Source: https://kerryunderwood.wordpress.com/2015/11/25/third-party-funding-saviour-of-the-law-2/
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THIRD PARTY FUNDING | Kerry Underwood
Third Party Funding is likely to play a vitally important role in litigation now that Jackson is in and the abolition of recoverability of success fees and after-the-event insurance premiums has taken place and legal aid abolished.
High Street firms in particular may find a relationship with a Third Party Funder more attractive than trying to borrow from a bank or being a minor owner of an Alternative Business Structure or being swallowed up by a bigger firm.
Properly run and regulated, Third Party Funding may be the salvation of independent law firms and their clients and could indeed be the private sector’s answer to the abolition of legal aid. In particular the receipt of payment of costs on account as the case progresses allows smaller firms to ameliorate the cash-flow problems of dealing with substantial cases under conditional fee agreements.
My starting point is that it is the potential saviour of the English legal system and my concerns and critical comments below should be seen in that light.
Third Party Funding has come to mean funding of litigation by a professional funder or investor with no previous interest in the case in return for a share of the damages in the event of success. Unfortunately the Code of Practice uses the term “Litigation Funding” which is obviously a misnomer. I use the term Third Party Funding.
It does not include funding by, for example, insurers or trades unions.
A typical Third Party Funding agreement provides for payment of some or all of the client’s own legal costs on an interim basis with the Third Party Funder’s fee being either a percentage of any damages received or a multiple of the amount of funding provided.
Confusingly the Third Party Funder’s fee is often referred to as a success fee but it has nothing to do with a conditional fee success fee, although a Third Party Funded case may well be conducted under a conditional fee agreement. Consequently I utilize the term “Funder’s Fee”.
Few cases have been funded by Third Party Funders and the demand outstrips supply and Funders have been highly selective in the cases that they choose to back.
In particular very few personal injury cases have been funded in this way, but that is changing rapidly now that the Jackson reforms are in place.
The Third Party Funder’s fee is typically two to four times the investment. Thus an investment of £100,000 funds will result in a fee of £200,000 to £400,000.
If the Funder’s Fee is calculated by reference to damages then the funder will generally expect between 25% and 45% of those damages.
Under The Damages-Based Agreements Regulations 2013 the maximum that a solicitor can charge is:
all other work 50%
There is no limit on the Third Party Funder’s fee and thus lawyers may choose to act as Third Party Funders rather than under a conditional fee agreement, or a Damages-Based Agreement, although acting as a Third Party Funder does create a potential Arkin liability for adverse costs – see below. Such a risk in relation to adverse costs does not exist in conditional fee cases – see Hodgson & Ors v Imperial Tobacco Ltd & Ors [1998] EWCA Civ 224 (12 February 1998), [1998] 1 WLR 1056, [1998] 2 All ER 673, [1998] EWCA Civ 224 – but on the face of it, applies to damages-based agreements, although it is likely that the courts will apply the Hodgson exception to damages-based agreements, but see Jackson LJ’s view below.
Third Party Funders may become Alternative Business Structures running cases through the medium of conditional fee agreements, thus avoiding the Arkin risk. They will still be able to take 45% or 50%, or whatever, without exceeding the success fee cap, as much of the fee will be solicitor and own costs on a no win lower fee agreement and/or an after-the-event insurance premium.
The same result can be achieved by using the Underwoods Method and Third Party Funders are now becoming increasingly involved in lower value cases and smaller firms of solicitors.
On 14 January 2014 the Civil Justice Council published an amended voluntary Code of Conduct for Litigation Funders, their name for Third Party Funders. The newly-formed Associate of Litigation Funders (ALF) agreed to abide by the Code. The Code appears at the end of this piece.
Under the Code the funder agrees not to seek more than 100% of the proceeds of the dispute unless the Litigant is in material breach of the Litigation Funding Agreement, but there is no other restriction or guidance in relation to the amount to be charged by the Litigation Funder, either by reference to a percentage of damages or otherwise.
Compare this with the restrictions on solicitors’ charges in employment cases and personal injury cases, whether conducted under a conditional fee agreement or a Damages-Based Agreement. Thus, as ever in this country, professionally qualified lawyers are heavily restricted, but bankers, which effectively describes the role of Litigation Funders, are free to do and charge what they like.
Disconcerting as that is it does give lawyers and their clients a degree of flexibility that they do not have in the absence of a Third Party Funder.
Paragraph 9 of the Code provides that a Funder will:
9.4.2 maintain access to a minimum of £2m of capital or such other amount as stipulated by the Association;
9.4.4 undertake that it will be audited annually by a recognised national or international audit firm and shall provide the Association with:
Capital adequacy is not defined and it is not stated as to how this requirement will be policed.
Paragraph 10 provides that the Litigation Funding Agreement shall state whether, and to what extent, the Funder will:
10.1 meet any liability for adverse costs;
10.2 pay any premium (including insurance premium tax) to obtain costs insurance;
10.3 provide security for costs;
Paragraph 11 sets out the circumstances in which a Funder can terminate the agreement.
The Code gives very little protection to clients. In particular there is no guidance as to the interplay between the conditional fee success fee, to be paid by the client in conditional fee agreements entered in to on or after 1 April 2013, and the funder’s fee. Taking in to account both of those matters and an after-the-event insurance premium to cover adverse costs orders, and the Funder will almost always insist on such insurance, the risk is that there may not be much left for the winning client.
Amidst the plethora of reforms it would be helpful to have guidance from the judiciary or lawyers’ regulatory bodies as to what is the maximum reasonable percentage total deduction from damages, including the funder’s fee and any lawyers’ contingency fee, or conditional fee success fee, and after-the-event insurance premium.
The waters have been further muddied by Lord Justice Jackson’s suggestion that solicitors acting under a Damages-Based Agreement may be liable for the other side’s costs in the event of defeat, following the principles set out in
Arkin v Borchard Lines Ltd [2005] EWCA Civ 655, [2005] 3 All ER 613
It is well-established that there is no such liability for adverse costs orders on solicitors in conditional fee cases Hodgson & Ors v Imperial Tobacco Ltd & Ors [1998] EWCA Civ 224 (12 February 1998) ([1998] 1 WLR 1056, [1998] 2 All ER 673, [1998] EWCA Civ 224.
Ironically it has only recently become clear beyond doubt that solicitors are allowed to assume responsibility for adverse costs orders – see Sibthorpe and Morris v Southwark London Borough Council (Law Society intervening) [2011] EWCA Civ 25, [2011] 06 LS Gaz R 18, [2011] NLJR 173.
Solicitors are also allowed to help their clients by funding the cost of disbursements without being liable for costs should the case fail, even if there is no After-the-Event insurance in place – see Flatman and Germany v Weddall and Barchester Health Care Limited [2013] EWCA Civ 278, and see also Heron v TNT (UK) Limited and Mackrell Turner Garrett (a firm) [2013] EWCA Civ 469, where the Court of Appeal dismissed an attempt by the successful defendant’s insurers to obtain an order for costs against solicitors who had been acting for the employee until they withdrew from the case and where the claimant did not have After-the-Event insurance. The Court of Appeal said:
“A solicitor is entitled to act on a CFA for an impecunious client who they know or suspect will not be able to pay own (or other side’s) costs if unsuccessful.”
The fact that before 1 April 2013 most personal injury clients expected a free ride with no deductions from damages partly explains the low incidence of such funding in personal injury cases. That all changed on 1 April 2013, with clients now routinely losing 25% of their damages to their own lawyer.
The Funder’s Fee is not recoverable on a between-the-parties basis and thus must be paid by the client out of damages, but that now happens in relation to conditional fee success fees and already happened in contingency fee cases.
Unlike After-the-Event insurance, Third Party Funding generally covers the clients own legal costs in full or in part, and Third Party Funders who fund a losing case are potentially liable for the other side’s costs to the extent of their own contribution.
Thus a Third Party Funder provides £100,000 but the case is lost. The Funder can be ordered to pay up to £100,000 to the successful party by way of costs, giving a total of £200,000 in all – see
Arkin v Borchard Lines Ltd [2005] EWCA Civ 655 [2005] 3 All ER 613
Consequently Third Party Funders will often insist upon After-The-Event insurance being taken out to cover that risk.
Lord Justice Jackson has suggested that in a Damages-Based Agreement case the court might hold the solicitor liable, in accordance with the principles in Arkin – see below.
If After-the-Event insurance is not taken out and the funder is willing to bear the adverse costs risk then inevitably the Funder will charge an even higher fee to the client. If there is no After-the-Event insurance in place and the Third Party funder is not indemnifying the client against an adverse costs order then it must be determined who will be liable to satisfy the adverse costs order.
A funding agreement will invariably comprise a contract to support litigation in exchange for a fee similar to that contained in the CFA model. Such funding agreements are not regulated by statute but are governed largely by common law principles, recently to a more limited extent by the CPR and finally by the jurisdiction on costs contained in s 51 of the Senior Courts Act 1981.
Such funding fills a gap which exists where clients cannot afford to pay lawyers and experts. Experts are expected not to work on terms which are conditional or contingent.
Great care must be taken in drafting the various agreements between the client, the solicitor, the After-the-Event insurer and the Third Party Funder.
In particular it is of crucial importance to agree in advance the order of priority of application of damages in the event that the eventual recovery is insufficient to discharge all of the fees and disbursements, which will include the After-the-Event insurance premium, the Funder’s Fee and the lawyer’s fees and disbursements, including the lawyer’s success fee.
In Harcus Sinclair v Buttonwood Legal Capital Ltd and Others [2013] EWHC 1193 (Ch)
the Chancery Division of the High Court allowed a third-party funder to terminate the agreement.
Here Buttonwood sought to terminate the agreement following a review of the case’s prospects of success, which it considered to have fallen below its required 60% threshold.
Funding had been granted on the basis of a preliminary opinion of counsel, which had not been updated as promised and when the solicitors failed to obtain a further advice the funders obtained their own advice. This showed the prospects of success to be less than 60% and so the funder terminated the agreement and the court held that they were entitled so to do.
The leading case in relation to Third Party Funding is
The Arkin case
Mr Arkin, having originally had legal aid, switched to a CFA with solicitors and counsel but required funding for the forensic support and evidence of Ernst & Young. The case involved an alleged shipping cartel. The funder was Managers and Processors of Claims (MPC) who ended up funding £1.3 million for disbursements and forensic support. Their fee arrangement was 25% of damages (the claim was £80 million). The defendants incurred costs of nearly £6 million.
Mr Arkin lost. The judge at first instance decided that no third party costs order should be made against MPC on the grounds that this would act as a disincentive for professional funders of litigation. The Court of Appeal decided that there had to be a balance between access to justice on the one hand and being fair to defendants on the other. Their compromise was to order that a professional funder shall be liable for third party costs to the extent of their investment in the case.
In so deciding, they accepted that the funding arrangement was not champertous. To arrive at this conclusion, they satisfied themselves that the funder did not exercise control over the conduct of the litigation, and that control remained at all times with the claimant and his lawyers.
The case was more about the liability of the funder for adverse costs than about the minutiae of funding agreements themselves.
Here was the kind of funding usually afforded by a non-lawyer who finances a claim on terms in exchange for a shire of the proceeds. The funding is invariably specific to the facts and is usually agreed as a last resort means of advancing litigation.
It is also important to stress that they type of agreement which was made in Arkin was approved of by the court as the funder did not retain any control over the litigation. At all times control remained with the claimant and his lawyers and not the funder.
The Court of Appeal formulated a solution so as to give effect to the twin public policy objectives of:
encouraging funding which enables access to justice; and
ensuring defendants who successfully defend such claims can still recover costs if the claimant is a man of straw.
The decision has implications for:
the extent to which such agreements can now be said to be lawful and therefore enforceable as between the parties;
the effect which the solution will have on the price a claimant must pay for funding.
Interplay between Third Party Funding and Maintenance and Champerty
The funding of litigation by third parties without an interest in the dispute is classic maintenance and champerty and has traditionally been unlawful and indeed was a criminal offence until 1967. It has been illegal since at least as early as 1275 when the Statute of Westminster codified the ban on such arrangements.
However for more than a century there has been a tension between that principle and the recognition that without third party funding many, probably most, claimants could not afford to pursue perfectly valid claims.
Although “access to justice” is a modern phrase that was the principle behind the courts allowing various litigation to be funded by various third parties, such as:
a master funding a servant’s litigation;
(ii) trades’ unions funding members’ litigation;
(iii) insurance companies funding their insured’s litigation;
(iv) legal aid;.
(v) lawyers working pro bono.
The Criminal Law Act 1967 abolished criminal and tortious liability for maintenance and champerty (section 14(1)) but section 14(2) unhelpfully provided that such abolition “shall not affect any rule of that law as to the cases in which a contract is to be treated as contrary to public policy or otherwise illegal,” a measure described by Lord Neuberger, President of the Supreme Court, as giving the rule against maintenance and champerty “a continuing half-life.” (Speech: From Barretry, Maintenance and Champerty to Litigation Funding, Harbour Litigation Funding First Annual Lecture – 8 May 2013.
As early as 1883 the Court of Appeal questioned the rule against maintenance and champerty. In Alabaster v Harness [1895] 1 QB 339 Lord Esher, Master of the Rolls, said:-
“The doctrine of maintenance…does not appear to be founded so much on general principles of right and wrong or of natural justice as on considerations of public policy. I do not know that, apart from any specific law on the subject, there would necessarily be anything wrong in assisting another man in his litigation.”
Here the Court of Appeal held that maintenance was permissible if given by “a man in (sic) behalf of a poor man, who but for the aid of his rich helper could not assert his rights, or would be oppressed and overbourne in his endeavour to maintain them.”
Thus a contract could be declared unenforceable on public policy grounds, although not of itself illegal. This was very much the model followed in relation to conditional fees in both the Courts and Legal Services Act 1990 and the Access to Justice Act 1999 and indeed is central to the concept of the indemnity principle.
In terms it is a message, essentially to lawyers but also to third party funders, that although nothing is now illegal in terms of funding you will always be taking a substantial risk as to whether you will be able to recover your costs from the other side or from your own client. Furthermore you are at risk of paying the other side’s costs in the event of defeat.
However the courts have worked hard to make conditional fees, and to a lesser extent, third party funding, work and there is no doubt that overall the senior judiciary take the view that the ethical problems are outweighed by the need to give access to justice to people of ordinary means in a post-legal aid world.
Lord Justice Jackson devotes a whole chapter of his Final Report to Third Party Funding (see below) and refers to the “uncertain ambit” of the law of maintenance and champerty casting “doubt as to the precise boundaries of proper conduct in relation to litigation funding” but does not offer any clear answers.
He supports the continued existence of section 14(2) of the Criminal Law Act 1967 but suggests that it be made clear “either by statute or by judicial decision that if third party funders comply with whatever system of regulation emerges from the current consultation process, then the funding agreements will not be overturned on grounds of maintenance and champerty”.
Overseas, the Courts have been giving positive encouragement to Third Party Funding.
In Barclay Wealth Trustees (Jersey) Limited v Equity Trust Jersey Limited and Equity Trust Services Limited, June 2013
the Royal Court of Jersey has supported the concept of Third Party Funding saying:
“There is a strong public interest in persons being able to obtain funding to enable them to bring proceedings to vindicate their rights”.
The court rejected an argument that such funding arrangements were unlawful as contrary to the law of champerty and the Jersey Code of 1771.
It made it clear that public policy requires that third party funding is properly structured, but that where it is “it facilitates the important objective of access to justice”, and that the Jersey Code of 1771 was designed to prevent the trafficking of claims, that is their sale, purchase and assignment. It was not a bar to funding arrangements which did not involve assignment.
In the Jersey case the Royal Court also considered what the position would have been if, contrary to its finding, the funding agreement had infringed a Jersey statute.
It held that even if the funding arrangement was void, voidable or unenforceable the defendants would not have been able to stay or strike out the proceedings as an abuse of process.
Claimants have a right to pursue their claims. Whether the claimant and the funder have an enforceable contract is not a defence to the claim.
This follows the Royal Court of Jersey’s similar decision in
In the Matter of the Valetta Trust, 25 November 2011
In E Eddy Bayens and others v Kinross Gold Corporation and others 2013 ONSC 4974
the Ontario Superior Court approved the use of third party litigation funding in one of the first cases of its kind in Canada, stating that in the absence of funding the exposure to the risk of adverse costs was a barrier to access to justice.
The court held that court approval was required in any class action before third party funding could be used.
The court would need to be satisfied that the following principles were satisfied:
non-interference by the litigation funder and no reduction in either the plaintiff’s right to control the litigation or the lawyer’s duties to the client;
an undertaking by the litigation funder in relation to its duty of confidentiality;
a finding that litigation funding is necessary to provide access to justice;
fair and reasonable financial terms, with the benchmark being the percentage charged by the Ontario Class Proceedings Fund.
New Zealand, Bermuda, British Virgin Islands
The New Zealand Court of Appeal and the Supreme Courts of Bermuda and the British Virgin Islands have also given their support to the concept of Third Party Funding.
In Saunders v Houghton [2012] NZCA 545
the New Zealand Court of Appeal said that the involvement of a litigation funder should provide reassurance for the defendants that the litigation will be conducted responsibly, as well as appropriately funded.
Jackson Until 1 April 2013 a client’s success fee was paid by the other side but the third party funder’s fee was paid by the client.
Now that the client is to be the payer in any event then an informed decision needs to be made in each case between these two methods of funding.
For example in what looks like a safe case the client may feel better off with a Third Party Funder taking 25% of any damages and agreeing to pay the solicitor in the event of defeat. The potential loser here is the solicitor who will receive no success fee but who will face no risk.
These will be difficult calls and the tension between non-recoverable success fees and third party funding has not been fully considered.
In the pre-2000, pre-recovery days there was no third party funding and so the issue has not arisen.
Suppose a third party funder was to advertise that it would back any viable road traffic accident case in return for 25% of damages.
What would the solicitor’s duty then be? To limit their own charge to the client to 25%? To limit their own charge to the client to 10%, that is the client paying 35% in all?
Lord Justice Jackson says in favour of Third Party Funding that it provides an additional means of funding litigation, “and for some parties the only means” and, unlike conditional fee agreements does so without “any additional financial burden upon opposing parties,” and that it tends “to filter out unmeritorious cases”.
Reflecting his view that recoverability of success fees be banned, which of course they have been, Lord Justice Jackson states that it is better for a claimant “to recover a substantial part of damages than nothing at all,” and noted, correctly, that Third Party Funding would “become even more important as a means of financing litigation if success fees under conditional fee agreements become irrecoverable.”
Jackson also appeared to accept that in the absence of the recoverability of after-the-event insurance Third Party Funding may fill the gap.
In referring to Stone and Rolls (in Liquidation) v Moore Stephens (a Firm) [2009] UKHL 39 where the third party funded claimant lost and had not taken out after-the-event insurance to cover its adverse costs risk Lord Justice Jackson said:
“These facts illustrate that third party funders can operate satisfactorily in the absence of ATE insurance and they can accept liability for any adverse costs orders”, adding that the risk undertaken by the funder was reflected in the percentage of damages which the funder was entitled to receive in the event of success.
What was not addressed is the percentage of damages to be left to the successful third party funded claimant.
Thus a clinical negligence action is third party-funded in a post-Jackson world where there is no recoverability of the success fee and only limited recovery of the after-the-event insurance premium. The third-party funder agrees to cover any adverse costs order, in other words to be the after-the-event insurer as well as the funder. In those circumstances a percentage take towards the top of the range for the third party funder would not be unreasonable – say 40% of damages. It agrees to pay a discounted fee to the solicitor in any event, that is the solicitor works under a discounted conditional fee agreement.
The solicitor’s conditional fee agreement success fee is capped at 25% of damages.
The claimant wins and thus gets 35% of damages awarded.
It could in fact be rather less – there may be interest on the third party funding and some irrecoverable solicitor and own client costs.
That is why Third Party Funding in an age of non-recoverability of success fees and after-the-event insurance premia risks a re-run of Claims Direct and the Accident Group.
While endorsing Third Party Funding, Lord Justice Jackson identifies three main areas of concern:
Withdrawal by a funder
Jackson’s view is that “the funder should be obliged to continue to provide whatever funding it originally contracted to provide unless there are proper grounds to withdraw”.
The Code of Conduct sets out the circumstances in which a funder may withdraw.
(ii) Capital adequacy
Jackson’s initial view was that capital adequacy, that is the third party funder’s ability to pay the costs, was “a matter of such pre-eminent importance that it should be the subject of statutory regulation by the Financial Services Authority”.
He now states that given that most third party funded clients are commercial parties there is no need for regulation.
Quite why a commercial client should be unprotected is unclear.
What is clear is that Jackson fails to see the likely role of third party funding in lay client work, especially personal injury and clinical negligence.
The Code of Conduct provides that there must be capital adequacy to meet liabilities for a 3 year period, but there is no indication as to how this will be policed.
(iii) Liability for adverse costs
Jackson supports the notion that third party funders should be liable for all adverse costs, stating that it was wrong in principle that a litigation funder who stood to recover a share of damages in the event of success should be “able to escape part of the liability for costs in the event of defeat”.
He said that going against the Arkin principle, whereby third party funders’ liability for adverse costs was limited to a sum equal to the extent of the funding provided (see above), would not inhibit third party funding.
“There is no evidence that full liability for adverse costs would stifle third party funding or inhibit access to justice”.
Well, obviously there is no evidence as it has never happened, but some would say that it speaks for itself – res ipsa loquitor in language that Lord Justice Jackson may understand.
He points out, with justification, that such limited liability “is unjust not only to the opposing party (who may be left with unrecovered costs) but also to the client (who may be exposed to costs liabilities which it cannot meet)”.
However Lord Justice Jackson appears not to see the irony in this. Until 1 April 2013 after-the-event insurance dealt with all of these problems at no cost to the claimant, but it is the Jackson Report itself which has successfully argued for the abolition of recoverability of after-the-event insurance premia, now enacted in Section 45 of the Legal Aid, Sentencing and Punishment of Offenders Act 2012 and now in force.
He also argues that experience in Australia was “to the opposite effect” in that only five costs orders, out of 200 funded cases, had been made against third-party funded claimants.
However in Australia third party funders themselves are not liable at all for adverse costs, following the decision of the High Court of Australia:
Jeffery and Katauskas Pty Ltd v SST Consulting Pty Ltd [2009] HCA 43
Consequently it may be that cases were settled which otherwise would not have been, maybe on a drop hands basis, as the potentially successful defendant knows that it cannot get costs from the third party funded claimant, who is unlikely to be good for the costs. If they were then they are unlikely to have entered into a third party funding agreement to start with.
Lord Justice Jackson states that it is perfectly possible for litigation funders to have business models encompassing full liability for adverse costs. “This will remain the case, even if ATE insurance premiums cease to be recoverable under costs orders”.
That is correct, but it will come at a heavy price to the claimant, maybe 40% to 45% of damages, with the lawyer taking up to 25% of damages by way of a conditional fee success fee, so the client being left with just 30%.
What is almost certain to happen is that certain Alternative Business Structures will offer claims management services and third party funding comprising after-the-event insurance and legal services and take a very hefty slice of damages – possibly as much as 50%.
It could be worse. Let us look at a variation on the clinical negligence action looked at earlier. The third party funder agrees to fund expensive disbursements and, say, half of the claimant’s solicitors costs in the event of defeat, but this time not to cover an adverse costs order. Because s/he is receiving something in any event the solicitor charges 15% of damages as a success fee rather than the maximum 25%. In fact the case settles for £40,000.00, which is distributed as follows:
to Third Party Funder – 40%
Success fee to solicitor – 15%
out of which the after-the-event insurance premium has to be paid. That could be as much as £20,000.00, leaving the successful client with a shortfall of £2,000.00.
It is Claims Direct and the Accident Group all over again.
The issues were not addressed in the Jackson Report. The formal recommendations are:
“6.1 I do not consider that full regulation of third party funding is presently required. I do, however, make the following recommendations:
(i) A satisfactory voluntary code, to which all litigation funders subscribe, should be drawn up. This code should contain effective capital adequacy requirements and should place appropriate restrictions upon funders’ ability to withdraw support for ongoing litigation.
Third party funders should potentially be liable for the full amount of adverse costs, subject to the discretion of the judge.”
Unfortunately this chapter also dealt with Maintenance and Champerty and even more unfortunately recommended retaining the rule, and even more unfortunately that the rule should be abrogated for third party funders.
So, a qualified extremely heavily regulated, insured solicitor who agrees to indemnify his or her client against an adverse costs order breaks the rule.
A voluntary coded (weren’t they discredited 30 years ago) unqualified Third Party Funder Claims Management Company Alternative Business Structure is free from such restriction.
Because “A number of respondents pointed out that abolishing the common law doctrine of maintenance could have unintended consequences”.
Well, that could apply to any proposal ever made anywhere. That is the problem with unintended consequences – they are just that – unintended.
Furthermore Lord Justice Jackson, speaking in January 2012, suggested that solicitors acting on a contingency fee basis should be liable for adverse costs orders. I have dealt with this issue above, but this threat makes contingency fee agreements in civil litigation even less attractive to lawyers.
As solicitors have to deduct, pound for pound, any costs received from the other side from the Damages-Based Agreement charged to the client, and as they do NOT have to do that in relation to a conditional fee success fee it will almost never be in the solicitor’s interest to act on a contingency fee basis as compared with a conditional fee agreement. Furthermore the indemnity principle applies in full to Damages-Based Agreements, giving the tortfeasor a windfall.
For clients the opposite is true – they will nearly always be better off under a Damages-Based Agreement than under a conditional fee agreement.
The risk of solicitors being liable for adverse costs under a Damages-Based Agreement, but not a conditional fee agreement reinforces this point.
Six months in to Jackson it is clear that almost no Damages-Based Agreements have been signed, outside the employment field where they are compulsory if acting on a contingent or conditional basis.
Third Party Funders and Indemnity Costs
In Excalibur Ventures and Others v Psari Holdings and others [2014] EWHC 3436 the court awarded costs on an indemnity basis against third party funders.
The claimants brought what turned out to be a very speculative claim against the defendants and consequently costs were awarded against them on an indemnity basis.
However they did not pay and an application was made that the third party funders pay; some admitted liability to pay but not on an indemnity basis and others denied liability and one third party funder did not acknowledge service.
The claimants had been ordered to provide security for costs but there was a shortfall of £4.8 million between the security provided and the amount of costs.
The security that was paid, as ordered, was £17.5 million and that was supplied from funds from three sets of third party funders.
The basis of the security ordered was, as normal, the standard basis and the shortfall between the security provided and the amount of costs was almost entirely represented by the difference between standard costs and indemnity costs.
The court held that the fact that the security was inadequate was not a ground for declining to make a non-party costs order; indeed it may be the reverse – see Petromec Petroleo Brasileiro Petrobras [2006] EWCA Civ 1038 and Dolphin Quays Developments v Mills [2008] 1WLR 1829.
At paragraph 58 of the judgment Christopher Clarke LJ sets out a lengthy list of reasons as to why he awarded indemnity costs against the claimant.
The judge then said:-
“60. The purpose of an order for indemnity costs is not to impose a penalty on the unsuccessful litigant (or his funders). It is to afford the successful party a more generous criterion for assessing which of his actual costs should be paid by his opponent because of the way in which the latter, or those in his camp, have acted. I set out some of the principles relating to the grant of indemnity costs in the costs judgment.”
The judge then dealt with the law concerning making a costs order against a non-party, commenting that the discretion under section 51(3) of the Senior Courts Act 1981 is very wide and the test is whether in all the circumstances it is just to exercise the power – see Globe Equities Ltd v Globe Legal Services Ltd [1999] BLR 232,240.
That discretion extends to the form of the order and the proportion of any costs to be paid and the amount of any award – see Nelson v Greening [2007] EWCA Civ 1358.
A third party order does not have to be on the basis of joint and several liability with the litigant.
Although there can be no comprehensive checklist of necessary or sufficient factors – see Systemcare (UK) Ltd v Services Design Technology Ltd [2011] EWCA Civ 546 [26] [64], the principles upon which the discretion should be issued were set out in Dymocks Franchise Systems (NSW) Pty Ltd v Todd [2004] 1WLR 2807 [25] as follows:-
“(1) A costs order against a non-party is “exceptional”, but “exceptional” means no more than outside the ordinary run of cases where parties pursue or defend claims for their own benefit and at their own expense. The ultimate question in any such “exceptional” case is whether in all the circumstances it is just to make the order.”
(2) The discretion will not generally be exercised against “pure funders” but where;
“the non-party not merely funds the proceedings but substantially also controls or at any rate is to benefit from them, justice will ordinarily require that, if the proceedings fail, he will pay the successful party’s costs. The non-party in these cases is not so much facilitating access to justice by the party funded as himself gaining access to justice for his own purposes. He himself is “the real party” to the litigation…”
(3) The most difficult cases are those in which non-parties fund receivers or liquidators (or, indeed financially insecure companies generally, in litigation designed to advance the funder’s own financial interests. Lord Brown said this at [29]:-
“In the light of these authorities their Lordships would hold that, generally speaking, where a non-party promotes and funds proceedings by an insolvent company solely or substantially for his own financial benefit, he should be liable for the costs if his claim or defence or appeal fails.”
(4) Where a funder says that there is no impropriety in promoting a claim because it received “encouraging advice” from its lawyers;
“This cannot, however, avail them. The authorities establish that, whilst any impropriety or the pursuit of speculative litigation may of itself support the making of an order against the non-party, its absence does not preclude the making of such an order.”
On this point the judge concluded:-
“66. In the light of those principles I have no doubt that Psari and Mr Lemos… should be liable to the defendants for their costs. The claim could not have been brought without their assistance; they stood to benefit from its success to the tune of a healthy multiple of their investment. That the pursuit of speculative litigation is in the same category and to be viewed in the same way as impropriety for these purposes was affirmed by Rix LJ in Goodwood Recoveries Ltd v Breen [2006] 2 All ER 533 at [59]. Similar considerations apply to the other funders.
In the same case Rix LJ, with whom May LJ agreed, accepted that where a non-party director could be described as “the real party”, seeking his own benefit, controlling and/or funding the litigation, then:
“even where he has acted in good faith or without any impropriety, justice may well demand that he is liable in costs on a fact sensitive and objective assessment of the circumstances”.
This is a change from the earlier requirement that there must be impropriety or a lack of good faith as set out in Metalloy Supplies Ltd v M/A. (UK) Ltd [1997] 1 WLR 1613, 1620; this approach was applied in Landare Investments Ltd v Welsh Development Agency [2004] EWHC 946 (QB).
In Systemcare the court pointed out the “and/or” formulation and said that it was not necessary for both elements to be present. So a third party can be liable in costs if they have controlled or funded the litigation. In Sims v Hawkins [2007] EWCA Civ 1175 the court referred to the principal question as “whether the non-party (who renders himself liable to the regime, whether by funding or controlling the litigation or even in some other way)” was the “real party” to the litigation.”
Indemnity Costs against the Funders The judge then went on to consider the issue of whether the costs to be paid by the funders should be on the indemnity basis.
The judge had no doubt that costs should be ordered on that basis if indemnity costs were appropriate generally in the case, and he had found that they were. “To do otherwise would, in my judgment, be unfair to the Defendants and their personnel, who were on the receiving end of claims and actions of the character that I described in the costs judgment.”
The Divisional Court had taken a similar view in R v SSHD Ex Parte Osman [1993] COD 204 and a similar approach was taken by the court in Murphy v Rayner [2014] 1 WLR 672.
“112. To make an order for indemnity costs would not be to penalize but to recompense. The sum presently in issue – about £ 4.8 million – is not disproportionate to the total monies contributed by Psari (and other funders), or to the individual contributions of most of them, and certainly not disproportionate to the anticipated return.”
The judge then reviewed, at length, the authorities in relation to indemnity costs against third party funders, which are essentially fact sensitive. The judge had this to say:-
“128. I recognize that there are, in this context, potentially competing public policies. If professional funders are exposed to the risk not only of standard but also of indemnity costs they may decline to fund, or only be prepared to do so at a higher cost or, perhaps more likely, against some form of indemnity or an increased reward for success, even in relatively standard cases. In either case access to justice may be curtailed…
I do not regard these considerations as compelling. Indemnity costs are awarded in circumstances (including but not limited to the conduct of a party and not necessarily involving dishonest, morally culpable or improper behaviour) which are outside the norm.”
Wasted Costs The judge also said that he did not regard the possibility of a wasted costs order against the claimant’s solicitors, Clifford Chance, as a reason not to make an indemnity costs order against the third party funders.
The principle of the “Arkin Cap” is that a professional funder should normally be potentially liable to the opposing party only to the extent of the funding provided. Thus if a funder provides £1 million they should not be liable to the other side for more than £1 million.
Here the court explained it in this way:-
“70. The position of a professional funder i.e. a funder who has a commercial interest in the outcome of the litigation, as opposed to a “pure funder” was considered by the Court of Appeal in Arkin v Borchard Lines Ltd (numbers 2 and 3) [2005] 1 WLR 3055. The Court recognised that there were two competing principles. The first was that costs should follow the event so that a funder who wholly or partly causes the defendant to incur costs should be liable for those costs. The second was the policy of ensuring access to justice. Exposure of funders to the risk of having to pay costs of the opposing party assessed on an indemnity basis might increase the risk and hence the price of funding litigation.
The solution derived by the Court was to hold that a professional funder who financed part of a claimant’s costs of litigation (£1.3 million in respect of the cost of expert evidence), should be potentially liable for the costs of the opposing party to the extent of the funding provided. The Court said that it could see no reason in principle why the solution suggested should not also apply where the funder had contracted the greater part, or even all, of the expenses of the action. But it reached no decision on the point.
What was the Funder’s Exposure? Here the court considered, apparently for the first time in any case, whether the cap should be the sum contributed by the funders for the claimant’s costs and thus not take into account the additional money provided for security of costs or whether it should be the total sum provided, including the sum provided for security of costs.
The court found that it was the total sum provided, including the sum provided for security of costs.
Thus if a funder provided £5 million towards the Claimant costs and then say £7 million for security of costs its total exposure in relation to an adverse costs order is £12 million.
Of course the amount provided by way of security of costs would go straight to the other party and would thus reduce the balance payable and thus it would not always be the case that the total further sum payable would equal the total sum invested by the funder.
“135. The provision of money to Excalibur in order that it may provide security for costs is not the equivalent of a payment of costs ordered at the end of the case. It was a form of funding of the claim in exchange for a return attributable to the monies provided for that purpose – in effect an investment.”
The judge went on to say:-
“137. If the position were otherwise a funder whose sole contribution was to provide money for security for costs, without which the action would not have continued, would be in the happy position of facing no possible exposure under section 51; whereas those who funded the costs would bear that burden (alone). This would be the position even though, had the claim succeeded, the security for costs provider would have a right to share in the proceeds increased by a percentage reflecting what he had contributed in respect of security. In effect such a provider would have, so far as exposure to an order under section 51 was concerned, a “free ride”, on the back of those financing the costs. This could not be just and cannot be right.”
Legal Aid Privatisation?
Speaking to the Association of Costs Lawyers annual conference in May 2013, Mr Justice Ramsey, the High Court judge responsible for implementing the Jackson reforms, referred to the future of third-party litigation funding as one of the “great questions” of the post-Jackson era.
He said that he expected greater certainty in the market over the next three years, which would give investors confidence to fund more cases.
“Funders should be able to make a decent profit and in effect transfer legal aid from the public sector to the private sector.”
The words on the door of The Old Bailey read “Defend the Children of the Poor and Punish the Wrongdoer.”
They appear not to have been brought to the attention of Lord Justice Jackson during the preparation of his report, or to the attention of Parliament, or the Rules Committee, or indeed anyone else. It was probably not at the forefront of the minds of the Worshipful Company of Rich Commercial Litigators and other such consultees.
How children are to fare post-Jackson is entirely unaddressed by everyone – see my piece Jackson’s Children – Children, Patients, Costs and Deductions from Damages.
In this piece I will pass over the apparent ignorance of all of the above of another Old Bailey inscription:
“The welfare of the people is supreme”.
The move towards costs not following the event throws in to sharp relief the issue of deducting costs from the damages of someone under a legal disability, typically a child.
This arises in the context of a solicitor seeking to charge solicitor and own client costs/success fee and also in relation to the deduction of a Third Party Funder’s fee, and to the taking out of after-the-event insurance with a non-recoverable premium.
It is clear beyond doubt that no money may be deducted from an award to a child or a protected party without the permission of the court (CPR 46.4).
Generally there must be a detailed assessment (CPR 46.4(2)), although in most cases that will now take the form of a paper-only provisional assessment.
The court need not order detailed assessment of costs in the circumstances set out in Practice Direction 46 (CPR 46.4(3)).
Practice Direction 46, Paragraph 2.1 reads:
“2.1 The circumstances in which the court need not order assessment of costs under rule 46.4(3), are as follows –
where there is no need to do so to protect the interests of the child or protected party or their estate;
where another party has agreed to pay a specified sum in respect of the costs of the child or protected party and the legal representative acting for the child or protected party has waived the right to claim further costs;
where the court has decided the costs payable to the child or protected party by way of summary assessment and the legal representative acting for the child or protected party has waived the right to claim further costs; and
where an insurer or other person is liable to discharge the costs which the child or protected party would otherwise be liable to pay to the legal representative and the court is satisfied that the insurer or other person is financially able to discharge those costs.”
Thus (b) allows a Litigation Friend to agree to pay a child claimant’s solicitor a success fee.
Once the child achieves adulthood then none of the rules concerning court approval and assessment that are particular to children apply.
Thus it is perfectly proper to have an agreement with a Litigation Friend that provides that if the child achieves majority before the case is resolved then the now adult claimant will pay solicitor and own client costs and a success fee or whatever. The claimant’s only remedy then would be a Solicitors Act 1974 solicitor and own client assessment, the same as any other adult client.
By Practice Direction 60th Update Annex B Practice Directions 44-48 Practice Directions 44, paragraph 9.9, the court will not make a summary assessment of the costs of a receiving party who is a child or a protected party within the meaning of Part 21 unless the legal representative acting for the child or protected party has waived the right to further costs. (9.9(1)).
The court may make a summary assessment of costs payable by a child or protected party. (9.9(2)).
There are no special rules relating to children in relation to Qualified One Way Costs Shifting.
The key question is as to how the courts exercising their discretion in the post-Jackson world of uneconomic portal fees where it is simply not worth lawyers taking on cases where they cannot charge the client an element of solicitor and own client costs over and above the low, fixed recoverable portal costs. 25% of damages has become the standard charge.
Any increase in the personal injury small claims limit exacerbates the problem, as obviously no costs at all are then recoverable.
The courts are faced with the dilemma of sanctioning a costs charge to a protected party, something that they have traditionally disliked, or risking children and protected parties becoming a no-go zone for lawyers, especially now that legal aid has been abolished for all except babies under eight weeks old with a clinical negligence claim.
Reports are varied, but it is clear that many judges are refusing to allow any deduction from damages.
ATE Insurance CPR 21.12 provides that a Litigation Friend who incurs expenses on behalf of a child is entitled to recover them out of monies received provided that the expenses have been reasonably incurred and are reasonable in amount.
All of the costs principles in relation to children apply in relation to Third Party Funding, which is not specifically mentioned in the Civil Procedure Rules or Practice Directions relating to children.
Presumably the incurring of a Third Party Funder’s fee is potentially a legitimate expense of a Litigation Friend under CPR 21.12, but unlike an after-the-event insurance premium, it is not specifically mentioned.
As Third Party Funding nearly always involves an adverse costs indemnity it is sensible to state a separate and precise figure for that element in cases involving children.
The issue is not decided until detailed assessment at the end of the case, which is obviously too late for the solicitor to change his or her mind. Early Court of Appeal guidance would be welcome.
Properly regulated, Third Party Funding has a major role to play in the funding of civil litigation in England and Wales and should be welcomed.
Unregulated they risk a repeat of Claims Direct and The Accident Group, where winning clients found themselves left with nothing.
I set out below the January 2014 Code of Conduction for Litigation Funders:
This code (‘the Code’) sets out standards of practice and behaviour to be observed by Funders (as defined in clause 2 below) who are Members of The Association of Litigation Funders of England & Wales (‘the Association’) in respect of funding the resolution of disputes within England and Wales.
A Litigation Funder:
2.1. has access to funds immediately within its control, including within a corporate parent or subsidiary (‘Funder’s Subsidiary’); or
2.2. acts as the exclusive investment advisor to an entity or entities having access to funds immediately within its or their control, including within a corporate parent or subsidiary (‘Associated Entity’), (‘a Funder’) in each case:
2.3 to fund the resolution of disputes within England and Wales; and
2.4 where the funds are invested pursuant to a Litigation Funding Agreement (‘LFA’) to enable a party to a dispute (‘the Funded Party’) to meet the costs (including pre-action costs) of resolving disputes by litigation, arbitration or other dispute resolution procedures. In return the Funder, Funder’s Subsidiary or Associated Entity:
A Funder shall be deemed to have adopted the Code in respect of funding the resolution of disputes within England and Wales.
A Funder shall accept responsibility to the Association for compliance with the Code by a Funder’s Subsidiary or Associated Entity. By so doing a Funder shall not accept legal responsibility to a Funded Party, which shall be a matter governed, if at all, by the provisions of the LFA.
A Funder shall inform a Funded Party as soon as possible and prior to execution of an LFA:
5.1. if the Funder is acting for and/or on behalf of a Funder’s Subsidiary or an Associated Entity in respect of funding the resolution of disputes within England & Wales; and
The promotional literature of a Funder must be clear and not misleading.
A Funder will observe the confidentiality of all information and documentation relating to the dispute to the extent that the law permits, and subject to the terms of any Confidentiality or Non-Disclosure Agreement agreed between the Funder and the Funded Party. For the avoidance of doubt, the Funder is responsible for the purposes of this Code for preserving confidentiality on behalf of any Funder’s Subsidiary or Associated Entity.
An LFA is a contractually binding agreement entered into between a Funder, a Funder’s Subsidiary or Associated Entity and a Funded Party relating to the resolution of disputes within England and Wales.
A Funder will:
take reasonable steps to ensure that the Funded Party shall have received independent advice on the terms of the LFA prior to its execution, which obligation shall be satisfied if the Funded Party confirms in writing to the Funder that the Funded Party has taken advice from the solicitor or barrister instructed in the dispute;
not take any steps that cause or are likely to cause the Funded Party’s solicitor or barrister to act in breach of their professional duties;
not seek to influence the Funded Party’s solicitor or barrister to cede control or conduct of the dispute to the Funder;
Maintain at all times access to adequate financial resources to meet the obligations of the Funder, its Funder Subsidiaries and Associated Entities to fund all the disputes that they have agreed to fund and in particular will;
ensure that the Funder, its Funder Subsidiaries and Associated Entities maintain the capacity;
maintain access to a minimum of £2m of capital or such other amount as stipulated by the Association;
accept a continuous disclosure obligation in respect of its capital adequacy, including a specific obligation to notify timeously the Association and the Funded Party if the Funder reasonably believes that its representations in respect of capital adequacy under the Code are no longer valid because of changed circumstances;
undertake that it will be audited annually by a recognised national or international audit firm and shall provide the Association with:
comply with the Rules of the Association as to capital adequacy as amended from time to time.
The LFA shall state whether (and if so to what extent) the Funder or Funder’s Subsidiary or
Associated Party is liable to the Funded Party to:
meet any liability for adverse costs;
pay any premium (including insurance premium tax) to obtain costs insurance;
provide security for costs; and
meet any other financial liability.
The LFA shall state whether (and if so how) the Funder or Funder’s Subsidiary or Associated Entity may:
provide input to the Funder Party’s decisions in relation to settlements;
terminate the LFA in the event that the Funder or Funder’s Subsidiary or Associated Entity:
The LFA shall not establish a discretionary right for a Funder or Funder’s Subsidiary or Associated Party to terminate a LFA in the absence of the circumstances described in clause 11.2.
If the LFA does give the Funder or Funder’s Subsidiary or Associated Entity any of the rights described in clause 11, the LFA shall provide that:
if the Funder or Funder’s Subsidiary or Associated Entity terminates the LFA, the Funder or Funder’s Subsidiary or Associated Entity shall remain liable for all funding obligations accrued to the date of termination unless the termination is due to a material breach under clause 11.2.3;
if there is a dispute between the Funder, Funder’s Subsidiary or Associated Entity and the Funded Party about settlement or about termination of the LFA, a binding opinion shall be obtained from a Queen’s Counsel who shall be instructed jointly or nominated by the Chairman of the Bar Council.
Breach by the Funder’s Subsidiary or Associated Entity of the provisions of the Code shall constitute a breach of the Code by the Funder.
The Association shall maintain a complaints procedure. A Funder consents to the complaints procedure as it may be varied from time to time in respect of any relevant act or omission by the Funder, Funder’s Subsidiary or Associated Entity.
The Code (as amended) applies to LFAs commencing on or after the date hereof.
READER COMMENTS:- Comment from Jason Libby on 11 September 2013:- Hi Kerry,
That makes a really interesting read and could well be the saviour of the PI market.
Although I have a question about how this would work to the benefit of a firm. You talk about using Litigation Funding to ease the cashflow of smaller firms and state that:-
“Third Party Funders may become Alternative Business Structures running cases through the medium of conditional fee agreements, thus avoiding the Arkin risk.”
Surely, if the matter was being run under a CFA then the firm could not utilise the funding to ease cashflow, as they would not be able to bill the client on an interim basis, given that payment under the CFA is contingent on their being a ‘win’?
If this is correct how would the firm be able to utilise Litigation Funding and run a claim on a CFA basis?
Kerry Underwood’s reply:- Hi Jason
Through a discounted conditional fee agreement as approved by the Court of Appeal in Gloucestershire County Council v Evans [2008] EWCA Civ 21, 1 WLR 1883, [2008] NLJR 219.
Written by kerryunderwood November 25, 2015 at 8:05 am
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November 25, 2015 at 4:32 pm	Reply	[…] Third Party Funding […]
December 1, 2015 at 2:33 pm	Reply	Hi Kerry
Excellent article as usual and very helpful indeed
I am interested in ascertaining whether an impecunious Claimant Company has somebody helping with funding, as I suspect they do ( QC now instructed ) and whether I can oblige the Claimant to disclose details of that , if it is indeed the case. This could well improve the likelihood of my Client recovering her costs , if the Claimant is unsuccessful and another litigation risk factor.
Any thoughts please email me and in meantime I will review the case law you have cited.
September 9, 2016 at 11:51 am	Reply	Sarah Thank you. There has been a very recent case on this point – Dawnus Sierra Leone Ltd v Timis Mining Corporation Ltd and Another [2016] EWHC B19 (TCC). I will be posting a new blog on this matter next Tuesday 13 September. However in Dawnus the court held that it had the power to make an order for disclosure of the identity of a third party funder and had power to order that third party funder to provide security for costs. However on the facts of that case the court declined to so order. Thus your remedy is to make an application against the claimant for security of costs and to seek an order disclosure of the identity of any third party funder. Of course that does not mean that your will necessarily be successful; that will depend upon the facts of the case. Kerry
September 9, 2016 at 3:10 pm	Reply	Many thanks indeed Kerry much appreciated
September 9, 2016 at 3:19 pm	Pleasure.
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