The third degree

In the brave and still relatively new world of litigation funding these are uncertain and fast-moving times. Last week the Ministry of Justice backed Lord Justice Jackson's plans for a radical reshaping of civil justice. While the Jackson review could well lead to a seismic shift in our litigation landscape, the message delivered to the infant third-party funding industry was largely positive. 'I remain of the view that, in principle, third-party funding is beneficial and should be supported,' declared Jackson LJ.

The endorsement struck a slightly ambivalent note in the context of the wider package of recommendations. How would a third-party litigation funding industry co-exist with a revamped model of 'no win, no fee'? Ministers are presently consulting on abolishing recovery of success fees and after-the-event insurance, as well as introducing a ten per cent increase in general damages. They are also looking at lifting the general ban on contingency fees.

'For all the hype over third-party funding over the last few years in the legal and business press, it is early days for the industry,' comments Tom Custance, head of dispute resolution at City firm Fox Williams LLP. An emerging market in funders has been relatively quickly established '“ the latest issue of the Law Society publication Litigation Funding magazine lists 19 funders. That list jumped 20 per cent following the publication of the Jackson report.

The market is opaque and the level of activity has proved difficult to ascertain. 'It is unclear whether Jackson and the coalition government's reforms that flow from it will provide the springboard that the industry and the profession wants, or ultimately inhibit its development,' continues Custance.

Pioneering stage

According to the Civil Justice Council, since third-party funding's emergence in England and Wales in mainstream litigation, no more than 100 cases have been funded in this way. (In fact, the CJC added the following qualification: 'Some of these cases may have been pursued by other forms of funding, some may not have been brought at all.')

While potentially a hugely significant development for the legal services market, third-party funding remains a minority interest for the profession. As Kerry Underwood, chairman of Law Abroad Plc and costs expert, puts it: 'Only 100 cases have been funded in this way. There are 10,120 firms in the country. I would say that it is irrelevant to 10,110 of them.'

'We are still in pioneering stage with those pioneers trying to find their place in the market,' comments Robert Musgrove, who recently left his post as CJC chief executive. 'Funders recognise there is a lot of scope to bring in commercial litigation funding whether that is in areas where there is no funding and access to justice is inhibited, for example, an SME dispute, or where funding is used as a hedge in a large litigation dispute where it's a matter of choice for a large corporation to do it that way.'

What's the attraction to investors? 'It is a new area and potentially the return is very strong,' replies Neil Purslow, chief investment officer at the funder Therium which launched in 2009. In February, the City of London Group took a 50 per cent equity share in the company for £300,000 with a view to start a fund to invest in litigation. Purslow explains that their money comes from primarily high-net-worth individuals and says that it is 'too early' for the institutional investors in the UK.

Purslow calls litigation funding 'a completely uncorrelated asset class'. 'The great thing about it is that you can have two cases and the results will not correlate with each other, let alone with the stock market or the property market or anything else in your portfolio.'

But, as Richard Fields, chief executive of the US funder Juridica, notes, there is a fear of the unknown. 'It is new and it is complicated and they are investing in a pretty risky asset,' he says. 'The future of the industry depends on the success of those of us involved over the next few years.'

So, where does Jackson leave this nascent industry? Commentators are divided as to whether the review has cleared the ground for the mainstreaming of litigation funding or muddied the field.

'Massively positive' is the view of Harbour's Susan Dunn. 'What we lacked, other than the decision in Arkin, was a clear discussion about funding.' Devoting a chapter of the final report put the topic more firmly on the landscape, she argues.

'It's all good news,' agrees Selvyn Seidel, chairman of the US funder Burford Group. 'I am not at all concerned about any the issues raised; I think that they are all capable of being addressed. They are all manageable.'

On the other side of the debate, Kerry Underwood views the Jackson proposals as 'ill thought out and illogical', not least when he approaches the issue of third-party funding. According to the costs expert, third-party funding in an age of non-recoverability of success fees risks 'a re-run of the scandals of The Accident Group and Claims Direct' at the beginning of the last decade in the accident market (where accident victims were left penniless and many unmeritorious cases were pursued). 'Solicitors are subject to all of the professional discipline that funders are not,' he notes.

A threat to consumers?

Underwood believes that it's easy to see claims companies jumping on the third-party model (combined with the potential for external investment as a result of the Legal Services Act 2007) with the same enthusiasm with which they took advantage of the Access to Justice Act 1999 '“ and he argues with the same threat to consumers.

The preliminary findings from a research project by academics at Oxford and Lincoln Universities recorded, perhaps inevitably, that consumer groups regarded the prospect of voluntary regulation as 'inadequate'. The researchers were specifically looking at how third-party funding might impact on access to justice. One particular concern was that industry-led regulation could lead to the larger firms 'unduly monopolising the market and preventing new entrants, who may offer a consumer-focused product, from being able to enter into the market'.

'You can't predict where the market is going to go and even if you could predict it you cannot control it,' comments Crispin Passmore, strategy director at the Legal Services Board. 'When a funder becomes something other than neutral in a case, then regulators need to think that through.' (Passmore is speaking in a personal capacity '“ the new regulator does not have a policy on third-party funding).

Passmore notes a range of potential models 'some quite neutral and others more activist in terms of taking over the case. One could imagine a corporate using third-party funding to close off risk on a big litigation against itself. In that instance, there seems to be a real issue: who is the lawyer and who is the client?'

He draws a parallel between TPF and another form of funding, legal expenses insurance. 'The insurer has under its policy some sort of stake in the claim. We need to find ways of making sure that the lawyer is clear who they're acting for and that they are acting in the client's best interest. But I don't think these issues are insurmountable.'

Passmore shares Kerry Underwood's view that there is potential for the third-party funding market to gravitate swiftly from commercial claims to consumer litigation, especially with the alternative business structures (ABSs) regime coming in next October.

'There is a tendency to think of ABSs in terms of one model [for example, Tesco law]. An ABS is what it says'¦ anything 'alternative' to the standard partnership model of delivering legal services.' That could 'play out in all sorts of different ways' including 'investment firms, claims companies or third-party funders involved in family law and disputes over assets', Passmore adds.

Model for the man in the street

According to the Oxford/Lincoln study, most of the claims levels currently involved in cases paid for by a litigation funder were 'well in excess of £100,000'. 'Our findings show that although funding has increased access to justice for companies, individuals do not benefit,' comments Dr Angus Nurse from the University of Lincoln. Litigation funders operating in the UK are 'primarily corporate entities working with large funds rather than smaller funders'.

Dr Nurse reckons that models currently being developed by funders are 'thus unlikely to be used by ordinary consumers'. 'A new, different model of litigation funding needs to develop for the ordinary person in the street to benefit,' he says. Is that likely? The academic believes so. 'There is scope for extending the availability of litigation funding through an expansion of the before-the-event (BTE) market and this could develop over time possibly driven by brokers and insurers,' he argues.

He reports that there is anecdotal evidence that brokers and non-corporate funders are considering funding smaller cases with a view to developing 'a high volume, small to medium litigation funding market'.

'Our research is currently investigating this issue but a consumer litigation funding product seems almost inevitable in the future,' he adds.