A recent claim in the UK by the liquidator of Stone & Rolls against City accountants Moore Stephens has focused attention on litigation funding.

The concept of litigation being funded by a non-party is not new; the past decade has seen the growth of after-the-event (ATE) insurance, and the spectacular collapses of some companies set up to service that growth, such as Claims Direct and The Accident Group.

However, whereas with ATE the ultimate funder’s remuneration is by way of insurance premium, in litigation funding the funder has a financial interest in the outcome of the litigation. The funder will pay a claimant’s legal costs and indemnify the claimant against an adverse costs order, in return for a proportion of the proceeds of the litigation.

Such arrangements have traditionally been considered contrary to public policy. However, a framework for the concept exists (section 58B Courts and Legal Services Act 1990, inserted by section 28 of the Access to Justice Act 1999). This is yet to be implemented but, if and when it is, litigation funding agreements will be enforceable provided certain conditions are satisfied.

In this respect the English jurisdiction, for better or worse, lags behind others. In certain Australian states, common law doctrines, which had previously been thought to prohibit litigation funding by a non-party, have been abolished. Further, in a recent Australian High Court case (Campbells Cash & Carry Pty Ltd v Fostif Pty Ltd [2006] HCA 41) the court stated there is nothing objectionable, in principle, to litigation funding schemes. There is a view in Australia that litigation funding lends itself to group litigation, which tends to be expensive. Traditionally, group litigation has been self-funded, by pooling the funds of claimants in equal or weighted contributions (the latter giving an opportunity for a defendant to exploit the different financial interests of group participants). Litigation funding, if it becomes available, will remove cost as a potential inhibitor for potential claimants in group actions.

So who should be concerned? In terms of insurance exposure, experience in Australia suggests that litigation funding is particularly relevant to directors’ and officers’ insurance, there being a high incidence in Australia of class actions commenced or threatened by shareholder groups in Australia against companies and/or the former officers of collapsed companies.

Similarly, as the Stone & Rolls case indicates, auditors and their professional indemnity insurers should also be concerned. If litigation funding develops, and if the Australian experience is followed, we may see a growth here in group litigation following corporate collapses