According to the legal press, the litigation funding market is now worth over $1bn. The market contains well known players who are members of the Association of Litigation Funders, and other individuals and entities which are prepared to risk their capital to fund speculative litigation in a more “informal” manner.

Funders and brokers have been adept at marketing to the larger litigation firms. Clients are interested in taking litigation costs exposure “off balance sheet” in consideration for agreeing to give up a bit of the “upside” in the event the litigation is successful.

Litigation funders are therefore the friends of litigation practices. But what happens when that friend turns? Can the funders bite the hand that feeds them? And, if so, how will such claims be played out?

Funding example

Funders will conventionally agree to provide funding in exchange for a share in the fruits of the litigation recovery. The risk to the funder is that the litigation will fail and that it will lose not just the amount it has funded, but also, potentially, an equivalent amount in respect of the winner’s defence costs.

Let’s assume a client, A (an insolvent company), has a claim against a defendant. A’s solicitors, Litigation Firm, provide a bullish opinion on the merits of the claim which is endorsed by counsel.

A will use that opinion as, essentially, a proposal form to obtain funding. In breach of strict legal professional privilege, the opinion will be shared with funders and/or brokers and a discussion of the merits of the case will ensue. A funder agrees to provide funding of £2m to support the claim, potentially putting £4m of its capital at risk (ie a liability to Litigation Firm of £2m and a liability to the defendant, in the event the defendant succeeds at trial, of £2m in respect of the defendant’s costs).

The claim proceeds to trial and A loses. The trial judge criticises the conduct of Litigation Firm and counsel in bringing the claim, and wonders why it was not struck out at an interim stage given its lack of merit.

The funders then turn on Litigation Firm. They say that the opinion was negligently over-optimistic – it painted far too rosy a picture of the merits. Important facts were not disclosed (for example that a Queen’s Counsel had provided a prior adverse opinion).

What remedy does the funder have?

The funder is not a client of Litigation Firm. Accordingly, there will be no retainer documentation. A duty of care may be inferred – the relationship seems a classic Hedley Byrne scenario of an assumption of a duty of care.

The funder relies solely upon the judgment as the basis of its claim. It seeks an indemnity from Litigation Firm in relation to its liability to pay the defendant’s costs, and also seeks reimbursement of costs paid to Litigation Firm.

How will the claim pan out?

Litigation Firm is unable to rely upon its files to rebut the claim – the claim is brought by a non-client, and hence there is no automatic waiver of privilege. Only “open” documents can therefore be relied upon. What however is the status of the initial opinion? That was clearly created in an environment of solicitor client privilege, but privilege in it was waived to allow the funder to decide whether to advance funds. Can it be said that the provision of that opinion somehow constituted a broad waiver by the client of legal professional privilege generally? That seems doubtful, absent any express wording to the contrary.

In the absence of privilege being waived, how then can the firm defend itself? The circumstances are very similar to the wasted costs regime where, in the absence of a privilege waiver, the court is obliged to give the benefit of any doubt to the lawyers who cannot rely upon their file to rebut allegations made against them. The wasted costs regime has, however, very specific machinery in place – there is appellate authority that such applications are only  to be made in the most obvious of cases. There are no pleadings, witness statements etc and limited disclosure.

Should, therefore, the wasted costs regime provide some sort of protocol as to how the claim by the funder should be pursued?.

What about a liability cap? In the retainer between Litigation Firm and A, there was a liability cap of £3m and a proportionate liability clause. However, the claim brought by the funder is not a contractual claim pursuant to the terms of the retainer. Will such provisions defeat or reduce any exposure that Litigation Firm may have ?

Conclusions

The relationship between Litigation Firm and funder will be confidential and potentially different in each case. Where there are contractual documents, the ones we have seen tend to focus on the potential for the claim to succeed, and, for example, the obligations of the solicitors to disburse settlement funds in an appropriate “waterfall”. In our experience limited thought is given at the early stage to the potential risks of adverse outcomes and ways in which the firm may defend itself should the funder “turn”. Firms should be mindful of these risks and seek to put in place a regime which allows the firm to defend itself, including:

  • an express privilege waiver by the client to allow the firm to rely upon its file to rebut claims by non-client funders
  • an agreement that any limitation of liability language in the client retainer (caps, sharing of liability clauses) may be relied upon to defend a claim by a funder
  • an agreement that the funder will not seek to recover costs paid to Litigation Firm (but allowing a claim in relation to costs the funder has had to pay to the defendant). Claims by the funder against Litigation Firm to repay its own costs may not be insured by Litigation Firm’s professional indemnity insurers.