With the recent multi-million pound claim made against accountants/auditors Moore Stephens, large scale litigation funding has now come to England, a cause for concern for professional organisations and their underwriters. This activity is currently unregulated, so defendants will have to look to the courts to address the issues of principle and public policy to which this practice gives rise. Ian Gordon and Jane Howard discuss various procedural tactics defendants might try to deal with such claims.
One of the more controversial claims made against a firm of accountants/auditors in recent times was the one brought against Moore Stephens around Christmas of last year. It was not the nature of the claim or its amount which caught the eye; it was the fact that the proceedings are being bank-rolled by a company which specialises in providing litigation funding.
The proceedings have been brought by the liquidator of Stone & Rolls, a collapsed British company whose accounts Moore Stephens had audited. However, the claim is being financed by IM Litigation Funding. IM Litigation Funding has no connection with either of the parties to the litigation or with the underlying dispute. The sole rationale of its involvement in these proceedings is to make a profit.
Although this is, so far, the largest funded claim which has been brought in England, it is part of a growing trend worldwide. IM Litigation Funding itself has high hopes for the future. Initially, it focused mainly on funding claims by companies which had gone into liquidation. However, it has gone on record as saying that it is prepared to fund any claim which (it believes) is sound on the merits, involves a prospective defendant who would be good for the money and where the costs to be incurred are likely to be proportionate to the damages being claimed. It has been reported that IM Litigation Funding has brought 35 claims so far, with a further 35 in the pipeline.
The case for funding “Access to justice” has been one of the major themes in the litigation arena in the last decade. In the light of the more restricted availability of legal aid, it was perhaps inevitable that would-be parties to litigation would look for other ways of funding legal proceedings. Why, it will be asked, should good claims not be brought before the courts simply because of the impecuniosity of the party said to have suffered a loss (especially if the claimant’s impecuniosity was arguably caused by the defendant’s negligence)? Indeed, in one case (Arkin v Borchard Lines1), the trial judge expressed the view that financing litigation in this way facilitates access to justice.
The concerns One difficulty with the “increased access to justice” argument is that this is not why the litigation funders are in this line of business. Their decision to support litigation is not based on a desire to increase the common good, but to make a profit. Essentially, they are gambling on the outcome of litigation. Whilst it is true that virtually every piece of litigation is, to a degree, a gamble (“How will my witnesses perform?” “Who will the judge be?”), most litigants are seeking compensation, rather than to make a profit from their claim. In addition, there are public policy concerns that funding litigation in this way might affect the integrity of the litigation process itself. An arrangement whereby a litigation funder finances claims brought by insolvent companies may be relatively unobjectionable, but the intervention of litigation funders has not been limited to such claims. Imagine, instead, a situation where a would-be claimant, not insolvent, has been persuaded by a litigation funder to pursue a claim in return for 70% or 80% of any damages awarded. Even if brought in the name of the company which claims to have suffered a loss, the claim would effectively be being made by the litigation funder itself. Should the conduct of the litigation be solely in the hands of the party seeking to make a profit out of it? What impact might this have on how claims are framed (and for what amounts) and how, for example, witness evidence is collated and presented?
What can be done to prevent abuses?
There have been calls for the practice of funding litigation to be regulated. Commentators have pointed out that there may be limited scope for the court itself to intervene. Whilst it is true that the court has the jurisdiction (see Arkin v Borchard Lines1) to order a litigation funder to pay the other side’s costs if the claim fails (and this should discourage the funding of speculative claims), as few cases go as far as a trial, the opportunity for the court to intervene in this way may be limited. However, it may be possible to invoke the jurisdiction of the court well before trial.
Although these funding arrangements are relatively novel (and, as a result, have not yet been tested by the courts), they may be open to challenge. Historically, the court has taken a cynical view of those who support litigation in which they have no legitimate interest. It has done this in various ways, most notably by the rules against maintenance and champerty. “Maintenance” is the giving of assistance or encouragement to a party to litigation by a person who has neither an interest nor any other motive recognised by the law as justifying his interference.
“Champerty” is a particular kind of maintenance, namely, maintaining an action in return for a promise to give the maintainer a share in the proceeds or subject matter of the action. If the party which has suffered a loss has assigned its cause of action to a litigation funder, it may be possible to challenge the funder’s title to sue on the basis that the purported assignment is champertous. The defendant would apply to strike out the claim on the basis that the claimant has no cause of action. However, if there has been no assignment of the cause of action and the claim is being formally brought by the party said to have suffered a loss, maintenance and champerty will provide no substantive defence.
It may still be possible to make an application to strike the proceedings out on the basis that they constitute an abuse of process. However, this would be a hard test to satisfy. The court would have to consider whether the litigation funder’s interest in the litigation is legitimate and whether it has a motive recognised by law as justifying its interference. The court would also want to look at the percentage of the litigation funder’s share of the proceeds, and how the litigation is being conducted.
In the words of the judge in R v Secretary of State for Transport, ex parte Factortame2, is the arrangement between the claimant and the litigation funder likely to involve seeking “to inflame the damages, to suppress evidence, to suborn witnesses or otherwise to undermine the ends of justice”? Each situation may have to be assessed on a case by case basis.
Professional organisations and their professional indemnity insurers are right to be concerned about these developments. Claims which, due to funding difficulties, might not otherwise have seen the light of day may now be litigated. Whilst that concern might not form the basis of a legitimate complaint, there are valid concerns about the impact which the professional funding of litigation might have on the civil justice system.
At the moment, the funding of litigation is not subject to any regulation. It is currently up to the courts to regulate the conduct of litigation. With the likely increase in the use of litigation funding, it can only be a matter of time before the courts are asked to decide whether financing litigation in this way is legitimate.