Third party funding: access to justice or access to profits?

17 Jul 2017

This article was first published for Butterworths Journal of International Banking and Financial Law.

In this article P.J. Kirby QC conducts a general exploration of the third party funding
of claims and considers its advantages, the problems of champerty and maintenance,
its economics and the availability of third party funding in different jurisdictions.

Third party funding of substantial commercial litigation and international arbitration is now a regular occurrence in many jurisdictions although many litigators are aware of the theory but have little experience of the practice of third party funded actions. A significant proportion of litigation has always been funded by third parties in the form of insurers or trade unions or other interested bodies. However, the funding of litigation by commercial funders who seek to make a profit from their funding of litigation is a more recent development.

In England a distinction has been drawn between “pure funders” and “professional funders” where the former do not seek to benefit from the litigation. That distinction between “pure funders” and “professional funders” was made by the Court of Appeal in Hamilton v Al Fayed (No.2) [2002] EWCA Civ 665. The court made clear that orders for costs would rarely be made against charitable or philanthropic donors who on the information before them had reasonable grounds for believing the claim to be a reasonable one and who were supporting the claim for reasons other than commercial. That distinction may remain important when one considers the liability of third party funders for adverse costs.

Third party funding in England & Wales got a clear stamp of approval in Lord Justice Jackson’s final report on the “Review of Civil Litigation Costs” where he set out the benefits of third party funding including: ‘Third party funding provides an additional means of funding litigation and, for some parties, the only means of funding litigation. Thus third party funding promotes access to justice.’ In England & Wales third party funding is self regulated by the Association of Litigation Funders (ALF), but membership of ALF is not compulsory so calls for more formal regulation will no doubt increase as third party funding develops yet further.

International arbitration has seen a significant growth in third party funded claims many of which are particularly attractive to funders as such claims are often in excess of £10m.

The advantages of third party funding
Third party funding of litigation can have advantages for clients and lawyers. It may enable them to bring a claim which through lack of resources they might otherwise be unable to bring. Third party funding may therefore provide access to justice where the complex nature and likely expense of the substantial litigation would otherwise prevent a claim being made. There was a time when third party funders were anxious to emphasise the important role that they played in permitting access to justice and, while that is a role that can still be played, funders are in business to make a profit, so whether the claim is one that could not have been brought but for the availability of funding is ultimately of little concern to the funders’ investors.

There has been growth in the number of companies that could afford to fund the litigation or arbitration but who choose to be funded and thus keep their litigation costs off the P&L account. It may be preferable from a risk management perspective in that the company is prepared to give up a share of the proceeds because it eases cash flow and reduces the risk of having to meet adverse costs (depending on the funding agreement and/or the requirement to obtain ATE (after the event) insurance). Third party funding utilised by claimants who could have funded the litigation themselves is often referred to simply as litigation funding.

Third party funders only want to fund claims that they think will succeed so there can be an advantage in obtaining third party funding in that the funder has independently assessed the claim as one with good prospects of success.

Third party funding provides the potential to unlock claims which could not otherwise be brought. It may help the economically weaker party to get closer to a level playing field against a well funded opponent. The availability of third party funding provides a means by which unresolved claims can be pursued even if they have been dormant for some time. While the claimant, whether impecunious or not, may be giving up part of the proceeds it is still, thanks to the third party funding, in a position to recover something rather than nothing.

From the funder’s perspective it is an investment in litigation but one that obviously carries a high level of risk and requires substantial financial investment. The funder is looking to make a profit but, despite its thorough due diligence prior to agreeing to fund, it knows that there will be funded cases which will be lost and where the financial investment is wasted and where it is exposed to a liability for adverse costs.

Obtaining third party funding
In order to get a third party funder interested in the claim the claimant will normally have to provide a considerable amount of information to the funder as to the merits of the claim and the ability of the proposed defendant to meet any award. The funder will expect to see counsel’s opinion in support of the claim together with key supporting documents. The funder will want a share of the proceeds so any opinion must deal with quantum as well as merits. Putting together a properly packaged application for third party funding can be an expensive exercise in itself so normally a claimant will have some upfront investment or alternatively will require the lawyers to act on some form of conditional fee basis pending the obtaining of a favourable decision from the funder.

The funder will need to know what sums it is likely to be required to invest which will therefore necessitate the lawyers providing a detailed budget. Funders are not too keen on lawyers subsequently coming back for an increased investment if the reason why more money is needed is that the lawyers failed to budget properly the cost of the claim. Recoverability is an essential element of the funder’s decision. There is no point funding a successful claim if the defendant has no assets to meet any award.

Making a profit
Funders are not charities. They are in the business of funding claims in order to make a return on their investment. Many third party funders are or are supported by banks or hedge funds. Those investors expect a substantial return on the successful cases. The funder invests considerable resources in due diligence, in the assessment and approval process. Funders will not win all of the cases that they invest in. Anyone who has experience of litigation knows that one has to expect the unexpected and the unexpected is sometimes fatal to one’s case.

The return sought by the funder is calculated according to a percentage share of the recovery or a multiple of the sum invested. The percentage sought by the funder may vary according to the prospects of the claim succeeding and the size of the claim but typically can be in the region of 30 to 50%. The multiple will vary but can be as much as three to five times the
amount invested.

Champerty and maintenance
Champerty and maintenance are often referred to together. Champerty is closely related to the concept of maintenance. In R (Factortame Limited and others) v Secretary of State for Transport, Local Government and the Regions (no.8) [2002] 3 WLR 1104 at para 32, Lord Phillips of Worth Maltravers MR approved the following two definitions of maintenance and champerty respectively:-

‘A person is guilty of maintenance if he
supports litigation in which he has no
legitimate concern without just cause
or excuse. Champerty occurs when the
person maintaining another stipulates
for a share of the proceeds of the action
or suit.’

It has therefore been said that champerty is an aggravated form of maintenance.

The common law’s antipathy towards champerty and maintenance meant that in England & Wales and many other common law jurisdictions third party funding agreements were originally considered to be unenforceable as a matter of public policy. While the crimes and torts of
champerty and maintenance were abolished by the Criminal Law Act 1967, the Act specifically preserved any rule of law as to cases in which a contract was to be treated as contrary to public policy or otherwise illegal. The common law restriction on maintenance and champerty therefore remained as a rule of public policy. The applicable public policy is the need ‘to protect the purity of justice and the interests of vulnerable litigants’ (per Lord Mustill in Giles v Thompson in the House of Lords [1993] 3 All ER 350 at 360). The court must therefore consider whether the funding agreement ‘has the tendency to corrupt public justice’ (per Steyn LJ in the Court of Appeal at 333). A third party funding agreement can still be unenforceable if control of the litigation is relinquished to the funder.

The Court of Appeal in Excalibur Ventures LLC v Texas Keystone [2016] EWCA Civ 1144 held that rigorous analysis of law, facts and witnesses, consideration of proportionality and review at appropriate intervals were to be expected of a responsible funder and would not be
regarded as champertous. In the light of Excalibur, one can expect funders to seek a greater level of involvement in the conduct of the claim.

In some jurisdictions, such as the Republic of Ireland, champerty and maintenance continue to render third party funding unlawful and other jurisdictions, for example Singapore and Hong Kong, have had to make legislative changes to permit third party funding.

Third party funding and security for costs
If an otherwise impecunious claimant company has brought a claim with the benefit of third party funding then it is likely that the defendant will seek security for costs from the claimant. Most third party funders will expect such an application and are likely to have built into the agreement with the funded party a provision in relation to the funds that it will provide by way of security. However, a funded party will need to be aware that those funders that base their return either solely or in the alternative on a multiple of the funder’s investment will take into account the amount put up by way of security in addition to the investment in the
claim itself.

Section 38(3) of the Arbitration Act 1996 and most rules of arbitration institutions in common law jurisdictions provide that an arbitrator may order security for costs. However, the arbitrator could not order the third party funder to provide the security. In litigation in England and Wales CPR 25.14(2)(b) permits the court to make an order for security for costs against any person who ‘has contributed or agreed to contribute to the claimant’s costs in return for a share of any money or property which the claimant may recover in the proceedings’. The English court can therefore order the funder itself to provide the security.

Third party funding and adverse costs
Commercial funders are normally liable for adverse costs up to a limit equivalent to the amount that the funder invested on behalf of the funded party. This is known as the “Arkin Cap”, see Arkin v Borchard Lines Ltd [2005] 1 WLR 3055.

The Court of Appeal in Excalibur decided that normally the fortunes of the funder should follow those of the funded party so that, if that party is ordered to pay costs on the indemnity basis, then the funder will have to pay them on that basis also. While the conduct of the funder may not necessarily be subject to criticism, the funder could not normally dissociate
itself from the conduct of those that it had enabled to conduct the litigation and from whom it hoped to make a return on its investment.

The Court of Appeal also held that the Arkin Cap would include not only the sum provided for the funded party’s costs but also any amount put up by way of security for costs.

Recovery of third party funding costs
In litigation in England & Wales a successful funded party will not be able to recover from the defendant the sums it has had to pay to the funder. The position may be different in arbitration.

In Essar Oilfield Services Ltd v Norscot Rig Management Pvt Ltd [2016] EWHC 2361 the Commercial Court held that the arbitrator’s general power to award costs included the power to award the costs of the third party funding, which were “other costs” within s.59(1)(c) Arbitration Act 1996.

This decision will make third party funding of arbitration claims even more attractive to claimants as it allows for the possibility that the percentage payable to the funder (and in Essar it was a fairly standard 35%) will be recoverable from the paying party. The ICC rules would permit a similar result so the outcome is not dependent on the application of the
Arbitration Act.

Conflicts and disclosure
In arbitrations, concerns have been expressed about the possibility of conflicts of interest arising where one of the arbitrators has had links with or had cases funded by the third party funder. In many instances it will not be known whether a party is funded although tactically a funded party may well want to disclose the fact of funding. The International Bar Association
and the ICC International Court of Arbitration have issued recent guidance in relation to the disclosure of the funding to the tribunal to tackle the potential problem of conflict of interest.

Third party funding internationally
There is now a fairly mature third party funding market in England & Wales, Australia and in most of the USA, but it is important to note that third party funding is not lawful in every jurisdiction. Those common law jurisdictions that imported the common law of England & Wales will therefore have laws against champerty and maintenance. Indeed if they have not had the equivalent of the Criminal Law Act 1967 and its abolition of the crimes and torts of champerty and maintenance, then they may still be common law crimes. This has, for example, been the position in the Cayman Islands, where the only exception to date has been for claims brought by companies in liquidation.

In the very recent decision of the Irish Supreme Court in Personal Digital Telephony Ltd v Minister for Public Enterprise [2017] IESC 27 it was held that the third party funding of claims was unlawful by reason of the law relating to champerty. Any such changes had to be brought about by the legislature and not the courts. The effect of the decision was that a very substantial claim against the government could not be brought through lack of funding. This is an example of funding providing access to justice and had it been allowed to proceed and had it succeeded would no doubt have provided a substantial return for the funder.

Singapore and Hong Kong have recently introduced legislative changes to enable third party funded arbitrations to be conducted within their jurisdictions. Clearly with the advent of third party funding no jurisdiction which is seeking to hold itself out as a centre for dispute resolution could hope to capture a significant market share unless it permitted the third party funding of claims.

In most civil law jurisdictions, unless there is a law prohibiting third party funding of claims, it is assumed that the same is permitted. It is possible that professional rules may prohibit the
use of the same. The Paris Bar Council has recently confirmed that third party funding is in the interests of claimants and counsel. Again this is an example of another jurisdiction wanting to make sure that it does not miss out in the world of international arbitration.

Third party funding of claims is here to stay. While third party funding can allow claims to be brought that otherwise could not be, funders are sophisticated financial businesses that seek to make a profit from their risky investment. Parties should consider carefully the terms that
the funder is offering and also the liquidity of the funder. Third party funding will be increasingly important in substantial international arbitrations, but there may be a greater need for the rules to make clear what level of disclosure is required to avoid possible conflicts of interest. There is also the problem that in arbitral proceedings the funder, not being a party to the arbitration, can remain in the background and not have to face directly any adverse decisions.


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