Regulation

Overview

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

Yes. Third-party litigation funding is permitted, and endorsed by the judiciary and policymakers as a tool of access to justice. While English law continues to discourage funders from ‘controlling’ the litigation that they fund, the courts have a generally positive attitude to third-party funding.

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 of 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 only 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 UK government by a company of Spanish fishermen who claimed that the United Kingdom had breached EU law by requiring ships to have a majority of British owners if they were to be registered in the United Kingdom. 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, the Court of Appeal was again sympathetic to the position of professional litigation funders as tools for access to justice (see question 18).

In a landmark ruling in 2016 (Essar Oilfields Services Limited v Norscott Rig Management [2016] EWHC 2361 (Comm)), 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 2017 case of Walter Hugh Merricks v MasterCard & Others [2017] CAT 16, while the Competition Appeal Tribunal rejected class certification (see question 16), the Tribunal stated that it would have approved the litigation funding arrangements in that case. In keeping with the dominant trend of judicial comment on both sides of the Atlantic, Mr Justice Roth and his colleagues on the bench spoke in positive terms about litigation funding, noting ‘a range of extrajudicial material which recognised the importance of third-party funding in enabling access to justice’. They said that it should not be difficult for a tribunal to work out what a reasonable litigation funding return should be, not least because there is ‘now a developing market in litigation funding’.

In March 2018, Lord Justice 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 ‘promote [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.’

Third-party funding is now a well-established and commonly used part of the English litigation landscape, which is judicially recognised as controlling costs and promoting access to justice. 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.

Restrictions on funding fees

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

Third-party funding is now well established in England and Wales. There are a large number of professional litigation funders in London, and the market is competitive. From a commercial perspective, therefore, there is a lot of downward pressure on funders’ success fees. A litigant with a good case should readily be able to find litigation funding on attractive commercial terms.

In addition to the competitive limit on a funder’s success fee, the principles of maintenance and champerty arguably apply in order to render unenforceable litigation funding arrangements where, even if the litigant’s case is wholly successful, the funder’s return is significantly greater than the litigant’s return.

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 members of the Association of Litigation Funders (ALF) 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. The Code 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.

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) Handbook is made up of two parts: the SRA Principles, which are mandatory principles and underpin all areas of legal practice, and the SRA Code of Conduct 2011. This Code sets out an outcomes-focused regulatory system for solicitors and establishes mandatory outcomes that must be achieved in appropriate circumstances in order to comply with the SRA Principles. The Code contains a number of provisions relevant to solicitors advising on funding. These include, chapter 1 on ‘client care’, chapter 3 on ‘conflicts of interest’, chapter 6 on ‘your client and introductions to third parties’, chapter 9 on ‘fee sharing and referrals’ and chapter 11 on ‘relations with third parties’.

It is accepted that solicitors have an obligation to 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 actively engages with government, legislators, regulators and other policymakers to shape the regulatory environment for dispute resolution funding.

The ALF has been charged with administering 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.

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 relevant court or tribunal will have oversight.

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.