Towards more creative funding models

August 27, 2013

This article was first published by Solicitors Journal on 30 July 2013, and is reproduced by kind permission.

The rise in claims funded by third parties is the natural next stage in a funding revolution started thirty years ago, say Tom Custance and Molly Ahmed

In 1980, the then Master of the Rolls, Lord Denning, vehemently denounced the idea that lawyers should act on a contingency. “Champerty is a species of maintenance: but it is a particularly obnoxious form of it,” he said. “It exists when the maintainer seeks to make a profit out of another man’s action – by taking the proceeds of it… for himself. Modern public policy condemns champerty in a lawyer whenever he seeks to recover – not only his proper costs – but also a portion of the damages for himself; or when he conducts a case on the basis that he is to be paid if he wins but not if he loses.” (Trendtex Trading Corporation and Temo Anstalt v Credit Suisse [1980] WL QB 629)

Fast forward 30 years or so and the funding of civil litigation in 2013 would be almost unrecognisable to Lord Denning.  Indeed, the litigation funding landscape has changed significantly in the last six months, including the implementation of the Jackson Reforms in April 2013. 

Until the 1960s, champerty and maintenance were illegal under English law.  Maintenance is defined as the improper support of litigation in which the supporter does not have a legitimate concern and most  usually occurs when the third party funds  the litigation. Champerty is defined as being a more aggressive form of maintenance which takes place when the maintaining party pays some or all of the costs of a party in return for a share of the proceeds of the action. The historic reasons why champerty and maintenance were illegal stem from mediaeval times, as described by Lord Mustill in Giles v Thompson [1993] 2 WLR 908: “the mechanisms of justice lacked the internal strength to resist the oppression of private individuals through suits fomented and sustained by unscrupulous  men of power…As the centuries passed the courts became stronger, their mechanisms more consistent and their participants more self-reliant. Abuses could be more easily detected and forestalled, and litigation more easily determined in accordance with the demands of justice.” 

On 21 July 1967, pursuant to section 14 of the Criminal Law Act 1967, the government decriminalised maintenance and champerty and abolished them as being torts, leading the way for third party funding, although nevertheless maintaining the illegality of contingency fee arrangements. 

‘Virtually useless’ 

The Hansard debates from February 1967 record the lord chancellor commenting that clause 14 should be inserted into the Criminal Law Bill 1967 because “[they  were] getting rid of something today which, in these days of legal aid and insurance companies, really is an anachronism.” He went on to cite the Law Commission who considered maintenance and champerty as torts to be virtually useless, with no point in retaining them. And as a positive benefit of the decriminalisation of maintenance and champerty, he referred to trade union members who relied on the financial support of their unions when involved in litigation.

As regards contingency fees, although they remained illegal, the lord chancellor thought that there was a “good deal to be said for them…there is considerable merit in acting on the basis that you do not have to pay anything if you lose the action, but if you win, then you pay 25 per cent of the damages, or whatever it is, to the lawyers. You know exactly where you are from the start.” 

Despite such forward thinking from the judiciary, it was not until nearly 30 years later that any further significant developments in the funding landscape took place, when in 1995 conditional fee agreements came into being pursuant to the Courts and Legal Services Act 1990, and at the same time the insurance industry began to develop after-the-event insurance products. 

Initially conditional fee agreements, particularly 100 per cent ‘no-win no fee’ agreements, were welcomed. In the words of then minister Geoff Hoon they would provide “better access to justice. Access will be given to the many people who fall between those who are very rich or those who are so poor that they qualify for legal aid. In future, the question of whether one gets one’s case to court will no longer depend on whether one can afford it, but on whether one’s case is a strong one.” 

Original aims perverted 

However, in the view of many, the subsequent Access to Justice Act 1999, which provided for the recoverability of success fees and ATE premiums, perverted  the original aims of the government and judiciary leading instead to a ‘compensation culture’, which was to become a catalyst for the Jackson Reforms. Lord Dyson, the present Master of the Rolls, examined the compensation culture in a speech on 15  March 2013. He concluded his Holdsworth Club Lecture thus: “The on-going problem is that of litigation cost... Faced with the prospect of expensive litigation, a potential defendant may feel a pressure to settle even an unmeritorious claim… especially in relation to personal injury claims, following the reform of conditional fee agreements by the Access to Justice Act 1999. 

The intention of those reforms was to make CFAs more attractive to claimants in order to increase access to justice... But an unintended consequence of this reform was to inflate legal costs, specifically the costs that defendants are liable to pay.” 

By way of contrast, in the commercial litigation sphere, virtually no cases were being funded by an alternative to the traditional private retainer between client  and solicitor. Even the 2005 seminal case of Arkin v Borchand Lines Limited & Ors [2005] EWCA Civ 655, where the Court of Appeal explicitly endorsed third-party funding, failed to increase either commercial litigants’ or commercial litigators’ appetite for funding. 

By late 2008, Lord Clarke (the then Master of the Rolls) asked Lord Justice Jackson to conduct a review into civil litigation costs because the senior judiciary had become so concerned about the burgeoning costs of civil litigation. The review took just over a year to complete, with the final report being published in  January 2010. 

Lord Justice Jackson has been a firm champion of third-party funding, considering that it promotes access to justice, and filters out unmeritorious claims without imposing any additional burden on opposing parties. As he was conducting his review, the third party funding industry was slowly but surely beginning to take hold in the English commercial litigation market. 

Post 1 April 2013, Lord Justice Jackson has changed the way litigation costs works, among other reforms: lawyers can now work under contingency agreements (also known as damages-based agreements); and the recoverability of success fees and ATE premiums from the opposing party has been abolished. 

Innovative arrangements 

In the last six months, we have been approached by an increasing number of large commercial clients seeking creative funding solutions. Even though such clients are able to afford the costs of litigation, they simply do not want to take the litigation costs risk. In our view, there are several third-party funders whose models and capitalisation are such that they can offer some innovative products, and we are finding that the funder is becoming an integral and important part of the litigation team. 

Clients and lawyers should also be reassured that in our experience the funders with whom we work will not take on cases in which the economics do not work: that is, where the price of the funding would leave the client with so little in damages as to have rendered the litigation of no real benefit to the client.

Even though contingency fees are now permitted, many commercial litigation lawyers are likely to be nervous about the impact on their cashflow of financing  a claim for months or even years under a contingency fee arrangement. In addition, there are also issues over the new regulations governing the terms of  contingency fees (The Damages Based Agreements Regulations 2013), which are generally regarded as being poorly drafted. Solicitors are being cautious about entering into contingency fee arrangements which could subsequently be found to be unenforceable because they do not comply with the regulations. 

However, once the regulations are revised and further clarification and guidance provided to lawyers (expected to be in late 2013 or early 2014), we also believe that the advent of contingency fees will not mean that lawyers and funders are vying for the same cases, but instead lead to some quite innovative and novel funding models ultimately to the client’s benefit and achieving the overall aim of increasing access to justice. 

Finally, Lord Neuberger, the current President of the Supreme Court, said in a lecture on 8 May 2013: “how litigation funding will develop in the years to come is something that we will all watch keenly, because funding is the life-blood of the justice system... it helps maintain our society as an inclusive one, which… will help ensure that it remains a society that  can prosper.”   


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