The advent of litigation funding is a dramatic development in the UK commercial litigation landscape and of real importance to retailers.

Litigation funding is the means by which third parties – such as banks, hedge funds or private equity – pay a claimant’s legal and other costs of bringing an action, in return for a share of the winnings, if the claim succeeds.

For many years under English common law, ancient rules of “maintenance” and “champerty” – designed to prevent third parties from profiting from litigation in which they had no legitimate interest – were thought to prevent litigation funding. More recently, the courts have begun to take amore relaxed view, tolerating third party funding arrangements except where they cause an abuse of process (eg, where the third party funder causes inappropriate steps to be taken in the all-out pursuit of success in the claim). The Civil Justice Council recommended in its June 2007 report that third party funding should be recognised as an acceptable option for mainstream litigation.

This market has taken off in Australia over the past few years. According to a paper produced for Australia’s attorneys general last year, there were five litigation funders operating, one of which (IMF) was listed. In 2003, IMF won a AU$60million settlement from Philip Morris and British American Tobacco over a licence dispute with tobacco retailers.

Another litigation funder, IMLitigation Funding (IML) launched itself spectacularly on the UK market at the end of last year when it supported a US$194 million action on behalf of creditors of Stone & Rolls against accountants Moore Stephens. It is paying for a City law firm to represent the claimants in that case. IML claims to have looked at about 400 cases and says it takes on cases which it considers have a 70% chance of success. It believes it has completed 40-odd cases, with a similar number pending. It generally takes one third to three quarters of the winnings on a successful claim. While it invests funds of its own, it also introduces third parties such as banks and hedge funds in about 15% of its cases. IML’s chairman is the experienced insolvency practitioner Christopher Morris (of BCCI fame).

Hedge funds and others have followed IML into this market and are offering a variety of funding packages directly to claimants.

Litigation funding will enable supply chain counterparties, consumers, employees and others with potential claims against retailers to bring claims where previously theymight not have been able to owing to a lack of resources. To those likely to be on the receiving end of externally-funded claims, a small consolationmay be that third party funders ought to think carefully before taking cases on because they can bemade liable for the defendant’s costs where the claimfails.

It remains to be seen whether parties who do have the means to bring a claim will use litigation funding to hedge part of their costs exposure.