The current talk of the Disputes world is funding. Litigation, third party call it what you will, funding litigation or arbitration1 is definitely of the moment, with increasing scope, both geographically and in terms of types of actions being funded.
Litigation funding is a financing arrangement in which the funder agrees to pay the client’s (who is usually, but not exclusively, the claimant party) legal fees to include experts, external counsel and other disbursements, in accordance with an agreed budget.
Funding’s evolution has increased at pace over the last 10 years’ and has come a long way since for example the 1960s and before in England, when it was considered champertous and to engage in ‘maintaining’ the litigation would be considered a criminal offence, since abolished by the Criminal Law Act 1967 (CLJ 1967).
Providing that the funder does not “control” the dispute (which may render it unenforceable s14(2) CLJ 1967), litigation funding is perfectly legal, and as seen in recent cases including Arkin v Borchard Lines Ltd2 which established that a funder’s liability would be capped at the amount of their contribution- the highly criticised “Arkin Cap” through to the 2013 Jackson LJ’s civil litigation reforms, positively encouraged by the English judiciary.
Benefits of funding
Corporate clients look to litigation funding not because they cannot afford to finance the litigation, but for a number of common reasons, including recognising that funding:
- Frees up capital to use to develop their business, rather than being tied up in the litigation/arbitration.
- Aids otherwise pressurised legal budgets.
- Enables the litigation to be taken off the balance sheet.
- Gives a ‘second opinion’ on the strength of the case; funders avoid cases they think will fail.
We are now seeing funding supporting cases previously not considered, for example arbitration both in England following cases such as Essar Oilfields Services Limited v Norscot Rig Management PVT Limited3 in which the costs of arranging the funding were considered recoverable in the arbitration, and elsewhere following the introduction of arbitration funding in Singapore, and soon to be in force arbitration funding in Hong Kong, as well in the traditional countries such as the US and Australia which for many years led the developments we now think of as imbedded.
Best practice when working with funders
- Avoid any possibility of the funder exercising control over the litigation, this is likely to render the agreement invalid and unenforceable.
- Take care to maintain legal privilege when informing funders of the merits of the claim; involving your lawyers here will help safeguard the position on privilege.
- Choosing funders who are members of the Association of Litigation Funders (ALF) is recommended. Funding is currently self-regulated, and those who are members of ALF are subject to their code of conduct (which includes provisions on identifying limits on control of case strategy, settlement approval, and withdrawal). ALF also requires its members to adhere to capitalisation requirements, and follow the ALF complaints procedure.
The future of funding
With Singapore now able to use funding in arbitration matters, to our knowledge there is now at least one funding arrangement in place, and with Hong Kong having now legalised the use of funding in arbitration, the Far East has now caught up with the international Disputes community and offers a competitive and accessible funded market.
Looking ahead, we envisage funding becoming more established in the Middle East and Latin America, particularly Brazil, where the international arbitration industry is keen to be competitive and attract parties from the more traditional jurisdictions.
In terms of sectors, we see funding becoming increasingly common in anti-competitive actions, which attract funders because of the sums at stake - particularly if involving a class action e.g. under the Consumer Rights Act 2015, or shareholder disputes, or cartel, and the high percentage that settle before trial – so reducing risk. Another likely area of growth is insolvency work. This follows the end to insolvency’s exemption from the Jackson reforms in April 2016 resulting in CFA success fees and ATE insurance premiums no longer being recoverable, making funding an even more attractive option for insolvency practitioners beyond the smaller funder claims traditionally funded.
We are also seeing the increasing funding of portfolios of cases, and ourselves look to arrange funding on this basis where possible.