The Third Party Litigation Funding Law Review: United Kingdom - England & Wales
The third party funding (TPF) industry has continued to flourish in this jurisdiction, with more participants than ever and, as a result of self-regulation and increased client support, it has shed the stigma of yesteryear. The value of court cases and cash directly held by UK litigation funders increased 400 per cent in the past five years, from £378 million at year end 2015 to £1.9 billion last year.2
Also entering the litigation funding market are law firms themselves, such as DLA Piper-owned Aldersgate Funding, to provide their clients with alternative ways to manage their legal expenditure. Over recent years, we have also seen the rise of the alternative business structure (ABS), allowing external investment and for non-lawyers to have a financial stake in a law firm. This year we saw PCB Litigation LLP opt for the ABS structure, to enable an equity stake from funder Burford.
Litigation funding has also assisted in the emergence of litigation boutiques in cities outside London, particularly in Liverpool. PGMBM (formerly SPG Law), for example, is utilising funding to bring large-scale consumer claims against Daimler AG (or Mercedes-Benz), Volkswagen, British Airways and other major multinational corporations. Another new Liverpool-based law firm, Provenio Litigation, this year launched a £50 million fund to assist clients minimise the burden of carrying the legal expense of high-value claims.
This is all despite England and Wales being one of the most expensive litigation centres in the world, and made worse by the absence of a fully functioning contingent fee regime. The Damages-Based Agreements Regulations (the DBA Regulations) have faced heavy criticism and caused considerable uncertainty, with the government accepting that damages-based agreements (DBAs) are actually rarely used.3 The scant detail of the DBA Regulations has a twofold logic: that only qualified legal representatives subject to professional body rules will use them; and that failure to comply with them renders a DBA unenforceable. Progress has been made in this regard through an independent review conducted by Professor Rachael Mulheron and Nicholas Bacon QC, whose findings and recommendations have effected a redrafting of the 2013 DBA Regulations.4
The adverse costs regime in this jurisdiction also presents a significant risk to claimants and funders alike, as was illustrated by the much-cited Excalibur case,5 where inexperienced funders were found jointly and severally liable for adverse indemnity costs to the tune of £32 million. The Arkin cap was applied,6 but included in it was the £17 million provided to Excalibur to enable it to provide security for costs, which the judge decided was an investment in the claim, akin to the money provided to pay the claimant's costs.
Factors such as these all play into the commercial risk assessment performed by the funder and are invariably priced into the decision on whether to proceed made by the claimant who wants to hedge his or her risk and the funder who wants to share in the win.
Legal and regulatory framework
i The Association of Litigation Funders
The market in England and Wales is largely dominated by 10 of the Association of Litigation Funders' (ALF) members – Augusta, Balance Legal Capital, Burford Capital, Harbour, Innsworth, Omni Bridgeway, Redress Solutions, Therium, Vannin Capital and Woodsford Litigation Funding.7 Outside the ALF, other well-known names in the market include Bench Walk Advisors, Litigation Capital Management, Manolete and Orchard, and certain other global hedge funds and family offices.
It should be noted that most, if not all, of the judgments that have taken issue with a funder's approach or the litigation funding agreement have concerned non-ALF members. By contrast, the courts have generally endorsed the ALF and the approach taken by its members.
ii A historical perspective
TPF in England and Wales has developed against the backdrop of the modernisation of the common law principles of maintenance and champerty, the scope of which is now limited through statutory amendment and case law.8 For a funding arrangement to amount to maintenance or champerty, it would have to constitute 'wanton and officious' meddling, for disproportionate control or profit, or a clear tendency to corrupt justice. Various Court of Appeal decisions from 2002 and 20059 made it clear that properly provided TPF would not offend maintenance and champerty rules, which, followed by Lord Jackson's influential costs review, cemented the position.
iii Regulation in England and Wales
The ALF is the independent body appointed by the Ministry of Justice to deliver self-regulation of litigation funding in England and Wales. The ALF's stated aim is to ensure best practice and ethical behaviour among litigation funders, working to improve the use and application of litigation funding as part of the rational management of financial risk in dispute resolution and actively shaping the law and regulation of TPF.
The current English legal framework consists of the Code of Conduct for Litigation Funders (the ALF Code), its supervision by the ALF and periodic judicial oversight of funding arrangements and agreements, all of which are considered below. Copies of the ALF Code and the ALF's independent complaints procedure can be found on its website.10
iv The ALF code
The Code of Conduct for Litigation Funders in England and Wales was first published by the Civil Justice Council (an agency of the UK's Ministry of Justice) in November 2011, to address the concerns around what was then a new industry. The Code delivered on the Jackson reports' recommendation for self-regulation of TPF and a desire to see 'a fair balance' between the interests of funder and funded client. The Code was subsequently revised and updated first in 2014 and again in 2016.
The ALF Code provides various protections to litigants who contract with the ALF's funder members and it has received judicial endorsement, most recently in the Competition Appeal Tribunal (CAT).11 The ALF Code requires funders to:
- maintain adequate financial resources to meet their funding obligations. All funder members of the ALF must have a minimum of £5 million of capital (a figure set to rise in due course) and are verified by a third party as able to cover their liabilities for 36 months;
- take reasonable steps to ensure that the funded party shall have received independent advice on the terms of the litigation funding agreement (LFA);
- not take any steps that cause or are likely to cause the funded party's lawyers to act in breach of their professional duties;
- not seek to inﬂuence the funded party's lawyers to cede control or conduct of the dispute to the funder;
- not include in any LFAs a right to terminate the LFA at the pure discretion of the funder (as this is seen as a potential shortcut to control of the claim);
- 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 through a mechanism in the LFA, referring such a decision to an independent QC for a binding opinion; 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. Funders will include a right to be consulted about any settlement opportunities that may arise during a funded case to ensure the claim is being conducted in an economically rational manner. In the event of a dispute about settlement, an independent QC may give a binding opinion.
Structuring the agreement
i The litigation funding agreement
The essence of most LFAs is the funder's promise to pay the claimant's legal costs in exchange for a share in the proceeds, should the claimant win. Conditions to the funding will be set out in the LFA, such as obtaining an insurance policy to cover adverse costs or obtaining the necessary corporate authorisations from the claimant. Both parties give undertakings to the other; in the claimant's case that it has obtained independent advice on the funding documents and as to the veracity of factual information it has provided on applying for funding. The claimant also undertakes to devote the necessary time and resources in pursuing the claim in good faith. The funder agrees to pay the claimant's legal costs in accordance with the agreed budget (ordinarily in the form of a Precedent H appended to the LFA).
An LFA will generally be supported by a priorities deed, which sets out the order of payments on a successful outcome between the funder, claimant and, depending on the circumstances of the case, the after-the-event (ATE) insurer and lawyers instructed on a contingent fee agreement.
There may be a need for further collateral documents. The circumstances of some funding transactions may require a creditors' and shareholders' standstill agreement or, if the funded party is a corporate, the funder may wish to take security over the proceeds of the claim, bearing in mind that the transaction is non-recourse other than to the proceeds. This type of security has come to particular prominence in the wake of covid-19 and the ensuing financial turbulence that corporates may face (beyond the litigation) during the lifetime of their claim.
ii Representative actions
Beyond the considerations in a 'typical' LFA, a growing body of jurisprudence on third party funding issues is emerging from the collective actions (class actions) regime in the CAT, especially in the context of opt-out claims. These issues have come to the fore as defendants have attacked LFAs in an attempt to undermine the class certification process. These attempts have largely been unfruitful, in part because funders have been allowed to amend the LFA following guidance from the CAT in response to arguments brought by defendants. Nonetheless, the jurisprudence highlights specific areas that may influence both the terms and conditions a funder includes in its LFA, as well as potentially the corporate structure through which a funder provides the funds. More fundamentally, the emerging jurisprudence on these issues underlines the role that the CAT plays in determining what are appropriate funding terms and structures, regardless of what a funder may have agreed with a prospective class representative, as well as the critical role that funding plays in the certification process.
One consideration regarding funding would be the question of where a funder's return on investment sits in the waterfall of payments upon success. While cash waterfalls in collective action claims can still be agreed between the funder and other parties who may be entitled to some contingent fee (e.g., lawyers and ATE insurers), this cannot be to the detriment of class members. Funders must take care to not impose obligations on the class representative to pay a share of the proceeds to the funder before distribution to interested class members has taken place.12 A similar principle has been adopted in the EU's forthcoming Collective Redress Directive for consumers and it will be interesting to see whether this has any influence on funding considerations for the courts in the current crop of representative actions currently being tested outside the CAT, in the High Court.13
Another consideration is the proactive use of redactions and applications for confidentiality rings, to keep aspects of the LFA confidential. In contrast to LFAs used outside the CAT's collective action regime, where disclosure of the LFA terms is limited (as discussed below), a class representative in a proposed collective action needs to file a copy of the LFA at the CAT as part of the application for a collective proceedings order. Most LFAs in collective proceedings to date have been heavily redacted, of which the CAT has been especially critical.
Finally, it is worth noting that, in the Trucks litigation, the CAT endorsed both the ALF and the ALF Code; in particular, as an objective basis for ALF-member funders to demonstrate their ability to meet their financial commitments under an LFA (although the different corporate structures utilised by the two funders in that case (Therium and Calunius) raised different considerations for the CAT on this point). It is understood that in subsequent opt-out claims funded by non-ALF members, the funders have nonetheless agreed to comply with the ALF Code in their LFAs.14
Inevitably a funder's assessment of a claim involves significant disclosure of documents to the funder by the instructed legal team, including documents covered by legal advice or litigation privilege. The cloak of privilege enables a party to withhold potentially sensitive and commercial material from its opponent and the court. For all parties, it is essential to ensure that disclosure to a funder does not cause the loss of the protection afforded by any privileged status.
There are principles established in this area, which assure lawyers and claimants that privilege is preserved. If documents are shared on an expressly confidential basis, this will either preserve privilege entirely or will be construed as a strictly limited waiver for the specific purpose of securing funding. Alternatively, a claimant can most likely rely on common interest privilege to preserve rights of this kind. Common interest privilege arises where a person confidentially discloses a document to a third party in recognition of an interest they share in its subject matter or in litigation in connection with which the document was produced.
While there are robust authorities confirming the principle that where a party shares a privileged document with a third party in confidence that party does not lose privilege, sharing of documents with a funder is done under a non-disclosure agreement, as well as pursuant to confidentiality provisions in the LFA.
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.
There is no clear requirement under the Civil Procedure Rules nor any statutory requirement to notify other parties of the fact that a claimant is funded. It may occasionally be possible for an opponent to seek an order for the disclosure of the identity of the funder if the opponent can satisfy the court that the claimant is funded and there is an arguable application for a non-party costs order, which would be made but for the uncertainty of the target. In practice, disclosure of the funder may also be granted when a security for costs application is being considered, irrespective of whether there is a pre-existing costs order in the proceedings15 and despite the nature and extent of the adverse costs liability of the funder strictly only being applicable when costs are ordered to be paid.
In arbitration, party appointment of arbitrators can give rise to potential conflicts of interest where an arbitrator has a relationship with a funder involved in the case, which has led to some debate about the disclosure of the existence of funding therein. In arbitration proceedings, the funder has to navigate the particular disclosure requirements of the existing rules of the given institution, be it the ICC, LCIA, SCC, ICSID, UNICITRAL, and so on.
i The funder's liability for adverse costs
In England and Wales, under Section 51 of the Senior Courts Act 1981, the court has full power to determine by whom and to what extent costs are to be paid. This enables a court to order costs against a provider of TPF where that provider has funded litigation on behalf of the losing party, irrespective of what has been agreed pursuant to the LFA. The early authorities established that the ultimate question is whether in all the circumstances it is just to make a non-party costs order. The Arkin cap,16 which effectively kick-started litigation funding in 2005, was the principle that commercial funders should only be liable to pay the costs of opposing parties to the extent of the funding that they had provided (that is, unless the agreement was champertous). The Court of Appeal considered access to justice would not be achieved if funders were deterred by the prospect of unlimited costs liability, but that it would not be fair to successful defendants if costs did not follow the event. The Arkin cap has since been the subject of considerable debate, with some considering the solution overgenerous to commercial funders.
As mentioned above in Excalibur, Lord Justice Tomlinson 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 ATE policy) or by their costs (the premium paid). The Court of Appeal judgment also established that (1) a funder will be required to contribute to the winning defendant's costs on the same basis as the claimant, be it standard or indemnity; and (2) a non-party costs order could extend to a party unnamed in the LFA, provided that party stood to benefit in the event of success.
That the Arkin cap is by no means the rule was confirmed in Davey,17 where the High Court disapplied the cap and provided useful commentary. When the claimant was ordered and unable to pay adverse costs on an indemnity basis of £7.5 million, the court made a non-party costs order against the funder. The funder sought to rely on the Arkin cap to reduce its liability to an invested £1.3 million. In refusing to do so, Justice Snowden exercised his general discretion as to costs under Section 51 of the Senior Courts Act 1981, with several considerations for TPFs:
- The funder's involvement was as a self-interested commercial investor. During the course of proceedings, it had halved its investment but maintained the same share of the proceeds. The Court looked at not only how much the funder had invested, but also how much it stood to gain.
- The funder was aware the claimant could not meet an adverse costs award of that order, which was to be far in excess of the funder's investment.
- The judge refused to hold the funder responsible for costs incurred before the funding agreement was in place.
On appeal by the funder, the decision at first instance was upheld and the decision not to apply the Arkin cap was confirmed.18 While Davey emphasised the need for adequate adverse costs protection for both claimants and funders, in effect this is reinforcing existing practices.
In arbitration, it is generally taken that an arbitral tribunal lacks jurisdiction to issue a costs order against a funder of the arbitration. This is because only the parties to the dispute being arbitrated are within the jurisdiction of the tribunal, by virtue of the contract or through the terms of a treaty. This leads many respondents to arbitration to make applications for security for costs.
ii The question of security for costs
In the High Court, payment into court or provision of a bond or guarantee or an insurance policy can be ordered against a defendants as security for an opponent's legal costs. An order will be made if the Court determines that in 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 so ordered.
In the case of an impecunious or insolvent claimant, an adverse costs insurance policy with a sufficient level of indemnity is often advanced in defence. Whether this is adequate is a developing area of the law. The governing principle taken from Premier Motorauctions v. PwC and another19 is that resolution of these issues is fact-sensitive. The extent of the insurer's right to avoid or otherwise terminate the policy is a focus of these developments, which has led to a requirement for suitable anti-avoidance endorsements from insurers or a stand-alone deed of indemnity from the insurer to the defendant, or both of these.
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 commercial TPF provider, as was successfully done against Hunnewell BVI recently in RBS Rights Issue Litigation.20 Here the judge listed the factors to be taken into account when deciding whether security for costs should be ordered against a TPF provider. These included whether there was a real risk of non-payment by the funder (as was the case here, on account of one of the funders' perceived 'deliberate reticence'), or whether the motivations were commercial or altruistic. In this case, the judge also considered whether the defendants ought to give a cross-undertaking to pay the claimants' costs of posting security, which it was determined should not be considered exceptional. The circumstances in which TPF providers may be ordered to provide security for costs was explored in detail earlier this year, in the Ingenius21 litigation, which were claims brought by several hundred claimants against various defendants to recover investment losses. The defendants made an application for security for costs against the funder in respect of both claimants it was funding and those it was not. Somewhat unsurprisingly, the application did not get much traction insofar as the self-funded claimants were concerned.
Given the nature and seriousness of the wide-ranging allegations of fraud in the case, when assessing the level of security to be awarded, the judge factored in the increased prospect of costs being awarded on an indemnity basis. No financial information about the funder was put in evidence and it was understood that the funder would have to call on its investor to contribute. That there were some wealthy claimants among the group did not mitigate the risk of the defendants failing to get paid. As well as having four ATE policies in place, the funder had also provided a contractual indemnity to a set of claimants. The argument that a combination of the wealthy claimants' resources and the ATE cover would have covered the claimants' potential cost liability did not stick, as the ATE policies were not designed as security for costs and there were concerns they would not respond. In addition, the ATE policy contained a provision whereby equivalent proceeds from the policy were to be held on trust by the claimants for the funder if the funder was required to give security. So in circumstances where the court ordered the funder to cover any ATE shortfall, this could be recovered from the claimants' ATE proceeds, thereby reducing the overall cover available for the defendants' costs.
The judge resolved to attribute percentage values of the relevant policies as security and also allowed the full value of the funder's indemnity, with the upshot of this being that the funder was ordered to provide approximately £4 million of security.
Also of note to TPFs was the court's decision not to order a cross-undertaking from the defendants for any loss the claimants would suffer on a successful outcome as a result of the increase in committed funds because of the security for costs order against the funder. The judge took the view that it was simply a matter of reallocation of the proceeds under the LFA – between the claimants and funder. 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. The claimant can then produce evidence of its funding arrangement and the tribunal will focus on the funder's right to terminate under the LFA and its obligation to cover adverse costs, with disclosure orders generally limited to those provisions.
Should the tribunal decide security for costs should be granted, this can be done by way of a funder indemnity, ATE policy or occasionally by bank guarantee. The defendant will normally be required to pay the costs incurred by the funded claimant in complying with the security, if the claimant eventually wins.
The year in review
Despite the rise of TPF in England and Wales, it is not often that a judgment is handed down that deals directly with funding issues; however, 2020 has been a notable year for us all in this regard.
We have seen the Arkin cap weaken – certainly not a rule to be applied automatically and now likely to be limited to cases where a funder has provided finance for only a limited aspect of the case.22 Although, cynically, the Arkin cap could not have confidently been relied upon and so the practical effect of the decision is limited.
In another case this year,23 instructed solicitors did not tell the funder they had received pessimistic advice from counsel regarding the prospects of the claim. While funders have no control over proceedings, they do expect to be kept abreast of key developments. However, the funder's claim was dismissed because of a poorly drafted LFA, which failed to include free-standing reporting obligations on the solicitor, nor was there any basis for implying such an obligation.
In Ingenius, the High Court demonstrated that it will take an active role in coming to a principled and thorough determination as to how security of costs should be awarded in complex mass litigation involving different claimants with different funding and ATE arrangements. It will scrutinise an ATE policy to determine whether it constitutes adequate security and, if so, to what extent. Nevertheless, the decision demonstrates that if the claimant is able to obtain an appropriately worded ATE policy, the sums awarded as security can be significantly reduced.
A common thread throughout these cases is the courts' emphasis on the individual context of a given case. The TPF funding industry has also received considerable encouragement from the judiciary, with Justice Knowles in Akhmedova v. Akhmedov urging caution against 'undesirable satellite litigation to investigate funding arrangements in circumstances where the claim is bona fide and the inquiry into funding arrangements would afford no defence to the claim'. This case serves as a reminder that where a claim is pursued with litigation funding advanced in accordance with the ALF Code, there is limited scope for a defendant to complain or seek to obtain the details of the funding arrangement.24
In the same vein, the CAT's encouraging commentary on the ALF Code in Trucks still stands, with the defendants being refused permission to appeal in that case.25
Conclusions and outlook
The TPF market in England and Wales is ever expanding, with no shortage of well-resourced investors enticed by the increasingly convincing record of non-correlating high returns for those who are willing to play the longer game and risk the losses.
The range and sophistication of funding products and structures has broadened and the uptick in awareness and the use of TPF has brought about greater judicial scrutiny of funding arrangements. Litigation funding is no longer solely about single case funding, but its ambit is far more wide reaching, with portfolio funding, the funding of law firms, case assignments or acquisitions and more.
TPF is now an established feature of the litigation landscape in this jurisdiction, and in these uncertain times with a slowed economy, we can only predict the demand for it to increase.
1 Simon Latham are investment managers at Augusta Ventures.
2 Analysis of total assets held on the balance sheets of the top 15 largest UK litigation funders, using data from Companies House and annual reports produced by Reynolds Porter Chamberlain LLP and dated 17 March 2020.
3 Ministry of Justice, Post-Implementation Review of Part 2 of LASPO, February 2019, https://www.gov.uk/government/publications/post-implementation-review-of-part-2-of-laspo.
5 Excalibur Ventures LLC v. Texas Keystone Inc  1 WLR 2221 (CA).
6 Arkin v. Borchard Lines Ltd and others  EWCA Civ 655.
7 Calunius is also a funder member of the ALF but is no longer investing in new cases.
8 'From Barretry, Maintenance and Champerty to Litigation Funding', https://www.supremecourt.uk/docs/speech-130508.pdf.
9 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).
11 UK Trucks Claim Limited v. Fiat Chrysler Automobiles NV and Others and Road Haulage Association Limited v. Man SE and Others  CAT 26.
12 Merricks v. Mastercard Incorporated & Ors  CAT 16.
13 Richard Lloyd is bringing a US-style (opt-out) class action against Google in the English courts, relying on the representative claims procedure set out in Civil Procedure Rule (CPR) 19.6. He brings his claim on behalf of more than 4 million Apple iPhone users for data breaches: Lloyd v. Google LLC  EWCA Civ 1599. YouTube is also facing a representative action brought in the High Court for allegedly breaching the privacy and data rights of under-13s in the UK.
15 Re Hellas Telecommunications (Luxembourg)  EWHC 3465 (Ch).
16 Arkin v. Borchard Lines Ltd and others  EWCA Civ 655.
17 Davey v. Money  EWHC 997 (Ch).
18 ChapelGate Credit Opportunity Master Fund Limited v. Money and others  EWCA Civ 246.
19 Premier Motorauctions v. PwC and another  EWCA Civ 1872.
20 RBS Rights Issue Litigation  EWHC 1217 (Ch).
21 Rowe v. Ingenious Media Holdings PLC & Others  EWHC 235 (Ch).
22 ChapelGate Credit Opportunity Master Fund Limited v. Money and others  EWCA Civ 246.
23 Hall v. Saunders Law Ltd & Ors  EWHC 404 (Comm).
24 Akhmedova v. Akhmedov  EWHC 1526 (Fam), dated 12 June 2020.
25 UK Trucks Claim Limited v. Fiat Chrysler Automobiles NV and Others and Road Haulage Association Limited v. Man SE and Others  CAT 28.