i Legal overview
In England and Wales, over the past three years, there was no decided case to rival the influence on third party funding (TPF) of the 18 November 2016 Court of Appeal decision in the costs appeal in Excalibur Ventures LLC v. Texas Keystone Inc,2 in which Lord Justice Tomlinson said: 'Litigation Funding is an accepted and judicially sanctioned activity perceived to be in the public interest.'
However, on 28 November 2019, a judgment by the President of the Competition Appeals Tribunal (CAT) of potentially equal significance was handed down, dealing with the costs and funding issues involved in two Trucks Cartel cases in the CAT, cited on the CAT website3 as UK Trucks Claim Limited v, Fiat Chrysler Automobiles NV and Others and Road Haulage Association Limited v. Man SE and Others  CAT 26.
The judgment contains an exhaustive review of the litigation funding agreements (LFAs) and after-the-event (ATE) insurance arrangements deployed by two different, independent funders in applications to the CAT for collective proceedings orders (CPOs), the first such review of any such arrangements by an English judge. This was in the context of the requirement for the CAT to assess the adequacy of the applicants' funding arrangements, in respect of both their own costs and their ability to meet the other side's costs, each of which was exhaustively challenged at the June 2019 hearing by the respondents' counsel.
The judgment contained three main statements that were highly supportive of TPF.
First, in the overall context of collective proceedings in the CAT, the judge blessed TPF by saying that 'The regime of collective proceedings introduced into the CA for competition claims by the Consumer Rights Act 2015 is dependent on TPF for its success, since there will be few cases where the class members will themselves be able to fund their claims.' This echoed similar comments by the judge in his earlier judgment in Merricks v. Mastercard Incorporated & Ors (Mastercard).4
Second, the judge conferred a further degree of judicial approval of litigation funding: 'TPF is a well-recognised feature of modern litigation and facilitates access to justice for those who otherwise may be unable to afford it.'
Finally, the judge adopted a markedly constructive and positive tone in relation to the Code of Conduct of the Association of Litigation Funders of England and Wales (the ALF Code)(see Section II).
On the admirably transparent CAT website, interested readers will find hearing transcripts, judgments, orders and a summary of the claim forms from those two cases. Readers will also find reference there to two more recent applications in funded cases for opt-out CPOs in Michael O'Higgins FX Class Representative Limited v. Barclays Bank PLC and Others and Justin Gutmann v. London & South Eastern Railway Limited.
I will return to funding issues arising in some of these cases and in the CAT generally later in this chapter.
ii Market overview
The significance of TPF in legal markets continues to grow. Use of TPF by both litigants with in-house advisers and those advised by outside counsel increases year on year.
This is against the background that England and Wales (effectively London for these purposes) is the most expensive and the riskiest litigation market in the world. The sheer expense of London High Court proceedings for the largest cases is driven by the combined effect of exhaustive pre-action procedures, exacting requirements for written pleadings, ever-increasing disclosure demands during discovery, the fervent belief of the judiciary in lengthy oral evidence and cross-examination, and the development of the £1,000-per-hour QC. All this complexity drives eye-watering expense, made worse by the absence of court-driven budgeting from the largest cases, which could be said to need it most, and by the absence of a fully functional contingent fee regime; however, some progress should now be made on contingent fees following the publication of the findings and recommendations of the Damages-Based Agreements Reform Project at Queen Mary College, which has effected a redrafting of the 2013 Damages-Based Agreements Regulations in an attempt to resolve the difficulties that arose under them.5
Then there are the risks contained within the adverse costs implications of losing a case in this jurisdiction, which can more than double the cost for claimants and funders of a case that is unsuccessful. This was graphically illustrated by the Excalibur case, where Excalibur's various inexperienced funders were found to be jointly and severally liable for adverse costs of nearly £32 million, quite apart from the money they lost in funding the claimant, who was defeated.
Needless to say, these risks are invariably priced into the decision at the outset of whether to proceed, on both the part of the claimants, who wish to manage and hedge the expense and costs risks, and of the litigation funders, who are being asked to provide the capital to enable the management and hedging of those risks.
No wonder then that essentially all research into the factors that have led to the growth of TPF identifies the need to manage the financial risk of litigation. Costs management is an urgent issue both for litigants and for the lawyers advising them.
II LEGAL AND REGULATORY FRAMEWORK
i The London TPF market
The market for the funding of large-scale litigation and arbitration in England and Wales is still dominated by the 10 funder members of the Association of Litigation Funders of England and Wales (ALF). At the time of writing, the funder members of the ALF were Augusta Ventures, Balance Legal Capital, Burford Capital, Calunius Capital, Harbour Litigation Funding, Innsworth Litigation Funding, Redress Solutions, Therium Capital, Vannin Capital and Woodsford Litigation Funding.
Other funders are active in England and Wales, including global hedge funds, funders whose operations are based overseas, and family offices, all mostly on an opportunistic basis.
ii A historical perspective
The TPF industry aimed at the funding of litigation in England and Wales has developed within the context of the underlying common law on maintenance and champerty and the associated risks to which funders of litigation are exposed in delivering TPF to clients.
In the 2013 Harbour Litigation Funding Annual Keynote Address6 by Lord Neuberger of Abbotsbury, then president of the UK Supreme Court, there is an authoritative and comprehensive account of the history of maintenance and champerty and TPF's gradual escape from their prohibitions in this jurisdiction
In brief, the business model that currently operates for litigation funders in England and Wales began to be delineated following various Court of Appeal decisions from around 2002 until 20057 (which made it clear that, within certain boundaries, the provision of funding by third parties for litigation in England and Wales would not necessarily offend against maintenance and champerty), then the publication in January 2010 of Lord Justice Jackson's immensely influential Review of Civil Litigation Costs (the Jackson Report),8 and subsequently the formation of the ALF.
The subject of TPF took up just eight pages of the Jackson Report in January 2010. However, that afforded Sir Rupert plenty of scope to bestow a generous blessing on litigation funding, which he saw as 'beneficial', because, in summary, it not only promoted access to justice without necessarily imposing financial burdens on defendants, but also filtered out unmeritorious cases.
iii Regulation in England and Wales
Today, in England and Wales, the ALF is the instrument by which the funding of litigation through TPF is subject to voluntary regulation. Voluntary regulation is a mechanism that is widely recognised by government and others as providing a viable regulatory framework as an alternative to statutory regulation, especially when, as in the case of TPF, no statutory body has ever put itself forward or been nominated for the purpose by government. The classical model for voluntary regulation is that industry professionals, with sponsorship from government entities, develop voluntary standards and codes of conduct to regulate standards, subjecting themselves to a complaints procedure of demonstrable independence. Thus the ALF delivers voluntary regulation of the TPF industry in England and Wales by means of the ALF Code backed by an independent complaints procedure that is available to any person or entity who has entered into an LFA with a funder member of the ALF. Copies of the ALF Code and the ALF's complaints procedure can be found on its website.9
iv The ALF Code
The ALF Code provides various protections to litigants who contract with the ALF's funder members. The CAT in the Trucks Cartel case placed a marked degree of reliance on the ALF Code, not only in judging the adequacy of a claimant's ability to fund its own costs, but also in assessing the effectiveness of the adverse costs protection offered in the funding arrangements.
The ALF Code delivers on the Jackson Report's desire to see 'a fair balance' between the interests of funder and funded client by requiring funders to behave reasonably. It does so by providing that funders must:
- take reasonable steps to ensure that the funded party shall have received independent advice on the terms of the LFA;10
- not take any steps that cause or are likely to cause the funded party's lawyers to act in breach of their professional duties;11
- not seek to inﬂuence the funded party's lawyers to cede control or conduct of the dispute to the funder;12
- maintain adequate financial resources to meet their funding obligations;13
- not include in any LFAs a right to terminate the LFA at the pure discretion of the funder.14 The right for a funder to terminate an LFA as and when it pleases is seen as a potential short cut to control of the claim, control by the funder being the principal of the vestigial elements of maintenance and champerty that can still void an LFA;
- behave reasonably in exercising rights to terminate for material breach of the LFA by the funded party or because the claim is no longer viable, if such rights are included in the LFA. This is achieved by requiring funders to give litigants the contractual option of going to an independent QC for a binding opinion if the reasonableness of the funder's behaviour comes into question in the context of such terminations;15 and
- in relation to approval of settlements, the LFA must state whether (and if so how) the funder may provide input to the funded party's decisions in relation to settlements. In practice, all funders will insert into their LFAs a right to be consulted about any settlement opportunities that may arise during a funded case. This is part of the funder's need to ensure that funded claims are always conducted in an economically rational manner. In the event that there is a dispute about a settlement, either party may take the dispute to an independent QC for an opinion that would bind both funder and funded party.
iii Structuring the agreement
The essence of a typical LFA, beyond the terms required by the ALF Code, is a clear promise in writing by the funder to pay the claimant's legal costs of its claim in return for a share of the proceeds, provided the case is successful. Each side gives undertakings to the other; the claimant gives warranties (e.g., that independent legal advice has been taken and all material facts have been disclosed) and undertakes duties, such as to pursue the claims 'with the due care and diligence of a prudent business person' and to produce, for example, monthly reports to the funder. The funder promises to pay the claimant's legal costs up to the amount specified in the LFA and as particularised in a legal costs budget, which is usually scheduled to the LFA.
The funder may also promise to indemnify the claimant against any order for adverse costs to which the claimant may become subject. However, it is important to mention here that, as we shall see, in England and Wales, a funder may be liable for the adverse costs of a failed claim, whatever the LFA may say.
The LFA will often contain a period of exclusivity during which the funder can conduct its initial due diligence before exercising its rights contained in the LFA to elect to proceed with funding of the case or to withdraw.
A conventional LFA will be supported by a trust deed, often called a priorities agreement, which creates a cash waterfall governing the order in which parties to the transaction are entitled to be paid. The parties will include the funder and the claimant and, perhaps, an ATE insurer, if such insurance was taken to deal with the adverse costs risk, and the lawyers if they were on some form of contingent fee.
There may be a need for further collateral documents. If the funded party is corporate, then the funder might wish to take security, but only over the proceeds of the claim, bearing in mind that the transaction is non-recourse other than to the proceeds. The circumstances of some LFA transactions may also require a creditors' and shareholders' standstill agreement, at which point the transactional documents begin to have a corporate finance feel to them.
A funder's evaluation of a claim for funding will invariably involve comprehensive disclosure to the funder by the claimant's legal team of the evidence in the case, including documents protected from disclosure to the defendants by legal advice or litigation privilege. From the points of view of both the funded party and the funder, it is essential to ensure that disclosure to the funder does not cause the loss of the protection from disclosure to the defendants that is conferred by the privileged status of the evidence.
There are a number of generally accepted principles at work in this difficult area that apply equally to litigation and arbitration.
First, it is absolutely essential for the funder and claimant to enter into a comprehensive non-disclosure agreement (NDA) at the outset of their discussions.
Second, the fact of the existence of an LFA and the identity of the funder will never in themselves be privileged information, although, subject to what is said later about the effect of the Rules of the Competition Appeals Tribunal 2015 (the CAT Rules 2015) on these issues, the detailed terms of the LFA will almost certainly include much content that would conventionally be regarded as privileged.
Third, the principle that a common interest exists between an insurer and its insured has been usefully imported to the world of TPF. If privileged evidence is disclosed to a third party, the evidence might cease to be confidential, and, if so, any privilege in it would normally be regarded as waived. However, where the person entitled to the privilege and the person to whom the evidence is disclosed have a common interest so that the sharing of the evidence is entirely consistent with its confidentiality, then privilege is unlikely to be regarded as having been waived. Establishment of the common interest in writing is one of the vital functions of the NDA between the claimant and the funder.
In England and Wales, there is little in the way of legal precedent on privilege specific to TPF but the law is widely regarded as well established, in accepting that claimants should be able to share evidence with funders, under an NDA that establishes a common interest, without waiving legal advice or litigation privilege.
Another aspect of confidentiality relevant here is disclosure of the fact that a claimant is funded, which in England and Wales is an area where practice differs between arbitration and litigation.
The principal (perhaps only) reason for the vigour of the debate in the arbitration community about disclosure of the existence of funding is the potential in arbitration for conflicts of interest between third party funders and arbitrators, particularly if an arbitrator has sat in a number of cases where the claimant has been funded by the same funder or if the funder is funding another case in which the funded claimant is represented by that arbitrator's law firm. Funders are very much alive to the destructive potential of these conflicts and will normally do their utmost to avoid taking on cases where such conflicts might exist.
Issues of this kind could never arise in litigation in the civil justice system in England and Wales, so the controversy is confined to arbitration, where existing rules of the ICC, LCIA, SCC, ICSID, UNCITRAL and many others make up an alphabet soup of procedural requirements through which funders and funded parties alike must navigate their disclosures most carefully.
This is a preliminary word on the interrelationship between the principles relating to a funder's direct liability for adverse costs and the courts' practice when deciding security for costs applications.
There are two particular complications of the law in this area; the first is that, while the question of the nature and extent of liabilities of litigation funders for adverse costs is strictly applicable only at the stage when costs are ordered to be paid, its effect is often considered at a security for costs stage. Then in the context of funders' involvement in security for costs, there is further complication involved in the interrelationship between, first, the statutory costs scheme under Section 51(3) of the Senior Courts Act 1981 and the related provisions of the Civil Procedure Rules and, second, the contractual arrangements on the claimant's side between the funder and the claimant in the LFA itself and, in turn, the details of their contractual relationship with any adverse costs insurer.
i The funder's liability for adverse costs
In England and Wales, Section 51 of the Senior Courts Act 1981 provides that: 'The court shall have full power to determine by whom and to what extent the costs are to be paid.' This enables a court to order costs against a provider of TPF where it has funded litigation on behalf of the losing party. The early authorities established that the ultimate question is whether in all the circumstances it is just to make a non-party costs order.
In Excalibur, Lord Justice Tomlinson expressed the principle thus: 'justice will usually require that, if the funded proceedings fail, the funder or funders must pay the successful party's costs'.
In Arkin (cited above),16 Lord Phillips MR held that commercial funders should only be liable to pay the costs of opposing parties to the extent of the funding that they had provided: the 'Arkin cap'. However, the part of his judgment that funders have (perhaps conveniently) forgotten went on to say that the Arkin cap would only apply where a commercial funder was just financing a part of the costs of the litigation.
In Excalibur, Lord Justice Tomlinson said of the Arkin decision: 'I understand that some consider the solution thus adopted to be over-generous to commercial funders, but that is a debate for another day upon which I express no view.' Others, including Sir Rupert Jackson in his report, have also voiced criticism of the Arkin cap. So the current meaning of the Arkin cap might be no more than the fact that when a funder invests in a case that goes all the way in the High Court in London the financial risk of loss will be at least twice the amount of the investment in claimant costs, because of adverse costs.
In Excalibur, Lord Justice Tomlinson also ruled that payments to the claimants towards their security for costs liability were a relevant expense when considering the extent of a non-party costs order. He declined, however, to rule on whether the adverse costs consequences of any funder's insurance arrangements for security for costs should be measured by their value (e.g., the limit of indemnity under an adverse costs insurance policy) or by their costs (e.g., the amount of the premium paid for such insurance).
The Court of Appeal judgment in Excalibur is also authority for two important further propositions in this area:
- that a commercial funder will ordinarily be required to contribute to the defendants' costs on the same basis as the funded claimant. Therefore, if a claimant has been ordered to pay costs on the indemnity rather than standard basis, the funder will be liable to indemnity costs irrespective of its own conduct, but, possibly, subject to the Arkin cap; and
- that an order for adverse costs may be made not only against the funder named in the LFA but also against a third party that provided those funds and stood to benefit in the event of success, in that case the funder's parent company, thus providing the potential to pierce any funder's corporate veil.
In arbitration, on the other hand, it is generally taken that an arbitral tribunal lacks jurisdiction to issue a costs order against a funder of the arbitration.17 This is because only the parties to the dispute being arbitrated are within the jurisdiction of the tribunal, normally by virtue of their being parties to a contract or through the terms of a treaty. This leads many respondents to arbitration to make applications for security for costs, as to which see below.
ii The question of security for costs
In the High Court, security can be ordered against a claimant if, in all the circumstances, it is just to make such an order, the claimant is resident out of the jurisdiction or there is any other reason to believe that the claimant, wherever situated, will be unable to pay the defendant's costs if ordered to do so.
In funded cases where the claimant is insolvent, an adverse costs insurance policy with a sufficient level of indemnity is often advanced by claimants and their funders, whereupon defendants will often challenge the insurance policy as inadequate. The governing principle taken from Premier Motorauctions v. PwC and another18 is that resolution of these issues is fact-sensitive. Currently, however, a pattern is emerging from the decisions subsequent to Premier Motorauctions as to two particular categories of objection to such insurance policies. First, there is the question of the extent of the rights of the insurer to avoid or otherwise to terminate the policy as a consequence of misrepresentation or non-disclosure, which has led to a general requirement for the insurance to contain suitable anti-avoidance provisions. Secondly the defendant may wish the court to assess the risk to the defendant of not actually receiving the money, due, for example, to insolvency of the claimant or exclusion of the Contracts (Rights of Third Parties) Act 1999, considerations that may require assignments to be undertaken between the claimant, the funder, the insurer and the defendant.
These principles are subjected to an interesting practical analysis by the President of the CAT at Paragraphs 79–109 in his recent judgment in the Trucks Cartel case referred to above (see Section I).
An application may also be made for security for costs directly against a professional TPF provider as it was recently in RBS Rights Issue Litigation.19
In the RBS case, the judge listed various factors that should be taken into account when deciding on whether security for costs should be ordered against a funder, such as whether its motivations were commercial or altruistic and whether there is a real risk of non-payment by the funder, such as that perceived by the judge as 'deliberate reticence' by one of the funders in that case, Hunnewell BVI. In the event, Hunnewell BVI was ordered to provide security for costs.
The judge also ordered RBS to give a cross-undertaking to pay the claimants' costs of posting security in accordance with the order, saying, 'though not commonplace or inevitable, I do not think it should be considered particularly exceptional for the court to require a cross-undertaking as the price of an order for security'.
In arbitration, applications for security for costs are generally decided on the basis of the party's impecuniosity or its inability to pay if costs were to be awarded against it at the conclusion of the proceedings.20
The impecunious claimant may then produce evidence of funding and submit to redacted disclosure of the LFA under which the TPF arrangements have been made. The attention of the tribunal and the respondent will be focused on the LFA's provisions on the funder's termination rights and the funder's obligation to cover adverse costs. Disclosure orders are normally limited to those parts of the LFA.
If an arbitral tribunal decides that a security for costs order is warranted, it can order security for costs in various ways; by production of a funder indemnity or ATE insurance, or, in exceptional circumstances by way of a bank guarantee. The tribunal will normally order a defendant for whose benefit the security for costs is granted, to pay the costs reasonably incurred by the funded claimant in complying with the order for security in the event that the claimant eventually prevails.
vi The Year in Review
Collective proceedings under the Consumer Rights Act 2015 and the CAT Rules 2015
On 1 October 2015, a class action regime was introduced to facilitate private actions against anticompetitive conduct, through a combination of the Consumer Rights Act 2015 and the supporting court rules of the CAT. The regime enables a representative claimant to act on behalf of a class of persons whose grievances share common issues of fact or law with the representative claimant.
The first two applications made for CPOs in the CAT under the new procedures both sought opt-out CPOs in follow-on damages claims – the first in relation to mobility scooters, and the second in relation to interchange fees on Mastercard credit cards. Each application was (in May and July 2017 respectively) refused by the CAT, in each case on the basis that it not persuaded that the claims were suitable to be brought in collective proceedings. Although the specific reasons were different in each case, the CAT's essential objection on both occasions was that the methodology suggested by the applicants' economic experts for calculating the losses incurred by members of the group was not appropriate. In other words, the applicant was unable to satisfy the CAT that it had a robust method for estimating (even broadly) the aggregate amount of damages owed by the defendants to the members of the class. The first instance judgment in Mastercard21 was successfully appealed at the Court of Appeal (with the substantive judgment on appeal to be found at Merricks v. Mastercard Incorporated & Anor).22 The Supreme Court has given leave for a further appeal and that appeal is now listed to be heard on 12 and 13 May 2020.
Readers will recall that, at the beginning of this chapter, reference was made to two applications to the CAT for CPOs in the context of the Trucks Cartel, for which the CAT's judgment on their respective funding arrangements was handed down in November 2019. Those applications were originally made subsequent to the first instance judgment but prior to the Court of Appeal's ruling. The determination of the substantive applications in both cases, covering issues beyond funding arrangements, stand adjourned because matters to be determined by the Supreme Court in Mastercard are likely to determine how the hearing of the Trucks Cartel CPO application will be conducted (for example, whether expert witnesses and others will be cross-examined), and the standard of proof the CAT should apply in determining other CPO applications.
During the hearings related to the funding issues in the Trucks Cartel cases, the funders concerned had to come to terms with the unique requirements of the CAT Rules 2015 and I make no apology for turning to the most basic provisions of those Rules to explain how they have changed the expectations of funders in this area, particularly regarding disclosure of issues relating to funding.
Under Rule 78(1) of the CAT Rules 2015, the CAT may authorise an applicant to act as the class representative in collective proceedings if the CAT considers it just and reasonable for the applicant to act as such.
Under Rule 78(2), in determining whether it is just and reasonable for the applicant to act as the class representative, the CAT shall consider, inter alia, whether the applicant would act fairly and adequately in the interests of the class members and would be able to pay the defendant's recoverable costs if ordered to do so.
Under Rule 78(3), in determining whether the proposed class representative would act fairly and adequately as above, the CAT takes into account all the circumstances, including whether the proposed class representative has prepared a plan for the proceedings that satisfactorily includes, inter alia, any estimate and details of arrangements as to costs, fees or disbursements that the CAT orders that the proposed class representative shall provide.
It is now clear that these simple provisions require the disclosure of matters hitherto regarded by funders as privileged and confidential. Complete, unredacted copies of LFAs, their supporting documents and suites of ATE policies are now expected to be disclosed to the CAT so that it can determine whether to grant the CPO applications. Cartelists' counsel can (and do) pick through the fine print and subject the funding arrangements to a level of potentially destructive scrutiny that would never be allowed in other courts in this or in other jurisdictions.
The results of the appeals and fresh applications in all cases before the CAT are eagerly awaited by litigation funders active in England and Wales in the knowledge that the level of transparency about funding imposed in the CAT may soon be the model for other courts in England and Wales and in other jurisdictions.
vii Conclusions and outlook
The obvious conclusion from this chapter is that expansion of TPF in England and Wales is likely to continue, fuelled by more capital, growing awareness and greater uptake of the opportunities.
In general, the expansion prospects for TPF seem assured. There is certainly no shortage of well-resourced would-be investors, seeking access to experienced investment managers with a TPF track record. The investment class is non-correlated, with an increasingly convincing record of high returns for investors who are willing to tolerate its illiquid character.
The future of TPF in England and Wales still seems assured.
1 Leslie Perrin is chairman of Calunius Capital LLP.
2 Excalibur Ventures LLC v. Texas Keystone Inc  1 WLR 2221 (CA).
4 Merricks v. Mastercard Incorporated & Ors  CAT 16 (21 July 2017), at para. 127.
6 'From Barretry, Maintenance & Champerty to Litigation Funding',
7 Including R (on the application of Factortame and others) v. Secretary of State for Transport, Environment and the Regions (No. 2)  EWCA Civ 932 and Arkin v. Borchard Lines Ltd & Others  EWCA Civ 655) (Arkin).
10 Para. 9.1.
11 Para. 9.2.
12 Para. 9.3.
13 Para. 9.4.
14 Para. 12.
15 Paras. 11–13.
16 See Section II.ii, footnote 6.
17 See Chapter 6, Principle C.4 of the ICCA-Queen Mary Report.
18 Premier Motorauctions v. PwC and another  EWCA Civ 1872.
19 RBS Rights Issue Litigation  EWHC 1217 (Ch).
20 See the ICCA-Queen Mary Report, Chapter 6, Principles D.1 to D.3.
21 Merricks v. Mastercard Incorporated & Ors  CAT 16 (21 July 2017).
22 Merricks v. Mastercard Incorporated & Anor  EWCA Civ 674 (16 April 2019).