The High Court has refused to strike out a claim as champertous where it had been assigned to an LLP in which the assignor had a one-third interest and which had been formed to pursue the assigned claim (and other similar claims): JEB Recoveries LLP v Binstock [2015] EWHC 1063 (Ch).

In recent years the courts have taken an increasingly liberal approach to the principles of champerty and maintenance (the ancient rules against “trafficking” in litigation) in the context of third party litigation funding. It had appeared that the principles would be applied more strictly where claims are assigned to, rather than merely funded by, a third party (as for example in the case of Simpson v Norfolk & Norwich University Hospital NHS Trust [2011] EWCA Civ 1149, outlined here). The present decision may indicate a softening of the court’s approach in that context also.

However, the assignment of claims remains a high risk strategy, as each case will turn on its facts and the effect of a finding of champerty is that the assignment will be void and the assignee will be unable to pursue the claim. It is also worth noting that the present decision may be appealed; the court said it was prepared to grant permission, if requested, given the importance of the issue.

Background

Legal background 

The House of Lords decision in Trendtex Trading Corp v Credit Suisse (1982) AC 679 HL established that the assignment of a bare cause of action will be found champertous, and therefore void as against public policy, where the assignee does not have a “sufficient interest” to justify pursuit of the proceedings for his own benefit. (Note however that there is a statutory exception for the assignment of claims vested in an insolvent company. There is also no difficulty in assigning debts, as opposed to claims for damages or other remedies.)

In Simpson, the Court of Appeal applied Trendtex in finding that the assignment of a personal injury claim against a hospital trust was void in circumstances where the assignee, a widow whose husband had died in the care of the same hospital trust, wished to pursue the claim as part of a campaign to highlight the hospital’s failings. Although the assignee had “honourable motives” in pursuing the claim, this was not a sufficient interest of the sort required by law. The court said it was not in the public interest to encourage litigation whose principal object was to pursue some object other than obtaining a remedy for a legal wrong.

Background facts 

The claim concerned an alleged debt under an alleged contract between a Mr Wilson and the defendant, under which Mr Wilson was to perform certain services relating to a proposed reverse takeover of the defendant’s business interests. Mr Wilson carried out work pursuant to the contract but no reverse takeover occurred. 

Mr Wilson and two other individuals formed the claimant (JEB) as an LLP and assigned to it certain claims against the defendant, including the present claim, for the consideration of £1. (The other assigned claims are not relevant for present purposes, as the court declined to hear them on jurisdiction grounds.) Mr Wilson undertook to provide information to JEB to assist in pursuing the claim, and to pass any monies received from the defendant to JEB.

The alleged consideration for the services provided by Mr Wilson comprised acknowledgment by the defendant of an alleged debt of £10 million said to have been due under a different contract and a monthly retainer of €10,000 plus expenses. By the Particulars of Claim, JEB sought (a) damages of £10 million; (b) amounts invoiced of €131,513.90 (after giving credit for sums paid by the defendant); and (c) “aggravated damages” of up to £2 million.

The defendant applied to strike out the claim as an abuse of the process on the grounds that it was champertous. It submitted that this was a bare assignment of a cause of action and was, or was on the brink of, litigation trafficking. The defendant also argued that to permit the claim to continue would be to allow Mr Wilson, as the subject of the claim, to “cost-proof” his litigation.

Decision

The court (HH Simon Barker QC sitting as a High Court judge) refused to strike out the claim on grounds of champerty (though the judge said he was provisionally minded, acting on the court’s own initiative, to strike out the claim for aggravated damages as groundless). He did however recognise that the application raised a point of law of some importance, and said it was therefore appropriate to grant permission to appeal if requested.

The judge accepted that a bare assignment of a cause of action has long been recognised as champertous and that, normally, an assignment of a claim in contract for damages would be likely to offend the public policy against maintenance and champerty. However, this case had a number of distinguishing features: the rights assigned were not confined to a cause of action, but included debts; and Mr Wilson remained entitled to one third of the fruits the claim, if successful, because of his one-third interest in JEB.

The position of Mr Wilson and JEB in relation to the claim was, the judge said, very different from that of the assignor and assignee in Simpson. JEB was a special purpose vehicle which had as its commercial objective the recovery of debts and claims of its partners and their families against the defendant; it had no separate purpose unconnected with the assigned claims. By contrast, in Simpson the assignee had sought to use the assigned claim to carry on a separate campaign.

Also, there was no question here of “trafficking in litigation”, as the phrase was used in Trendtex, ie a cause of action which was expected to be traded commercially between unconnected third parties. The assignors were all connected with JEB and all had a direct or indirect (through family) interest in the assigned rights or similar rights.

The judge observed that, far from the assignment cost-proofing Mr Wilson in relation to the litigation, it had made it likely that (if the claim was not struck out as champertous) the defendant would be able to get an order for security for costs against JEB, whereas Mr Wilson as an impecunious individual would not have fallen into one of the categories for which security is available. Accordingly, that should not be a matter weighing against JEB.

It was also relevant that the assignment required Mr Wilson to provide information to JEB about the rights, and Mr Wilson and his wife would be the claimant’s witnesses whether the action was brought by Mr Wilson or JEB. So it was improbable that evidence would be suppressed or exaggerated because the claim was brought by JEB.

The court concluded that permitting the claim to proceed would not put the integrity of the legal process at risk or otherwise undermine the ends of justice. Accordingly, it did not offend against the public policy underlying the prohibition of champerty.

Comment

The judge in this case cited the Court of Appeal’s observation in Simpson that the law on maintenance and champerty is open to further development as perceptions of the public interest change. He also said he bore in mind that: shortly before Simpson, the Court of Appeal (in Morris v Southwark LBC and Sibthorpe v Southwark LBC [2011] EWCA Civ 25) rejected an argument that it was champertous for solicitors acting under a conditional fee agreement (CFA) to indemnity their clients against an adverse costs order and noted that champerty was to be curtailed not expanded; and since Simpson, the rules relating to litigation funding had changed to permit damages-based agreements (DBAs) which allow lawyers to act in return for a share of damages. The judge in the present case appears to have taken the view that these developments indicate a shift in public policy, justifying a more liberal approach – particularly where (as here) the arrangement gives the defendant greater costs protection than it would have had if the claims had been brought by the original party:

“In a litigation climate where legal representatives can both share in the fruits of the claim they advance and underwrite their client’s costs risk of the claim and thereby enable an impecunious client to pursue a just claim, why should the court decline to hear, on grounds of public policy, the claim of an impecunious litigant which has been assigned to an entity in which he has an interest and which assignment creates the opportunity to open an otherwise closed door to reasonable and proportionate protection in costs on the application and for the benefit of the defendant…?”

It is not clear to what extent the decision was also influenced by the facts of the particular case, including that the assigned claims included claims in debt as well as damages, and the nature of the connection between the assignor and assignee. It would certainly be dangerous to interpret the decision as giving carte blanche to the practice of assigning claims to an SPV where they are to be pursued in the English courts  – a practice which  is more common in some other EU jurisdictions, such as Germany, where claims are in some cases being “bundled” in an SPV by claimants, to be pursued together.