Litigation Funding: Where Next?
Third-party funders are increasingly sophisticated in the way they navigate common law developments. In this article, Genevieve Athis discusses the law surrounding litigation funding and emphasises the need for statutory regulation in this sector. (This article won first place in our commercial article writing competition)
Introduction
On 7th August 2019, Burford Capital, the darling of the third-party funding market, saw its stock plummet. This wiped more than £1.7 billion off its total market value.[1] Burford is a London and NYSE-listed professional litigation funder whose business model centres around monetising potentially successful legal actions by funding civil litigation for corporate clients, in return for a share of the pay-out for successful claims. The sudden loss of confidence in Burford came after US short-seller Muddy Waters announced its short on Burford’s stock by releasing a 25-page report attacking the firm’s accounting practices, liquidity and corporate governance. Such an assertive attack on a leading litigation funding firm poses deeper questions about the future of litigation funding in the UK, which has been increasing rapidly in recent years.[2]
This article aims to assess the state of the law in England and Wales in relation to litigation funding. First, it gives a brief outline of recent developments in the law in this area. Next, it assesses the obligations placed on third-party funders by these recent changes. Finally, it argues that the common law has failed to keep pace with these new developments and emphasises the need for statutory regulation of this sector.
The Law as it Stands
Historically, English and Welsh courts were hostile to third-party funding as they considered it contrary to public policy - namely protecting the purity of justice.[3] The common-law rule against maintenance aims to prevent improper support of litigation in which the supporter has no legitimate concern. The common-law rule against champerty aims to prevent such improper support manifesting itself through third parties paying the costs of the litigant in return for a share of the profits from the action. In post-war Britain, the increased emphasis on access to justice led to the scope of these common-law rules being significantly narrowed. The introduction of public funding parties via the Legal Aid and Advice Act 1949 led the courts to dispense with their traditional conception of what constitutes maintenance and champerty. Both offences were abolished as crimes and torts in the Criminal Law Act 1967.[4] Ironically, recent reductions in legal aid, especially for civil matters, has led the courts to be even more receptive to novel funding arrangements.[5]
However, the common law rules of maintenance and champerty still exist, subject to various exceptions, and continue to be relevant to third-party funding arrangements.[6] Whilst the scope of these rules has receded, the consequences of their breach remain severe. If the rules are contravened, the funded party will be unable to recover its costs from their opponent and the funder may face a non-party costs order.[7] The courts are more likely to find an agreement to be champertous if the funder attempts to exercise control over the process and direction of the litigation itself or will recover disproportionate sums in the event of a successful outcome.
Obligations on Third-Party Funders
The 2005 Court of Appeal case of Arkin v Borchard Lines Ltd established that the liability of third-party funders should be limited to the extent of the funding provided.[8] This decision appeared to confirm the validity of funding arrangements, provided that the funder’s part in the actual process of litigation was of a limited nature. This was reflected by the funder’s limited liability for the cost of proceedings, which came to be known as the ‘Arkin cap’.
However, its application is not automatic: last year the Court of Appeal approved the judgment of Snowden J in Chapelgate Credit Opportunity Master Fund Ltd v Money.[9] In affirming the decision at first instance, Newey LJ emphasised the differences between the funding provided in Arkin, which only covered expert witnesses, and the extensive role played by many professional funders today. Where litigation funders essentially stand in lieu of a party in exercising significant control over a case and standing to gain a considerable share of the damages, the Court of Appeal confirmed that the Arkin Cap will not necessarily apply and the litigation funder may be the subject of a costs order beyond their financial investment.[10] This recent decision reflects the growing sophistication of third-party funders and the practical responsibility that the courts are willing to impose on them as a result. This recognition of the involvement of such funders within modern civil litigation perhaps signals that it is high time for a clarification of the champerty rules.
The Need for a More Sophisticated Approach to the Reality of Third-Party Funding
The recent case of Chapelgate Credit Opportunity Master Fund Ltd v Money makes clear that the courts are willing to impose obligations on third-party funders, given the potentially significant return on their investment. Such cases are indicative of increased judicial acceptance regarding the need for litigation funding, given the lack of legal aid available for civil claims. This raises the question of whether the common law doctrines of champerty and maintenance are suitable for regulating a sophisticated and commercial practice such as litigation funding. In Australia, the courts have declined to prevent more aggressive forms of litigation funding. This includes where a third party exercises significant control over the litigation in question with the aim of profiting from it.[11] Existing English case law suggests that the degree of control exercised by the funder is still a relevant consideration in judging whether the funding arrangement is ultimately enforceable.[12]
There is a clear potential conflict of interest for legal professionals who, in effect, represent both their own client and the investor. What should a solicitor do when they reach a point in litigation proceedings where they feel it is best for their client to settle but they are concerned about the impact this will have upon the investor, and perhaps their view of that solicitor’s firm? These issues are clearly beyond the scope of common law doctrines.
The Necessity of Regulation
The litigation funding sector is still largely unregulated in the UK. Currently, the only check on such funders is through their (voluntary) membership of the Association of Litigation Funders, a self-regulating authority with its own financial requirements and code of conduct to which members must adhere. It would be more desirable for the government to impose statutory rules regulating funding arrangements to safeguard all parties involved. When Jackson LJ approved the Association of Litigation Funders in 2011, this was with the proviso that the need for more formal regulation would have to be revisited as the market expanded.[13] Statutory intervention following a comprehensive review of this sector is best placed to provide certainty for funders and fundees alike. This in turn will allow both parties to manage their risk liability more effectively. When the underlying asset at stake is litigation, it is unsurprising that third-party funders wish to exercise a measure of control over the litigation process itself. The UK could follow the approach taken in Australia, where regulations have been introduced requiring litigation funders to have conflict management procedures in place to regulate the relationship between funders, lawyers and clients.[14]
Conclusion
The ability of Burford Capital to bounce back after the damning Muddy Waters report is indicative not only of its own initiative but of the growing confidence of the market in litigation funding. The sector continues to provide increasingly sophisticated instruments which allow commercial entities to manage the costs and risks of litigation more efficiently. This article has argued that these complex arrangements should no longer be subject to the residual common law concepts of maintenance and champerty, but the target of modern legislative efforts.
Written by Genevieve Athis.
[1] The Times, Burford Capital Q&A: what is being alleged? (13 August 2019), https://www.thetimes.co.uk/article/burford-capital-q-a-what-is-being-alleged-cfwcc25qn (30 Jan. 2021).
[2] Figures suggest that overall, the UK’s 16 main third-party funders now have over £1.5 billion under asset management: Brunel Professions, Third Party Litigation Funding Market is Booming (Sep. 2018), https://www.brunelpi.co.uk/news/general-news/third-party-litigation-funding-market-boomingpublished-september-2018 (30 Jan. 2021).
[3] Lord Denning in Re Trepca Mines (No 2) [1963] Ch 199, pp. 219 – 220.
[4] The Criminal Law Act 1967, ss 13 and 14. S 14(2) left intact the rule that if a contract breaches these rules it will be unenforceable.
[5] Legal Aid, Sentencing and Punishment of Offenders Act 2012.
[6] Conditional Fee Agreements (CFAs) and Damage-Based Agreements (DBAs).
[7] Senior Courts Act 1981, s 51.
[8] Arkin v Borchard Lines Ltd and others [2005] EWCA Civ 655.
[9] Chapelgate Credit Opportunity Master Fund Ltd v Money and others [2020] EWCA Civ 246.
[10] Ibid, paragraph 38.
[11] Campbells Cash & Carry Pty Ltd v Fostif Pty Ltd [2006] HCA 41. Court held 5:2 that litigation funding was not an abuse of process or contrary to public policy.
[12] Myatt v National Coal Board [2007] EWCA Civ 307.
[13] This view was formally recognised in his report two years earlier: Lord Justice Jackson, Review of Civil Litigation Costs: Final Report, p. 121.
[14] Gordon Grieve, Greg Whyte, Martin del Gallego and Simon Morris, ‘Regulation of litigation funding in Australia’, Lexology, (Dec. 2019).