A complex beast - but does litigation funding need taming?

The basis on which they had worked together for many years was now in question. This was not a challenge to the principles behind funding but a very precise examination of a hotchpotch of legislation. As the dust settled, however, the import of the decision became clear; litigation funders provided “claims management services” and therefore some funding agreements were unenforceable. Now the decision is to be reversed by statute to restore the status quo ante. PACCAR, along with other events, has, however, brought political attention to litigation funding and its role and further legislation may follow.

Litigation funding has grown as an investment asset class alongside the growth in contingency work for lawyers. Contingency work has its modern roots in the legislative and common law changes of the late 90s. The Woolf reforms and the consequent Access to Justice Act 1998 bedded in lawyers working on a ‘no win, no fee’ basis. At the time, the change was directed towards personal injury claims to replace legal aid which had been removed from the great bulk of such claims. The changes were hot rodded by the revolution that allowed the recovery of the lawyers’ success fee and the premiums for adverse costs insurance cover (ATE). Although these changes applied widely initially, it was only in civil claims arising out of insolvency that we saw widespread use of contingency and, in due course, funding.

Both were challenged by defendants, but the Courts endorsed the changes by reining back the common law principles of champerty and maintenance to ensure the new arrangements could work to ensure clients and lawyers were able to use the new arrangements to the full.

As lawyers started to meet the potential of the reforms and increase access to justice, they looked to ways in which the risk they took could be shared with funders, providing the vital capital to run larger and more complex cases against defendants only too willing to use their deep pockets to protract and exhaust claimants in lengthy litigation, as the Post Office did against the sub-postmasters.

Three major events then boosted the developing contingency funding market: the Global Financial Crisis in 2008/09, which gave rise to massive international claims requiring financing; the reforms of Lord Justice Jackson in 2013, which removed the recoverability of ATE premiums and the lawyers’ success fee; and the reforms to group Competition claims, introducing an opt-out process for mass claims. All three highlighted the necessity for the litigation funding industry to provide essential capital to run cases that claimants (and lawyers) simply did not have the capital to run.

The changes in contingency arrangements and the legal market’s response to it, both lawyers and funders, developed in a fairly haphazard way, which was the root cause of the problems that arose in PACCAR, deriving from a convoluted statutory picture, the consequence of which was a statutory interpretation by the Supreme Court had not been in the contemplation of the drafters. The picture now painted by the Supreme Court, in short, made funding agreements that provided for a percentage return of the damages for the funders, unlawful. The litigation funding industry and claimant lawyers reacted quickly, amending agreements so that they are paid on a multiple of the funding provided, thus taking them outside the DBA Regulations. Despite the Courts now approving these amendments, a swathe of satellite litigation over past agreements has resulted.

The Government soon saw that the existing legislative framework had unintended consequences and agreed to add to legislation going through Parliament to correct the error. As the new section was debated, some MPs sought to widen the scope of the changes but were met with arguments that such changes were outside the scope of the Bill. Around the same time, the Post Office scandal was hitting the headlines again. One element of focus was the vital part that litigation funding had played in ensuring that the sub-postmasters had been able to match the financial weight that the Post Office had thrown at seeking to defeat the claims in every possible procedural way. The publicity and strength of feeling that was created by the Post Office scandal convinced the Government that making some small amendment in a passing Bill did not match the enormity of the issue and it has now announced the restoration of the position prior to PACCAR would be the subject of a separate and fresh legislation. We have yet to see the Bill but Alex Chalk, the Lord Chancellor, suggested its primary purpose will be to undo the Supreme Court decision.

At the same time, Alex Chalk also suggested the Government will look separately at possible regulation of the litigation financing sector. Neither practitioners nor funders have concerns about regulation as a principle, but red tape for the sake of red tape should be avoided. The Association of Litigation Funders has long had a code of practice, which includes, for instance, capital adequacy i.e., a guarantee for the client and lawyers that the funder is good for the money and can fund a case to the end. Members of ALF have already said that regulation that reflects the Code of Practice would be welcome.

In collective actions before the Competition Appeal Tribunal, those funding these claims are already subject to detailed scrutiny by the Tribunal and the Tribunal takes a fairly hands on approach in seeking changes to terms where it sees fit. Further, under the CPR, funders are often required to provide security for costs usually in the form of an ATE policy against the potential adverse costs liability they may face if the claim is unsuccessful.

The concern, however, is that regulation will go further, reflecting moves in other jurisdictions. In Australia, there has been an ongoing debate about regulation of funders the mood for which alters depending on the government in power. In Germany, the return for funders is, for certain types of consumer claims limited to 10% of the proceeds. For funders, having that limit will no doubt cause them to withdraw from that market. In the EU, a German MEP introduced proposals to regulate third party funding. This gained some purchase and is now with the European Commission to determine whether it will introduce a Directive. The Voss proposals are wide ranging and include a cap of 40% on returns for funders.

It remains to be seen what the UK Government means when it refers to regulation but no doubt there would be much debate about any proposals to cap returns. Funders will say that it is simply not possible to price finance by statute because each case has different moving parts that will determine what the litigation funding market will bear; as with all investments, the greater the subjective risk, the higher the price. But litigation funding is not an isolated form of investment. It must compete with all investments and, indeed, deposit interest rates. In order to attract money to a highly risky product, funding must compete with commensurate returns. Statutory caps may introduce a rigidity that will have a substantial effect on offerings and returns, causing investors to pull back. What then for access to justice?

As, funding expert, Professor Rachael Mulheron, said at a recent conference, regulation of funding is a complex beast and needs deep thought before launching into legislation.

David Greene and Natasha Pearman, Co-President and Treasurer of The Collective Redress Lawyers Association

Photo by Wilfried Wittkowsky