the Funder's most recent annual financial statements;Footnote 34 and (4) provide to the ALF “reasonable evidence from a qualified third party (preferably from an auditor, but alternatively from a third party administrator or bank) that the Funder … satisfies the minimum capital requirement prevailing at the time of the annual subscription”.Footnote 35 These requirements are ancillary to the general obligation in the Code,Footnote 36 namely that a Funder will “maintain at all times adequate financial resources to meet the obligations of the Funder, its Funder Subsidiaries and Associated Entities, to fund all the disputes that they have agreed to fund”. Further provisions, relevant to capital adequacy, have also been added to the ALF's 2014 Rules of Association, including a list of factors that the ALF may refer to, in order to determine whether a Funder has “adequate financial resources” (even where the Funder has met the £2 million minimum capital adequacy),Footnote 37 such as whether there is evidence of the Funder being “conservative” about capital and “pessimistic” about when returns will be expected under its LFAs.
The motivation for these changes was to address oft-noted criticismsFootnote 38 that the capital adequacy requirements were not sufficiently rigorous to provide sufficient protection to either the Litigant or to a successful defendant, should a call be made upon the Funder to meet its liabilities under the LFA.
The bolstering of these capital adequacy requirements must be considered, however, in light of another less obvious, but equally important, change to the 2014 Code, namely to render more transparent the corporate structures under which Funders commonly operate. Under the 2011 Code, a Funder could be either an entity which “has access to funds immediately within its control” or an entity which “acts as the exclusive investment advisor to an entity or entities having access to funds immediately within its control”.Footnote 39 However, the 2014 Code more explicitly recognises that it may not be the Funder which holds the money at all. It may be the corporate subsidiary of a Funder which has access to funds within its immediate control (a “Funder's Subsidiary”Footnote 40) or the Funder may be acting as exclusive investment adviser to another entity (an “Associated Entity”Footnote 41) which has access to funds within its immediate control. That Funder's Subsidiary or Associated Entity will not, themselves, be members of the ALF; but their separation from the Funder Member has certain legal ramifications.
First, the LFA must be entered into by the Litigant with whichever of these three entities appliesFootnote 42 and it is that particular contracting party which is entitled to receive a share of the proceeds if the claim is successful.Footnote 43 Secondly, that entity must meet any liability for adverse costs (if applicable)Footnote 44 and must itself satisfy the capital adequacy requirements of the Code.Footnote 45 Thirdly, there is now a pre-LFA disclosure requirement that the Funder must inform the Litigant “as soon as possible” if the LFA will be entered into with the Funder's Subsidiary or Associated Entity.Footnote 46 Fourthly, if (say) the Litigant enters an LFA with a Funder's Subsidiary and that Subsidiary cannot meet the capital adequacy stipulated in the revamped 2014 Code, that will call into play a new clause 4 of the 2014 Code, that the Funder “shall accept responsibility to the ALF for compliance with the Code by a Funder's Subsidiary or Associated Entity”.Footnote 47 This means that the Funder may be suspended or expelled from the ALF if the Subsidiary “falls short” and breaches the capital adequacy requirements.
However, and importantly, while the transparent separation of the various entities under the 2014 Code deliberately brings into sharper focus the corporate structure under which Third Party Funding may be provided in England, these revisions do not expressly provide contractual remedies to a Litigant against the Funder if the Funder's Subsidiary does not maintain capital adequacy. Clause 4 provides that “a Funder shall not accept legal responsibility to a Funded Party, which shall be a matter governed, if at all, by the provisions of the LFA” if the Funder's Subsidiary or Associated Entity do not comply with the Code. The contractual relationship (i.e. the LFA) will be between the Litigant and the Funder's Subsidiary, and the LFA is unlikely to contain the Code's minimum capital adequacy requirements as a term of that contract. Hence, even if the Funder itself has assets, it is not a contracting party. Expulsion of the Funder from the ALF is the sole legal remedy to which the aggrieved Litigant will be entitled (albeit that such an outcome would represent a significant sanction for the Funder itself).
B. Full Statutory Regulation versus Self-Regulation
The implementation of the 2011 Code had an immediate and tangible impact, in that most Funders operating in England were required to modify the terms of their LFAs (by e.g. inserting a mandatory “Q.C. clause” for the resolution of disputes, and restricting the grounds for terminationFootnote 48), in order to ensure compliance (if they were members of the ALF, that is). Hence, the Code achieved more uniformity and “best practice” across the industry, which was a positive outcome.
Undoubtedly, however, the self-regulation of Third Party Funding in England remains the subject of much debate. To reiterate, membership of the ALF is non-compulsory and the 2014 Code only applies to those Funders who join up as members of the ALF.Footnote 49 Notably, Sir Rupert Jackson was of the view that “soft regulation” of the industry should be sufficient, “[p]rovided that a satisfactory code is established and that all funders subscribe to that code”.Footnote 50 However, it remains of concern, in the legal marketplace, that Funders which are offering non-recourse funding and who truly fall within the definition of a “Funder” may be operating in the market without being subject to the Code (and the various checks on capital adequacy which that entails) because they are either unwilling or unable to apply for ALF membership.Footnote 51 At the time of writing, 7 of the 16 recognised Funders operating in England are currently members of the ALF.Footnote 52
The relative virtues of full statutory regulation, versus a regime of “soft” or self-regulation, has been an equally contentious matter elsewhere. For example, it has become the subject of recent and renewed debate in Australia, given that the Government's Productivity Commission has been requested to consider, inter alia, “[w]hat risks are posed by litigation funding arrangements, and how do these differ from the risks posed by contingent and other billing practices? What proportionate and targeted regulatory responses are required to manage these risks? Is more uniform regulation required across [State] jurisdictions on this matter?”Footnote 53 The Commission produced a draft report in April 2014, in which it recommended that Funders operating in that jurisdiction “should be required to hold a financial services licence, be subject to capital adequacy requirements, and be required to meet appropriate ethical and professional standards” and that their financial conduct should be regulated by the Australian Securities and Investment Commission.Footnote 54 The Commission is due to publish its final report later in 2014.Footnote 55 The Australian Attorney General has also publicly supported the regulation of Third Party Funders, “in order to protect companies and unsophisticated consumers from opportunistic claims” and “to inhibit moral hazards and conflicts of interest”,Footnote 56 and has expressed opposition to any arrangement whereby a Funder is owned by the principals of claimant law firms.Footnote 57 Hence, even in a jurisdiction whose development of Third Party Funding is both highly sophisticatedFootnote 58 and closely connected with a long-standing (since 1992) class actions regime,Footnote 59 the debate between self-regulation and full statutory control is still evolving and uncertain.
Notably, any suggestion that Funders should be compelled to join the ALF and thereby subscribe to the Code of Conduct – and that law firms should only deal with ALF Funder Members when arranging funding for their clients – may potentially raise allegations of anti-competitive conduct. On that point, the 2001 decision in Institute of Independent Insurance Brokers v Director-General of Fair Trading Footnote 60 is instructive. The General Insurance Standards Council (GISC) produced a set of rules (the GISC Rules) which were intended to establish a system of self-regulation governing the selling, advising, or brokering of general insurance in the UK. Under rule F42, insurer members of the GISC agreed not to deal with any intermediaries who were not GISC members.Footnote 61 Two entities – the Institute of Independent Insurance Brokers and the Association of British Travel Agents Ltd. – objected to the GISC Rules (and to any compulsion under rule F42 that their members join the GISC), alleging that they had “as their object or effect, the prevention, restriction or distortion of competition”, in contravention of the Competition Act 1998.Footnote 62 It was held by the Competition Appeal Tribunal (CAT) that rule F42 contravened the prohibition on anti-competitive conduct. Of course, there is no equivalent of rule F42 in the Code of Conduct, which immediately distinguishes the governance of the insurance industry in that case from the present governance of Third Party Funding in England. However, the findings of the CAT have resonance, given the similarities between the GISC and the ALF (i.e. the GISC was the sole regulator; charged fees for admission; “had the features normally to be found in a private sector organisation or company accountable to its members, rather than a publicly constituted body exercising ‘public powers’”; had been “set up by the industry itself without any statutory basis”;Footnote 63 and was not accountable to Parliament, nor to the financial regulator). In that light, the creation of any compulsory system of self-regulation of Third Party Funding would appear to be very problematical, given the competition law issues referred to in Independent Insurance Brokers.
Another key point is that there must be a political appetite for full regulation if it is to be implemented. To date, that has been entirely lacking in England. Sir Rupert Jackson noted, at the time of his report,Footnote 64 that the then-Financial Services Authority (FSA), together with the Ministry of Justice, were holding a “watching brief” regarding Third Party Funding, but that he did not consider that full regulation was either necessary or likely to be accepted: “the FSA would not be able to deal with capital adequacy alone. If the FSA takes on a regulatory role, it would undertake full regulation of third party funders, the costs of which would need to be outweighed by the benefits.”Footnote 65 There is no indication, at the time of writing, that this costs–benefit analysis has changed. Sir Rupert consideredFootnote 66 that the option of full regulation might become necessary “if the use of third party funding expands” or “if funders are supporting group actions brought by consumers on any scale”, but neither circumstance has arisen in England as yet.
In light of this background, the prospect of, and need for, statutory regulation of Third Party Funding in England remains unlikely in the short term, in this author's view. However, the Australian review, and the further push for tighter regulation in that jurisdiction, will undoubtedly attract the continuing and close observation by law- and policy-makers in England.
III. Precluding Champerty
The legislative attitude towards champertyFootnote 67 and maintenanceFootnote 68 has altered drastically in recent years. They were both abolished as criminal wrongs in England in 1967Footnote 69 and cannot (since that date) constitute torts which give rise to the right to damages either.Footnote 70 The Law Commission considered (in 1966) that they should no longer be actionable as tortious wrongs giving rise to damages, because of three factors.Footnote 71 First, so much litigation was funded by third parties “with lawful justification or excuse” – via trade unions, trading associations, friendly societies, insurers, the State via legal aid, and by parties who may justifiably be interested in funding the litigation of another – that there was very little room for the torts to operate. Secondly, both torts required proof of damage, but that element was almost impossible to prove, because it would have to be proven that the proceedings would not have been brought or continued without the assistance of the maintainer. Thirdly, there were so few relevant cases that the torts were described as being “empty shells”, “ancient”, and “virtually useless”. Moreover, in a further loosening of the shackles, a former prohibition in solicitors' professional conduct rules,Footnote 72 which banned a solicitor from “acting in association with” any entity which received a “contingency fee in respect of [personal injury] claims”, was not included within the revamped Solicitors' Regulation Authority's Code of Conduct 2011.
However, these former torts have not lost their relevance entirely – principally because section 14(2) of the Criminal Law Act 1967 provides that removal of criminal and civil liability “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”. Hence, the occurrence of champerty and maintenance, if proven, may still taint an LFA. The potential consequences of any such finding would then be: rendering that LFA unenforceable,Footnote 73 exposing the Funder to an order for non-party costs,Footnote 74 precluding the Funder from any quantum meruit claim,Footnote 75 and possibly leading to a stay of the funded action if an abuse of the court's process, by virtue of some champertous funding arrangement, has occurred.Footnote 76
Modern case law demonstrates that ad hoc judicial scrutiny of an LFA, in order to determine whether it is champertous in any respect, may arise for a variety of reasons. Applications may come from a law firm which holds a Funder's money in escrow, pending requests from a Litigant for payments of ongoing costs and disbursements;Footnote 77 from a defendant who complains that the funded proceedings against it are an abuse of process and should be struck out;Footnote 78 and from the court's own motion, under a Beddoe-type application, where the court must be satisfied that it would be appropriate to authorise a new trustee to assume the capacity of the Litigant under an LFA.Footnote 79
A. Avoiding Champertous Conduct: The Relevant Factors
Three important anti-champerty factors (derived from relevant case law) are specified in the 2014 Code,Footnote 80 namely independent advice, an absence of conflicts of interest, and no improper control. Additionally, according to the author's previous case study of English champerty law,Footnote 81 three further factors have been established by case law, namely not improperly stirring up litigation, not taking too high a proportion of “the spoils”, and a willingness to meet liabilities under the LFA. All of these will be judicially considered “in the round” when assessing whether an LFA so “undermine[s] the ends of justice”Footnote 82 that it is tainted by champerty. Indeed, it may assist to clarify the expectations which the law has of Funders if all six anti-champerty factors cited above were to be referred to in future revisions of the Code. These factors are briefly expanded upon below (all references are to the 2014 Code, unless otherwise stated).
First, the Funder must ensure that the Litigant “received independent advice on the terms of the LFA” (per clause 9.1). Such an obligation was already incorporated in the 2011 CodeFootnote 83 but has been bolstered by a timing requirement – the advice must be received “prior to the execution” of the LFA. Ironically, this accords precisely with what Sir Rupert Jackson recommended before a client could enter into a DBA with a lawyer (i.e. “no contingency fee agreement should be valid unless it is countersigned by an independent solicitor, who certifies that he or she has advised the client about the terms of that agreement”Footnote 84). However, the Government ultimately declined to impose that for DBAs,Footnote 85 considering such a measure to be unnecessary and costly.
Secondly, the Funder must not take any steps that would cause, or be likely to cause, the Litigant's solicitor or barrister “to act in breach of their professional duties” (per clause 9.2). Essentially, the Litigant's legal representative should not be placed in a position of a conflict of interest, torn between the wishes of the Funder and the interests of the Litigant. However, this requirement must be read in light of a judicial caveat, in that English courts have been most unwilling to overplay the potential for conflict. In Giles v Thompson,Footnote 86 Lord Mustill was not prepared to countenance that “theoretical” conflicts should render an LFA champertous. It was conceivable that the interests of the car-hirer (the Funder) and the motorist (the Litigant) in that case could diverge where, say, a mixed settlement offer was made in respect of the motorist's personal injury claims and the Funder's hire costs, without any demarcation between the two. However, whilst this would “present difficult questions of law, as to which party was dominus litis, and of legal ethics, where a solicitor was faced with conflicting duties towards clients with differing interests”, that conflict would arise “only in theory” and should not render a funding agreement unenforceable.
Thirdly, the Funder must ensure that it will not “seek to influence the [Litigant's legal counsel] to cede control or conduct of the dispute to the Funder” (per clause 9.3). The LFA must also state whether (and, if so, how) the Funder may provide input to the Litigant's decisions in relation to settlements (per clause 11.1). These provisions reinforce that the lawyer's client is, and always remains, the Litigant, and that the Funder must not “monopolise” the litigation, nor seek to influence or control the outcome of the action. Again, however, English case law counsels against overstating the issue. For example, the fact that the lawyer who conducted the proceeding was chosen by the Funder and not by the Litigant himself does not, of itself, constitute a wrongful assumption of control (according to Giles v Thompson Footnote 87) and nor does the fact that the Litigant needs the consent of the Funder to any settlement or compromise (according to Arkin v Borchard Lines Ltd. Footnote 88). Independent advice should be forthcoming from experienced and reputable advisers to the Litigant throughout the litigation, so as to enable him to make properly informed decisions about how the proceedings should be conducted, and as a “check and balance” upon the control exercised by the Funder (per R. (Factortame) Ltd. v Secretary of State for Transport (No. 8) Footnote 89). Recently, the Jersey Royal Court had regard to the LFA used by Harbour Fund II (the investment arm of one of the ALF Founder Members) in Re Valetta Trust Footnote 90 and expressly approved of the contractual provisions whereby “control” of the proceedings was stipulated to remain with the Litigant and its lawyers, with the Funder's entitlement being a right “to be informed of the progress of the proceedings”, and where the Litigant agreed to conduct the litigation “in accordance with the reasonable advice of its lawyers”.
The three remaining anti-champerty factors are not specified in the Code, but emerge in case law and are equally as important.
Fourthly, a Funder must not “improperly stir up litigation and strife”Footnote 91 or engage in “wanton or officious intermeddling” in another's claim.Footnote 92 Although judicially referred to, this ground of champerty has never been successfully proven against any Funder in an English case, so far as the author can ascertain. The Factor certainly will not arise where the Litigant has engaged legal, accountancy, or other experts to prosecute the claim on its behalf, and has shown a real and genuine intention to recover compensation from the defendant (per Giles v Thompson Footnote 93). Other jurisdictions shed more light on the factor, however, noting that champerty can be established, for example, where the Litigant had shown no intention of enforcing the claims itself (per Operation One Inc. v Phillips,Footnote 94); the action merely duplicated other proceedings on foot (per Trendlen Pty Ltd. v Mobil Oil Australia Pty Ltd. Footnote 95); or the Funder embarked on a course of conduct (sending fliers, emails, newsflashes) “designed to stir up litigation” and using inflammatory language (e.g. that franchises were “rooted in medieaval feudalism … little better than serfdom”) (per Wong v Second Cup Ltd. Footnote 96).
Fifthly, avoiding an inordinately high share of the proceeds will also dissuade any finding of champerty. No definitive figure has emerged in English jurisprudence, as to what is “too high” a success fee – although, in Factortame (No. 8), it was said that the greater the share of the spoils that the Funder contracts to receive, “the greater the temptation to stray from the path of rectitude”.Footnote 97 A “modest percentage” of 8% was acceptable there, as were the 25% and the 55% success fees in Arkin and in Latreefers, respectively (the latter was acceptably higher, because the Funder had a pre-existing interest in the subject matter of the dispute which it was entitled to seek to recoup). More recently, in Golden Eye (Intl.) Ltd. v Telefonica UK Ltd.,Footnote 98 Golden Eye entered into agreements with victims of alleged copyright infringements, not to conduct litigation, but to provide other services, in return for Golden Eye's receiving 75% (or less) of the proceeds. That return was described as a “handsome share of the proceeds” but did not jeopardise the proper administration of justice.
Courts in other jurisdictions, which have considered an English Funder's standard LFA, have shown a similar degree of liberalism. In Valetta Trust,Footnote 99 the Funder was due to receive 25% of the damages recovered (or twice the legal costs of C, whichever was the greater), which increased to 50% of the damages (or three times the legal costs of C, whichever was the greater) if the proceedings exceeded a certain length of time. That LFA was upheld as acceptable, with the court expressly noting that the Litigant “will still retain a substantial proportion of the damages if successful”. A take-up by the Funder of 40% of the recovered damages did not trouble the Supreme Court of Bermuda in its recent 2014 decision of Stiftung Salle Modulable v Butterfield Trust (Bermuda) Ltd. Footnote 100 either, with the Court's remarking that “such funding arrangements should be encouraged rather than condemned. I see no reason why Bermuda's common law should adopt the antiquarian approach contended for by [the defendant]”.
Sixthly and finally, the Funder's willingness and ability to meet potential liabilities under the LFA are also an important anti-champerty factor. A Funder is not required, by either common law or by the 2014 Code, to cover adverse costs or security for costs orders which may be ordered against the Litigant, nor to pay the Litigant's ATE premium – but what the Code requiresFootnote 101 is that the extent of such coverage which the contracting parties agree between themselves must be stated in the LFA itself. The willingness of a Funder to contractually meet such liabilities may be relevant in dissuading any finding of champerty. In Latreefers Footnote 102 and Valetta Trust,Footnote 103 the shipping broker Funder and Harbour Litigation Investment Fund LP,Footnote 104 respectively, were contractually obliged to pay all adverse costs orders that may be awarded in favour of the respective defendants and, hence, their costs exposure was significant. The English Court of Appeal and the Jersey Royal Court, respectively, considered this to be a factor which showed that the LFAs were not abusive or against public policy, nor tending towards any corruption of justice.
In conclusion, and as stated recently in Rees v Gateley Wareing (a firm), it will always depend upon “a case-by-case basis, whether the [LFA] would undermine the purity of justice or corrupt public justice”.Footnote 105 In the 2013 Ontario case of Bayens v Kinross Gold Corp Footnote 106 (where the LFA was entered into by the investment arm of one of the ALF founding Funder Members), Perell J. expressly approved of the LFA, whilst reiterating that, in any given case, the enforceability of an LFA will always depend upon a Funder's conduct.Footnote 107 Similarly, compliance with the three anti-champerty factors in the 2014 Code will not necessarily preclude a finding of champerty against a Funder – an analysis of all the facts and circumstances will be relevant.
B. The Arkin Cap Revisited
The Arkin principle applies (uniquely) in English law, and remains unaffected by the 2014 Code. It states that a Funder may be subject to an award of costs against it as a non-party,Footnote 108 whereby the Funder's liability to pay those adverse costs shall be capped to the extent of the level of funding which that Funder provided to the Litigant. In other words, the amount of funding provides a ceiling upon the Funder's liability for adverse costs (the so-called “Arkin cap”) wherever the LFA is otherwise non-champertous.Footnote 109
The principle is derived from the landmark Court of Appeal case of Arkin v Borchard Lines Ltd.,Footnote 110 in which, after a 50-day trial, Bouchard's legal costs in successfully defending Mr. Arkin's claim of anti-competitive conduct were approximately £6 million. Mr. Arkin was impecunious and, in what the Court called “the considerable fall-out of a disastrous piece of litigation”,Footnote 111 Borchard sought these costs back from Mr. Arkin's Funder, MPC. The LFA was silent about the issue of adverse costs. A non-party costs order may be made against any person, including a Funder, who has a “connection” with the proceedings in question.Footnote 112 Such an order was made against MPC (to the extent of the Arkin cap) because it would be “unjust that a funder who purchases a stake in an action for a commercial motive should be protected from all liability for the costs of the opposing party if the funded party fails in the action”.Footnote 113 The Court acknowledged that, as a result of its ruling, no doubt a Funder would require, as the price of the funding, a greater share of the recovery should the claim succeed, thus reducing the amount left for the Litigant. Although that was described as “unfortunate”, it was a necessary compromise – “it seems to us that it is a cost that the impecunious claimant can reasonably be expected to bear”. As a result, the Funder in Arkin was required to pay £1.3 million by way of contribution to Borchard's costs (hence leaving that defendant with a considerable shortfall in recovering its costs).
Unsurprisingly, the Arkin principle has not been received with universal approval. In his costs and funding review in 2009, Sir Rupert Jackson declared it to be “wrong in principle” that a Funder should be able to “escape part of the liability for costs in the event of defeat”. He recommended that, in order to protect the successful defendant against the prospect of unrecovered costs, and to protect the Litigant against the prospect of being exposed to liability to the defendant for those costs, the Arkin cap should be overruled, whether by rule change or by legislation,Footnote 114 and that the amount of a Funder's liability should be “a matter for the discretion of the judge in the individual case”.Footnote 115 Notably, this recommendation was not expressed to be limited to the scenario (as in Arkin) where the LFA was silent as to the Funder's liability for adverse costs, but appeared to encompass the scenario in which an LFA expressly provided that the Funder would not bear any liability for adverse costs. However, at the time of writing, there would seem to be no prospect that the Ministry of Justice (MOJ) will introduce any legislation in that regard. The recommendation has not featured in any legislation either mooted or enacted since the Jackson report was delivered.
In this author's view, there are further reasons as to why Arkin should be overruled, apart from the matters identified by Sir Rupert in the preceding paragraph. The decision was, as judicially acknowledged subsequently, purely policy-driven.Footnote 116 However, policy changes over time. The suggestion by the Court of Appeal that liability for adverse costs per the Arkin cap would force a Funder to closely assess the merits of a case which would be “in the public interest”Footnote 117 has been overtaken by the litigious climate in which Funders and lawyers now operate in England. Funders will always undertake a close assessment of the merits of a claim, and detailed costs budgets are typically insisted upon, in order to assess the risk of supporting the case – and the imposition of the Arkin cap is unlikely to change Funder behaviour in that regard. Furthermore, although the first instance judge in Tinseltime Ltd. v Roberts Footnote 118 held that it was not open to him to depart from the Court of Appeal's Arkin principle and to follow Sir Rupert's recommendation (“no matter how eminent the source” of the criticism of Arkin), the law may increasingly move to a position whereby a Funder's refusal to cover adverse costs in full is perceived to taint an agreement with champerty. Indeed, the converse position was evident in Valetta Trust.Footnote 119 The Jersey Royal Court cited Sir Rupert Jackson's observations and, having noted that, in all material respects regarding champerty, English and Jersey law were “of like effect”, proceeded to hold that, where the Funder had contractually agreed to indemnify its client against the whole of the risk of adverse costs, then “far from this agreement being contrary to the purity of justice, it fulfils the important role of facilitating access to justice without endangering the purity of that process”.Footnote 120
In practice, the author understandsFootnote 121 that there is presently a great deal of variation among LFAs as to whether, and to what extent, a Funder will cover adverse costs, should the Litigant lose its claim. Some Funders will not undertake to pay any adverse costs (and their share of the proceeds is consequently lower); some Funders will typically agree to cover all adverse costsFootnote 122 and others will contractually incorporate the Arkin cap as the ceiling upon their liability. Essentially, given that the Arkin cap remains good law, it was unrealistic to expect the 2014 Code to oblige a Funder to provide full adverse costs protection and, predictably, it does not do so. However, whether the Legislature will accept Sir Rupert Jackson's recommendation to remove the Arkin cap remains to be seen.
IV. Termination of a Litigation Funding Agreement
The contractual bases upon which funding can lawfully be withdrawn by the Funder are inevitably controversial, for to do so will inevitably hamper (and perhaps even stultify) the Litigant's ability to prosecute its claim. It was one of the Law Society's principal concerns that a Funder could cease funding in circumstances which would be contrary to the Litigant's interests or on unreasonable grounds.Footnote 123 Similarly, Sir Rupert considered that “[t]he precise definition of proper grounds for withdrawal will require some careful drafting”.Footnote 124
The 2014 CodeFootnote 125 (as did the 2011 Code before itFootnote 126) provides for three grounds for termination, namely where the Funder (or Funder's Subsidiary or Associated Entity) “reasonably ceases to be satisfied about the merits of the dispute”; or “reasonably believes that the dispute is no longer commercially viable”; or “reasonably believes that there has been a material breach of the LFA by the Funded Party”. There is (deliberately) no discretionary right on the part of a Funder to deviate from these grounds of termination in the LFA.Footnote 127 The Funder must remain liable for all funding obligations accrued to the termination date, unless the ground of material breach applies.Footnote 128
As mentioned previously,Footnote 129 the termination provisions contained in the 2011 Code have had a tangible impact in that most Funders have been required to modify (i.e. restrict) the terms of their LFAs, in order to ensure that they complied with the Code. Conversely, the author also understands that, in a recent instance, one of the Code's stipulated grounds of termination (“no longer commercially viable”) has been excluded from an LFA, at the Litigant's request and with the Funder's agreement.Footnote 130
The first ground of termination in the 2014 Code – that the Funder “reasonably ceases to be satisfied about the merits of the dispute”Footnote 131 – was recently in dispute in the pre-Code case of Harcus Sinclair (a firm) v Buttonwood Legal Capital Ltd..Footnote 132 As a case of first impression, the court observed that it was “concerned with a new type of satellite litigation, of which, given recent developments in the funding of large commercial claims, the courts appear likely to see much more”.Footnote 133
The Funder (Buttonwood Legal Capital, hereafter, “Buttonwood”Footnote 134) was permitted to terminate under the LFA if, “in the reasonable opinion of the Funder, the [Litigant's] prospects of success in proceedings are 60% or less”. Buttonwood had agreed to provide substantial sums to fund the litigation, but subsequently formed the view that the chances of success of the claim did not exceed 60% and gave notice terminating the LFA. The Litigant was obliged, under the LFA, to obtain a written advice from its legal representatives that its prospects of success exceeded 60% and, whilst the Litigant had provided a Q.C.'s opinion to that effect, the opinion was highly qualified (i.e. “very much a preliminary view”). No further opinion as to prospects was ever provided by the Litigant, but its solicitors repeatedly stated that the chances of success exceeded 75%. In any event, the Litigant contended that Buttonwood's opinion on the prospects of success was unreasonable, was not based upon all the relevant evidence, was formed just before the date when security for costs had to be provided by the Funder, and, in all the circumstances, was unreasonable. However, the opinion was held to be reasonable and, hence, the LFA was effectively terminated.
The decision confirms that, where the Funder has serious doubts about the merits of the funded action and wishes to terminate, its assessment of the prospects of success is “a purely substantive question, to be answered by an objective assessment of the available evidence” and that “it matters not by what route or process it was reached; the result is all”.Footnote 135 A “reasonable” assessment did not include any obligation on Buttonwood's part to consult the Litigant or to postpone a decision until the Litigant's lawyers had furnished a further opinion. Hence, the case confirms that any possible gaps in the evidence considered by the Funder or the pressure to form the opinion timeously do not negate that “reasonableness”. Only the verdict itself matters. As a case of first impression on this important issue as to the circumstances in which a Funder can exercise its contractual right to withdraw from a case based on dwindling merits, Buttonwood provides some important guidance to what is not relevant in forming that objective assessment.
It was crucial that the Code of Conduct provided for non-discretionary and finite grounds of termination to address some significant concerns raised during the Jackson review. Nevertheless, the fact that a Litigant has since successfully secured an agreement by its Funder to omit one of those grounds and the dispute in Buttonwood which ultimately provided a favourable precedent for the Third Party Funding industryFootnote 136 are illustrative of the genuine controversy which continues to surround the issue.
V. The Impact of Damages-Based Agreements Reform on Third Party Funding
Whether a Litigation Funding Agreement is a damages-based agreement (DBA) – and this article strongly contends that it is not – has been an unwelcome, and entirely unnecessary, distraction for the Third Party Funding industry. It is an important and timely example of the overriding concern that the Legislature should not introduce any degree of doubt in the legal marketplace when enacting new legislation, particularly where retrospective uncertainty could arise. This final section analyses the reasons for the conundrum, and suggests a form of clarifying statutory amendment to remove any possible lingering uncertainty.
A. The Impact of the Damages-Based Agreements Regulations 2013
Percentage contingency fees, under the nomenclature of “damages-based agreements”, were always lawful for “non-contentious” businessFootnote 137 and a limited statutory regime governed their use in employment matters only.Footnote 138 However, following Sir Rupert Jackson's recommendation that both solicitors and counsel be permitted to enter into DBAs with their clients,Footnote 139 the use of DBAs for contentious business was made lawful by section 45 of the Legal Aid, Sentencing and Punishment of Offenders Act (LASPO) 2012, and DBAs were permitted “across the board”. The DBA Regulations 2013 took effect on 1 April 2013 and the definition of a DBA in section 58AA was widened to include all subject areas of civil litigation, and not just that of employment matters.
Since implementation, a query has arisen in the legal marketplace as to whether a Funder's LFA is a DBA for the purposes of the statutory framework which now governs DBAs.Footnote 140 If so, then that would have important consequences. For example, Funders would need to comply with the statutorily set caps imposed by that legislationFootnote 141 and the common law “indemnity principle”,Footnote 142 deliberately retained by the Government under the DBA Regulations 2013,Footnote 143 may arise for consideration. Funders would also be caught up by the uncertainties that presently afflict aspects of the drafting of those Regulations, including dilemmas such as: what the “sum ultimately recovered” means (to which the percentage contingency applies); what an “expense” outside the contingency fee cap properly includes or excludes; whether the Regulations cover a funding agreement which is entered into for any action which settles before the claim is issued; and whether a so-called “hybrid DBA” is permittedFootnote 144 (a vexed issue which has led to the Funders' developing new funding models to seek to “fill the gap” during the ongoing statutory uncertainty about hybrid DBAsFootnote 145).
In this author's view, a Funder's LFA is not a DBA as a matter of statutory interpretation and, hence, must fall outside the realm of application of the DBA Regulations 2013. Before explaining the reasons for this view, it is appropriate to set out why the query has arisen in the first place.
B. The Reason for the Query
The concern about the interaction between Third Party Funding and DBA funding arises directly from the definition of a “damages-based agreement” in the now-amended section 58AA(3) of the Courts and Legal Services Act 1990 (CLSA 1990) (reproduced below) and from the rather convoluted trail of statutory provisions which are necessarily linked to this definition:Footnote 146
a damages-based agreement is an agreement between a person providing advocacy services, litigation services or claims management services and the recipient of those services which provides that –
(i) the recipient is to make a payment to the person providing the services if the recipient obtains a specified financial benefit in connection with the matter in relation to which the services are provided, and
(ii) the amount of that payment is to be determined by reference to the amount of the financial benefit obtained.
Under an LFA, there are some superficial similarities with this definition. The Litigant, as the “recipient of services”, will make a payment to the Funder if the claim is successful; and the share of the proceeds which the Litigant is liable to pay to the Funder will necessarily be determined by some pre-determined share of the proceeds as outlined in the LFA. The real question, however, is whether the Funder is “providing advocacy services, litigation services, or claims managements services” within the definition. The issue arises under the DBA Regulations 2013, too, as to whether the Litigant and the Funder fit within the definitions of “client” and “representative”, respectively:
“client” means the person who has instructed the representative to provide advocacy services, litigation services (within section 119 of the CLSA 1990) or claims management services (within the meaning of section 4(2)(b) of the Compensation Act 2006) and is liable to make a payment for those services;
“representative” means the person providing the advocacy services, litigation services or claims management services to which the damages-based agreement relates.
Is a Funder providing “litigation services” within these definitions? That term is defined, in section 119 of the CLSA 1990, to mean:
any services which it would be reasonable to expect a person who is exercising, or contemplating exercising, a right to conduct litigation in relation to any proceedings, or contemplated proceedings, to provide.
The reality is that a Funder may, from time to time, undertake services that a solicitor would otherwise (or additionally) provide to a client, such as undertaking due diligence checks, assessing the merits of a case upfront, and ascertaining issues regarding the enforceability of a judgment which may be obtained against the proposed defendant. Of course, it is an obligation imposed upon a Funder under the 2014 CodeFootnote 147 that in no case will a Funder be permitted to “seek to influence the Litigant's solicitor or barrister to cede control or conduct of the dispute to the Funder”. However, as that clause implies, a Funder is properly permitted to have some involvement in the dispute, but not “too much” involvement.Footnote 148
Alternatively, is a Funder providing “claims management services” within the meaning of the DBA definitions?Footnote 149 This term, according to the CLSA 1990, section 58AA(7), “has the same meaning as in Part 2 of the Compensation Act 2006 (see section 4(2) of that Act)”. Moving to Part 2 of the Compensation Act 2006 (CA 2006), section 4(2), as directed, that provides that:
“claims management services” means advice or other services in relation to the making of a claim.
For the purposes of section 4(2), the meaning of “services” is expanded in section 4(3)(a)(i) of the CA 2006 to include “the provision of financial services or assistance”. Of course, a Funder unquestionably provides financial assistance to a Litigant. If, on that basis, a Funder is taken to be providing “claims management services” as defined in the CA 2006, then an LFA is a DBA and, therefore, a Funder's activities (and the content of that LFA) would be governed by the DBA Regulations 2013 and not just by the 2014 Code.
However, in the author's view, this contention cannot be correct, for the following reasons.
C. The Contrary (and Correct) Position
Before moving to precise points of statutory interpretation, it is worth reiterating that there was no manifest intention in a number of contemporaneous key documents by which to achieve any outcome whereby an LFA could be treated as a DBA.
As a member of both the CJC's Working Party on Contingency Fees (2012)Footnote 150 and the Working Party on Third Party Funding (2011),Footnote 151 the author can unhesitatingly state that neither Working Party intended or contemplated that LFAs would be construed as DBAs or that Third Party Funders would be encompassed by either section 58AA of the CLSA 1990 or by the DBA Regulations 2013. Furthermore, when Jackson L.J. discussed the topics of “contingency fees” and “third party funding” in the report which preceded, and guided, the 2013 reforms,Footnote 152 there was no indication that there would be any interaction or overlap between them, insofar as their legislative governance was concerned. Moreover, the Government's formal response to those recommendations referred to a DBA as a “no-win–no-fee” agreement for the calculation of “the lawyer's fee” – and omitted any suggestion that it should relate to a Funder's fee too.Footnote 153 Additionally, there is nothing in the Explanatory Memorandum accompanying the DBA Regulations 2013 that would indicate that the MOJ or Parliamentary Drafting Office intended Third Party Funding to be governed by those Regulations – indeed, to the contrary, certain statements in the Memorandum confirm that DBAs would only be entered into by “qualified legal representatives”.Footnote 154 All indications are that any suggestion that an LFA could be a DBA was entirely unintended.
In any event, the principal point of statutory construction – which precludes any such unintended consequence – is that there is already a statutory regime for the governance of Third Party Funding, by virtue of section 58B of the CLSA 1990,Footnote 155 which provides, inter alia, that:
(1) A litigation funding agreement which satisfies all of the conditions applicable to it by virtue of this section shall not be unenforceable by reason only of its being a litigation funding agreement.
(2) For the purposes of this section a litigation funding agreement is an agreement under which –
(a) a person (“the funder”) agrees to fund (in whole or in part) the provision of advocacy or litigation services (by someone other than the funder) to another person (“the litigant”); and
(b) the litigant agrees to pay a sum to the funder in specified circumstances.
According to a Parliamentary Standing Committee at the time, the intention of section 58B was to provide “a comprehensive scheme by which the Lord Chancellor may authorise a person or body to offer … litigation funding agreements”.Footnote 156 Due to political inactivity, that section has never come into force and remains “prospective” only.Footnote 157 However, the important fact that the drafters of the inserted provisions in the CLSA 1990 have seen fit to separate out LFAs in section 58B from DBAs in section 58AA – in immediately adjacent, but separate, sections – is a comprehensive indication that the former were not intended to be treated as the latter.
As a second point of statutory construction, it is worth reviewing the purpose of section 4 of the CA 2006 – it is to govern the “provision of regulated claims management services” (per the heading of the section). The content of section 4(3)(a)(i), reproduced previously, must properly be read in that light. The provision of financial services or assistance, in Part 2 of the CA 2006, is specifically drafted with regulated claims management services in contemplation. Funders do not provide regulated claims management services and, on that basis, the entirety of section 4 of the CA 2006 does not apply to them.
D. A Proposal for Statutory Amendment
It is manifestly unfair to the participants in, and users of, the Third Party Funding market that any uncertainty could exist on this point where all indications are that any purported “capture” of LFAs by the DBA Regulations 2013 was entirely unintended. Funders are entitled to conduct their businesses in circumstances where an aggrieved defendant or a disgruntled client cannot bring an opportunistic piece of satellite litigation by which to “test the point”, however vainly. It is, of course, one thing for lawyers to decline deliberately to enter into any DBA while the scope and drafting of the DBA Regulations 2013 remain unclear, but it is quite another thing for LFAs to be subject to any uncertainty as a result of the DBA Regulations 2013 coming into effect.
For the sake of absolute clarity, the author suggests that Regulation 1(2) of the DBA Regulations 2013 should be amended, as per the italicised section below:
“representative” means the person providing the advocacy services, litigation services or claims management services to which the damages-based agreement relates, but excludes “a Funder” as defined in clause 2 of the Code of Conduct for Litigation Funders 2014.
This would ensure that the Regulations would exclude the entity (i.e. the Funder) – and thereby exclude, from the scope of the DBA definition, any “litigation services” that may otherwise be caught by section 119 of the CLSA 1990. An alternative drafting solution may be to amend Regulation 1(4) of the DBA Regulations 2013 as follows in italics:
… these Regulations shall not apply to:
(a) any damages-based agreement to which section 57 of the Solicitors Act 1974 … applies; and
(b) any litigation funding agreement as defined in section 58B(2) of the Courts and Legal Services Act 1990.
In summary, the author considers that any application which sought to render a LFA unenforceable because it did not meet the requirements of the DBA Regulations 2013 would be bound to fail. However, for the removal of any residual doubt in the marketplace, the matter should be rendered statutorily transparent by a suitably drafted amendment to the DBA Regulations 2013.
VI. Conclusion
Third Party Funding in England is both contentious and evolving. Full statutory regulation of its operation in this jurisdiction appears most unlikely for the foreseeable future, albeit that that topic will undoubtedly remain at the forefront of debate. Meanwhile, it must be emphasised that champerty is not a “dead letter” in English law, insofar as Funders are concerned. It is, as Lord Phillips admitted in Factortame (No. 8), an issue of “public policy, [and] the law must be kept under review as public policy changes”Footnote 158 – and it is a “developing area” of policy at that.Footnote 159 Nevertheless, this is against a backdrop of strong judicial endorsement for Third Party Funding in England. Not only did Sir Rupert Jackson remark that “third party funding is beneficial and should be supported”,Footnote 160 but modern courts have generally refused to find that an LFA is unenforceable.Footnote 161
However, the area represents one of those difficult and complex areas of jurisprudence, in which substantive law and governmental policy are closely intertwined. Given the absence of statutory regulation, the proactive review of the Code of Conduct by the ALF and the buttressing of the capital adequacy required of a Funder (or Funder's Subsidiary or Associated Entity) in the 2014 Code are very positive initiatives. But, on the other hand, the Legislature shows no inclination, as yet, to remove the Arkin cap and to compel a Funder to provide full adverse costs protection, nor to amend the DBA Regulations so as to expressly rule out an LFA from the scope of those Regulations. Both measures would enhance the legal certainty for those operating within the industry.
As the critical analysis undertaken in this article has demonstrated, both the operation of the 2014 Code of Conduct with strong supervision by the ALF together with ad hoc judicial oversight and legislative intervention where needed must play their respective parts in managing the legal conundrums which arise in Third Party Funding governance – so that “strangers to the litigation” may continue to assist Litigants to test their grievances in meritorious cases, for an acceptable price.
