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 third parties funding litigation. More recently, the courts have begun to take a more relaxed view of third party funding arrangements, except where they might tend to interfere with the administration of justice. In a June 2007 report, the Civil Justice Council recommended that third party funding should be recognised as an acceptable option for mainstream litigation.

Currently, the three principal alternative methods of litigation funding are:

A third party funding the costs in return for a percentage of any damages awarded.

After the event (ATE) insurance covering the other side's costs and own disbursements if unsuccessful in return for a premium (which may be deferred and may only be payable if the case succeeds, in which case it may be recovered from the opponent). Cover for a percentage of own party costs may also be available.

Hedging risk, where, for example, a claimant sells off a percentage of a claim in return for a fixed sum which could be used in part to fund the case.

Key issues for claimants

The availability of funding may encourage parties to bring or continue claims or defences which might otherwise have been considered too costly or too risky, though generally the funder will want to ensure it is investing in a case with good prospects. It could lead to actions which would never previously have been pursued getting off the ground. An obvious example is class actions.

There are of course potential issues for parties considering funding. Not every case will attract funding: A professional funder will review the merits of a case before deciding whether to support it, and generally will only want to take on cases that it considers have a high prospect of success. Further, such funding arrangements can be expensive for a claimant. The funder or insurer will want to see a return on its investment and that return, particularly where the party has no other source of funding and therefore is in a weak bargaining position, is likely to be substantial. Third party funders and ATE insurers will also want to have the right to remove funding if the chances of success substantially diminish.

Key issues for defendants

A defendant facing a funded case can generally assume that the claimant considers its case to have a high likelihood of success. It will also know that the financial pressures on the claimant of bringing the case have been eliminated or at least substantially reduced, provided the prospects of success do not substantially worsen.

With third party funding there is a risk that, even where successful, the defendant will not recover all its costs. A professional funder is likely to be ordered to contribute to any costs liability, where the claim is unsuccessful and the funded party is ordered to pay an opposing party's costs. As the law currently stands, however, it seems that this contribution will be limited to the amount of the funding provided (though the funder may be ordered to pay the liability in full if, for example, it has controlled the litigation). This may be of less concern where ATE insurance is in place and/or security for costs has been obtained.

Where the claimant has ATE insurance in place then, if the case is successful, the defendant will be liable for the cost of the premium (subject to reasonableness), as well as paying damages and costs.

Comment

These are early days and it remains to be seen whether the new methods of funding will change the commercial litigation landscape, In our view, however, the costs and risks involved in litigation mean alternative methods of funding are likely to grow.