This article was prepared for and first featured in CDR News 24 February 2011

Third-party litigation funding has had a slow start in the UK. Gavin Foggo and Molly Ahmed of Fox Williams, which recently published a report on the trend, address market hang-ups and call for greater awareness.

Third-party funding is a developing area of legal practice in the UK and in other major jurisdictions where business, law and finance intersect. The past year or so in the UK has seen:

  • the government carry out a consultation (the conclusions of which are yet to be reported) on proposals suggested by Lord Justice Jackson in his review on the costs of civil litigation, including recommendations into litigation funding; 
  • the launch of a number of new funders with substantial financial capitalisation; and
  • a high-profile case reaching the House of Lords which was backed by third-party litigation funding.

In the US, third-party funding is beginning to gain steam. In contrast, the funding method is more developed in Australia.

These developments in the UK, US and Australia have been discussed by third-party funders, leading litigators, academics and legal commentators in a report entitled The New, New Thing by legal research company Jures, commissioned by City of London law firm Fox Williams LLP. The findings of the report are summarised below.

Evolution, not revolution

Third-party funding is a mechanism whereby a third party unconnected to the litigation provides funds to the claimant (usually) in order to finance litigation. The extent of the funding will be the subject of agreement between the litigant and the funder but may encompass the entire cost of the proceedings, a specific stage of the proceedings, disbursements only or simply a commitment that the funder will cover a party’s exposure to an adverse costs order. In return, the funder will take a share of the damages recovered: either as a multiple of the amount of the funding provided or an agreed percentage.

“Changes to the legal profession in the UK are evolutionary not revolutionary” is the view of Richard Fields of Juridica, an AIM-listed fund. This might explain why, despite the fact that the English Courts have explicitly endorsed funding since 2005, the third-party funding market is still in its infancy in the UK. According to the Civil Justice Council (CJC), in the arena of commercial litigation only around 100 cases have been funded in this way.

This led the authors of the report to examine the factors impeding the funding of more cases and the extent to which third-party funding will take off in the future. The starting point appears to be the criteria applied by funders to determine which cases will be suitable for funding. Typically, funders seek cases that have been given high prospects of success (70% or above) by a leading barrister, with a high value (a minimum of £3 million is routinely quoted) against a defendant who can afford to pay the judgment debt (such as government bodies, insurance companies or large companies). Accordingly, the current model of funding is more suitable for high-value commercial litigation, rather than the consumer cases, of which there are more in the court system.

Moreover, while there are advantages for commercial parties in obtaining third-party funding (such as removing litigation costs from a company’s balance sheet), parties which could otherwise afford litigation are often reluctant to take out funding because of the prospect of having to pay over a sizeable percentage of the damages to the funder.

Commentators are divided as to whether there is a reduced appetite on the part of investors in backing litigation funding. Robert Musgrove, the former chief executive of the CJC, recounted that he had “sensed from some of the funders coming into the market…that they have been more nervous than the funding behind it”. On the other hand, Susan Dunn of Harbour Litigation Funding disagrees. She says: “Just because you haven’t heard about it, doesn’t mean that it’s not going on…There have been lots of well-known cases that have actually been funded but people just don’t know about it”. Neil Purslow of litigation fund Therium endorses this view. He considers litigation funding to be an attractive investment on the basis that it is a “completely uncorrelated asset class…you can have two cases and the results will not correlate with each other, let alone with the stock market or…anything else in your portfolio”.

Access to information

The report also identifies that the success of litigation funding will depend upon the extent to which it is embraced by the legal profession. Not only does there appear, at least to one major funder, to be a lack of awareness of the products available, one of the biggest threats to third-party funding in the long term is likely to be the advent of contingency fees in the UK, where lawyers take a proportion of the damages in lieu of fees. These are currently unlawful in the UK, but Lord Justice Jackson has expressed approval for contingency fees in his report on civil litigation costs.

It has been argued that contingency fees in the US are the reason why the litigation funding market is relatively underdeveloped. However, Wayne Attrill of the Australian funder IMF has reported that “there’s a surprising amount of interest coming out of the US for litigation funding”. This is echoed by Selvyn Seidel of US funder Burford Group, who sees third-party funding as making a “major contribution to… access to justice”. The common theme of the US commentators interviewed for the report is that there is space for both contingency fees and third-party funding, but that contingency fees will remain the preferred method of funding in the majority of cases.

Third-party funding has been part of the Australian civil justice scene for the last decade. Wayne Attrill ascribes the success of third-party funding to two reasons: first, the fact that the law regarding funding has been given serious consideration by Australia’s senior courts; and second, because there is “a wealth of public information” about funding. Both lawyers and clients are aware of what is available, and the benefits and the disadvantages of funding.

Third-party funding can both bring access to justice to clients who might otherwise be unable to afford legal advice and to enhance the range of funding options available to wealthier clients. However, awareness on the part of lawyers and the business community is vital for third-party funding to take off in the UK and US, as it has done in Australia.

The full report can be found at www.jures.co.uk.

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