Regulation

Overview

Is third-party litigation funding permitted? Is it commonly used?

Third-party litigation funding is permitted and endorsed by the judiciary and policymakers as a tool of access to justice. Consistent with modern public policy, English courts have a generally positive attitude to third-party funding.

The Competition Appeal Tribunal (CAT) recently described third-party litigation funding as ‘a well-recognised feature of modern litigation’ that ‘facilitates access to justice for those who otherwise may be unable to afford it’ (UK Trucks Claim Limited v Fiat Chrysler Automobiles NV and Others and Road Haulage Association Limited v Man SE and Others [2019] CAT 26). The tribunal’s view underlines how far the law has changed since the days when funding another party’s litigation could constitute both a crime and a tort.

The historic, and long-abandoned, prohibition of third-party litigation funding was rooted in the ancient concepts of maintenance and champerty. Maintenance is third-party support of another’s litigation. Champerty is a form of maintenance in which the third party supports the litigation in return for a share of the proceeds.

At the start of the twentieth century, maintenance and champerty were both crimes and torts. Following the Second World War, the law on funding civil litigation changed dramatically. The introduction of legal aid in 1950 created a state-funded exception to the historic prohibition on litigation funding. Further exceptions came with the growth of insurance and trade union-funded litigation. The Criminal Law Act 1967 abolished the crimes and torts of maintenance and champerty. While those principles continue to exist in the public policy relating to litigation funding, their scope has been much reduced, and they apply nowadays largely to discourage funders from exerting undue control over the litigation that they fund. ‘No win, no fee’ arrangements between litigants and lawyers (in effect, another form of litigation funding) were introduced in the early 1990s and substantially liberalised in 2000.

R (Factortame Ltd) v Secretary of State for Transport was a case taken against the United Kingdom’s government by a company of Spanish fishermen who claimed that the UK had breached European Union law by requiring ships to have a majority of British owners if they were to be registered in the UK. The case produced a number of significant judgments on British constitutional law. In 2002, the Court of Appeal in Factortame (No. 8) [2002] EWCA Civ 932 explained that only those funding arrangements that tended to ‘undermine the ends of justice’ should fall foul of the prohibition on maintenance and champerty. In other words, reasonable litigation funding arrangements entered into with professional and reputable third-party funders who respect the integrity of the judicial process are perfectly lawful.

In its 2005 decision in the case of Arkin v Borchard Lines and Others [2005] EWCA Civ 655, the Court of Appeal was again sympathetic to the position of professional litigation funders as tools for access to justice. In a landmark ruling in 2016 (Essar Oilfields Services Limited v Norscot Rig Management [2016] EWHC 2361 (Comm)), a case funded by Woodsford, the English Commercial Court upheld the decision of an arbitrator (former Court of Appeal judge, Sir Philip Otton) to allow a successful claimant to recover its third-party litigation funding costs from the losing defendant as ‘other costs’ under section 59(1)(c) of the Arbitration Act 1996 (AA 1996).

In the case of Walter Hugh Merricks v MasterCard and Others [2021] CAT 28, the importance of litigation funding was specifically highlighted in deciding whether to grant a Collective Proceedings Order (CPO). One of the two conditions for granting a CPO is whether the applicant bringing the proceedings as the representative of the class may be authorised under Rule 78(2) of the Competition Appeal Tribunal Rules 2015. Whether a person may be authorised is contingent upon whether they can act fairly in the interests of the class and manage proceedings. Managing proceedings includes, inter alia, access to adequate funds for the proceedings. Given that the class representative had access to increased funding (following a change in litigation funder), the CAT was satisfied that the level of funding would enable the representative to sufficiently bring proceedings on behalf of the class. It is worth noting here that the CAT scrutinised the Litigation Funding Agreement between the funder and the representative for these purposes.

In March 2018, Sir Rupert Jackson, while reviewing the reforms made as a result of his 2009 report into the civil litigation costs regime in England and Wales, noted that his proposals to:

 

[P]romote [third-party funding] and introduce a code for funders have been successful. These reforms enable parties to pursue claims (and sometimes defences) when they could not otherwise afford to do so. Funders are highly experienced litigators and they exercise effective control over costs. They often insist upon having court-approved budgets. Self-evidently, these reforms promote access to justice and tend to control costs.

 

Litigation funding is now used across a spectrum of cases in England and Wales, and Mrs Justice Knowles recently considered its use in family law proceedings (Akhmedova v Akhmedov [2020] EWHC 1526 (Fam)). In Akhmedova, it was submitted to the court that the ban on conditional fee agreements in family proceedings should be applied by analogy to third-party funding. However, Mrs Justice Knowles was not persuaded, highlighting in respect of litigation funding that ‘first-instance decisions in the Family Division have concluded that (a) it is “a necessary and invaluable service in the right case” (per Mr Justice Francis at paragraph 53 in Weisz v Weisz [2019] EWHC 3101 (Fam)) and (b) that nothing should be said “that makes it even more difficult for litigants to obtain litigation funding in the future, particularly given that there is no legal aid available in this area anymore” (per Mr Justice Moor at paragraph 9 of Young v Young [2013] EWHC 3637 (Fam))’.

The third-party funding industry, which is arguably centred in London, has grown significantly in terms of the number of market participants, the capital available to them, the types of disputes that are funded and the size of investments made. Formed in 2011, the Association of Litigation Funders (ALF) now has 20 members and a recent analysis by RPC found that in 2019, the total value of cases and cash held by UK litigation funders was £1.9 billion, up 46 per cent from 2017/18.

Restrictions on funding fees

Are there limits on the fees and interest funders can charge?

Third-party funding is well established in England and Wales. There are a significant number of professional litigation funders in London, and the market is competitive. A litigant with a good case should readily be able to find litigation funding on attractive commercial terms.

Specific rules for litigation funding

Are there any specific legislative or regulatory provisions applicable to third-party litigation funding?

The voluntary Code of Conduct for Litigation Funders was facilitated by the Civil Justice Council, a government agency that is part of the Ministry of Justice of England and Wales (Ministry of Justice), on 23 November 2011. This code sets out the standards of practice and behaviour required of ALF members funding litigation in England and Wales. ALF membership is voluntary; however, most of the more long-standing, professional third-party funders in the London market have joined. In Akhmedova, Mrs Justice Knowles specifically noted Burford’s membership of the ALF, highlighting that litigation funding ‘practised by a funder adhering to the Code of Conduct has been endorsed by the senior courts in robust terms’.

The ALF code of conduct includes provisions ensuring the capital adequacy of funders, the limited circumstances in which funders may be permitted to withdraw from a case, and the roles of funders, litigants and their lawyers.

In UK Trucks Claim Limited v Fiat Chrysler Automobiles NV and Others and Road Haulage Association Limited v Man SE and Others, the CAT described the ALF code of conduct as ‘a voluntary code’, but that in their view it was ‘wholly unrealistic to suppose that a leading litigation funder that is commercially active in this field would not honour these commitments to the Association of which it is a founder member, and thus place at risk the whole regime of self-regulation’.

Legal advice

Do specific professional or ethical rules apply to lawyers advising clients in relation to third-party litigation funding?

The Solicitors Regulation Authority (SRA) Standards and Regulations are made up of the SRA Principles, which comprise the fundamental tenets of ethical behaviour that underpin all areas of legal practice for solicitors and the SRA Codes of Conduct for solicitors and firms. The code of conduct for solicitors applies to UK practitioners, registered European lawyers and registered foreign lawyers, and establishes a framework for ethical and competent practice to which individual practitioners are personally accountable for compliance with the code. The code of conduct for firms describes the standards and business controls expected of firms authorised to provide legal services. The codes contain a number of provisions relevant to solicitors and firms advising on funding. These include sections relating to ‘Maintaining trust and acting fairly’, ‘Service and competence’, ‘Conflict, confidentiality and disclosure’ and ‘Referrals, introductions and separate businesses’. Solicitors should advise litigants on all reasonable funding options, including insurance and third-party funding. A failure to do so could result in sanction by the SRA, and, potentially, also liability for professional negligence.

Regulators

Do any public bodies have any particular interest in or oversight over third-party litigation funding?

The ALF, founded in November 2011, is an independent body charged by the Ministry of Justice with delivering self-regulation of disputes whose resolution is to be achieved principally through litigation procedures in the courts of England and Wales.

The ALF administers self-regulation of the voluntary code of conduct for Litigation Funders that are ALF members and it also maintains the complaint procedure to govern complaints made against members by funded litigants.

In addition to ALF membership, several funders in England and Wales (including Woodsford) are now also members of the International Legal Finance Association (ILFA), formed in September 2020. ILFA members must agree to uphold the association’s ‘Best Practices’, which include avoiding conflicts of interest and a commitment to maintaining appropriate capital adequacy.

Most professional litigation funders in London are staffed by solicitors and other professionals (eg, chartered accountants) who will ordinarily be regulated by their professional bodies.

Also, litigation funding necessarily exists in the context of litigation or arbitration proceedings, in which the involvement of the court can provide an additional source of oversight. By way of example, in collective proceedings in the CAT, funding arrangements are likely to be reviewed and scrutinised by the tribunal as part of the certification process. This was the case in Walter Hugh Merricks v MasterCard and Others [2021] CAT 28.

In January 2017, Lord Keen of Elie, speaking on behalf of the UK government, stated that the market for third-party litigation funding continued to develop well and that he had no concerns about the activities of litigation funders. While the UK government continues to keep the industry under review, it remains of the view that the ALF voluntary code of conduct works well, and that there is no need for statutory regulation for third-party litigation funding.