On 20th May 2013, Mr David Donaldson QC, sitting as Deputy Judge of the High Court, gave Judgment in a case between Harcus Sinclair (a Firm) v (i) Buttonwood Legal Capital Limited (“BLC”), (ii) Rylatt Chubb (a Firm), (iii) Alternative Real Estate Fund Limited and (iv) Roskill Advisors (Cayman) Limited. The case focussed upon whether BLC, a company specialising in third party litigation funding, had been previously entitled to terminate its funding of a commercial court action being brought by the Third and Fourth Defendants (collectively “AREF”), and what should therefore happen to certain monies held in escrow by Harcus Sinclair on behalf of BLC.
Privacy restrictions imposed on the publicity of the Judgment have now been lifted.
It can now be reported that BLC was held by Mr Donaldson to be entitled to terminate its funding arrangements, that it had validly done so, and that the escrow monies were therefore ordered to be repaid immediately to BLC.
This is the first reported case to consider termination of third party litigation funding agreements since the arrival of the new Jackson regime, which came into force on the 1st April 2013. This Judgment not only confirms that courts will enforce the terms of commercial third party funding agreements between the relevant parties, but also underscores the fact that a funded party and their solicitors should be fully cogniscent not only of their respective rights but also of their obligations under the funding agreement, to understand and observe a funder’s right of continuing review and the advisability of claimants working to keep a funder appraised of a case’s developments.
This case concerned monies held in an escrow account by the Claimant firm as part of a litigation funding agreement (the “Agreement”) under which monies were loaned by BLC to AREF, Cayman companies, to pursue a claim against First Rand Bank in the Commercial Court. That litigation concerned a claim by AREF against First Rand Bank for their alleged withdrawal as a “cornerstone investor” in one of AREF’s investment projects.
The key question for the court was whether the Agreement had been validly terminated in January 2013 pursuant to a clause in the Agreement permitting unilateral termination where “in the reasonable opinion of the Lender the prospects of success are less than 60%”.
Further issues arose, if BLC were entitled to terminate the Agreement, as to BLC's liability, if any, as funder, to pay fee requests made of it both before and after the termination, and also whether provision of a sum by way of security for costs in the First Rand proceedings was still a liability of BLC.
A condition of funding under the Agreement was that the prospects of success of the underlying funded case continued to exceed 60%. Initially at the outset of funding in 2011 a short counsel’s opinion was submitted, described as a ‘preliminary view’ so as to ‘enable potential backers to decide whether to put up sufficient funds’. More formal advice was anticipated to be provided to the funders as the case progressed.
In 2012, BLC repeatedly requested provision of an updated counsel’s merits advice in respect of the underlying proceedings. BLC did not receive what they had repeatedly requested and eventually, in November 2012, gave notice to AREF's solicitors that they would seek their own independent counsel's review of the prospects of success of the funded case.
In the period November 2012 to January 2013, the counsel instructed by BLC received a number of papers and requests for further information that were relayed to AREF's solicitors. Not all of these requests were responded to by AREF's solicitors. A draft and then a final opinion were issued by BLC's independent counsel which stated that, on the available evidence, the prospects of success were less than the minimum threshold allowed for in the Agreement. BLC considered the ongoing funding issue in light of this advice and ultimately decided to terminate the Agreement. That decision was communicated to AREF's solicitors immediately afterwards on 8th January 2013.
It was argued by AREF that the opinion arrived at by BLC was not ‘reasonable’ as they had not had sight of all relevant materials. The judge held that whilst there may have been further information that could have been made available by AREF to BLC, and in spite of BLC’s requests for any and all materials to be made available to their counsel, this information was not disclosed in a timely manner, or at all. On that basis, Mr Donaldson held that the opinion arrived at by BLC’s counsel, and BLC’s termination based upon that opinion, was reasonable.
A claim that BLC was estopped from terminating the agreement was also dismissed.
As it was established that the agreement had been terminated, it was also held that the two release requests for solicitor’s fees and disbursements which were filed after the date of termination were not due or payable by BLC.
On the issue of any payment to be made in respect of an order for security of costs to be given in the underling proceedings, it was held that the appropriate form of request required under the contract had not been made prior to termination. As an exercise of judicial discretion, specific performance of any obligation to pay would not be ordered as, pursuant to the termination, AREF had obligations under the Agreement to repay to BLC all monies previously loaned to them.
Accordingly it was held that all relevant monies in the Harcus Sinclair escrow account be returned to BLC in accordance with the terms of the relevant Undertaking.
There are a number of changes imposed under the Jackson Costs Reforms which put litigation funders at the forefront of options for a litigant in pursuing a claim in court. Alongside the introduction of Damages Based Agreements new and innovative ways of funding litigation are being introduced to the market to enable parties to pursue large commercial claims where they may otherwise have been unable to do so.
This case demonstrates the fact that funding agreements are very much a commercial agreement between a borrower and lender. Litigants and their solicitors must ensure that they recognise and observe their obligations towards their funders, and that information provision terms need to be observed.